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The Almighty Buck Businesses

Why Snapchat and Its Ilk Face a Revenue Conundrum 104

Posted by samzenpus
from the show-me-the-money dept.
Nerval's Lobster writes "Snapchat managed to attract a lot of buzz in 2013—perhaps more than any other app on the market—and it's easy to see why: in these paranoid times, with the NSA allegedly sniffing around the world's collective inbox, and lots of software on the market designed to snoop into people's lives, it's comforting to have an app that'll vaporize your messages within seconds of their opening. Snapchat's executives see the startup's future as so bright, in fact, that they reportedly turned down a $3 billion buyout from Facebook. But whether Snapchat eventually accepts a buyout offer, or tries to parlay its popularity into some sort of IPO, it faces a rather unique problem: how do you make money off a free app that near-instantly vaporizes all content? Snapchat could emulate enterprise-centric vaporizing-message firms such as Silent Circle and start charging for subscriptions, but that would probably kill the service; a multitude of free rivals would likely spring up, with the express purpose of stealing irate customers away. More likely, Snapchat will probably launch some sort of display ad system, similar to what Facebook and Twitter have now—but given how it doesn't store user information on its servers, it'll probably be hard to monetize its users as extensively as those social networks. With that in mind, Snapchat might be left with two options going forward—either expand its services in a radical new (and more profitable) direction, or sell to a Tech Big Fish for a whole lot of money."
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Why Snapchat and Its Ilk Face a Revenue Conundrum

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  • They simply... (Score:5, Insightful)

    by spacefight (577141) on Monday December 23, 2013 @10:34AM (#45766503)
    ... should have taken the offered cash and start a new venture, producing more in long term value.
    • Re:They simply... (Score:4, Insightful)

      by Anonymous Coward on Monday December 23, 2013 @10:44AM (#45766553)

      ... should have taken the offered cash and start a new venture, producing more in long term value.

      ^THIS.

      They obviously started this company without a plan. And part of every business plan is an exit strategy - let alone HOW TO DRIVE REVENUES.

      That's why it's important tech entrepreneurs to get a business advisor if you don't have business experience.

      • by Anonymous Coward

        But the 3 billion was a lie in the first place. No one outside of snapchat confirmed the offer was real. Facebook did not issue a statement

    • by Exitar (809068)

      Or even better they should have taken the offered cash and retired to a tropical island.

    • Remember the pets.com puppet? I'm sure that must have brought in a lot of cash at the bankruptcy proceeding. See, there's lots of ways to monetize internet companies.

      I honestly don't understand how snapChat is supposed to work. I can understand the concept of "We make it inconvenient" for someone to get a copy of your picture or text. But the idea that it's gone forever seems preposterous. If the device it is beamed to can display it, then presumably all the information necessary to decode and preserve

      • It's simply DRM. The analog hole still exists, and it could probably be trivially bypassed with a root app, like VNC. That's before even touching their super-secure client. The app itself isn't special. Their user base was apparently worth 3 billion dollars. Once FB invests sufficient money into developing and marketing their own version, Snapshat will be worth peanuts.
        • by goombah99 (560566) on Monday December 23, 2013 @01:45PM (#45767951)

          I Once FB invests sufficient money into developing and marketing their own version, Snapshat will be worth peanuts.

          I've heard the internal code name for it is CrotchBook.

        • by sqrt(2) (786011)

          It's even more laughable than that. You can simply take a screenshot and it'll be saved permanently. In iOS, press the home button and the lock button at the same time. I'm sure it's easy with Android, too.

          • by tlhIngan (30335)

            It's even more laughable than that. You can simply take a screenshot and it'll be saved permanently. In iOS, press the home button and the lock button at the same time. I'm sure it's easy with Android, too.

            Except they detect that. If you take a screenshot in Android, a message is sent back to the sender that you took a screenshot. Basically, do this enough times and the sender may exclude you from future snapchats and send you the photo directly - after everyone else has found out.

            It's a form of social DRM

      • by moschner (3003611)

        What they might do is look at using some kind of image recognition software to deliver ads based on the attached image. This way they don't have to worry about the user profile, but rather deliver ads based on the content of the photos. Kinda like ad words I would guess.

    • by rsborg (111459)

      ... should have taken the offered cash and start a new venture, producing more in long term value.

      Most buyout offers have these annoying things called conditions - one of them could have been that a) founders must stay to certain period/goal or achieve a result post-acquisition (usually monetary, might be tied to purchasing company's metrics) or the payout offered (often in purchasing company's stock) would be reduced (sometimes it's worded positively like $X without conditions, but $5*X if conditions are met, with partial work being rewarded appropriately) or b) preventing founders from starting a co

  • A Better Question (Score:4, Insightful)

    by CanHasDIY (1672858) on Monday December 23, 2013 @10:38AM (#45766517) Homepage Journal

    Why the obsession with money? Seriously.

    Why is it, that unless somebody's making fat bank off a thing, the thing is considered to not be worth doing?

    • by Trepidity (597)

      In Soviet America, individuals are devalued and the only thing that counts is your numerical contribution to The American Economy.

      • Yes, capitalism is communist. It is a collective. All value is derived solely from its cost/benefit ratio.

    • Because in some cases there is no other reason that makes it worth doing.

    • by Nemyst (1383049)
      In this day and age, the corporation is the pinnacle of human advancement. And corporations make money as a fundamental principle.
    • Yes. (Score:5, Insightful)

      by Anonymous Coward on Monday December 23, 2013 @11:09AM (#45766731)

      Why is it, that unless somebody's making fat bank off a thing, the thing is considered to not be worth doing?

      If you are not making money, you can't pay for the infrastructure, help, taxes (like property taxes that you have to pay regardless of your profitability), and other expenses of running the firm - let alone paying yourself so you can pay for rent, food, healthcare, student loans, etc ....

      As far as them not taking the 3 billion, that's because they haven't planned and their hubris in thinking that, some how, they can make more on their own.

      • by lsllll (830002)
        Which is why I don't understand them not taking the 3 billion. It's just an app. It's not like it's a comprehensive social web site. I can't imaging FB having offered 3B for a simple app. You can't build a social experience around one app, so sell the app and use the money to come up with something entirely different, without the need for VC.
    • Re: (Score:3, Insightful)

      by roman_mir (125474)

      You better explain to me who is paying their bills? They have employees, right? They are renting space somewhere, correct? They have servers running, so they bought those, isn't it so? How about energy and support and maintenance of those servers?

      So you better try and find an explanation how can a business live without making money and if the bills so far were paid by investors, then why are you surprised that investors want to see a return?

    • Why the obsession with money? Seriously.

      Because money is important for reasons that should be self evident and having more of it can make your life a lot easier.

      Why is it, that unless somebody's making fat bank off a thing, the thing is considered to not be worth doing?

      Because the amount of money you can charge for something is a pretty useful proxy for how much it is valued by society once you take scarcity (real or artificial) into account. Furthermore if people are willing to pay a lot for something that means there are potential opportunities to earn a living providing that something. Since we all have to earn a living it is probably in our intere

    • Because any service offered costs money. Even if it's done as a hobby by one person (and thus no salaries need be paid), server space and bandwidth cost money. Without some sort of income, the service depends on the bank account of the person running it. Small projects can get away with being run off of donations. Larger projects require more funding. Snapchat, like make other Internet services, is spending money to keep the service alive but isn't taking any money in. Eventually, this means that they

    • by DaveV1.0 (203135)
      Please tell me how you manage to have internet access and servers without paying for them.
      • Please tell me how you manage to have internet access and servers without paying for them.

        I have a day job that covers the majority of my expenses.

        Not everything I do is for profit.

        • by DaveV1.0 (203135)
          Does your day job provides you with enough money to pay for the servers and bandwidth needed by a service like SnapChat? That is the infrastructure to handle about 4,500+ "snaps" a second. Oh, and don't forget the 30 employees SnapChat employs. Assuming they earn $50,000.00 per year, that is $1.5 million in salary per year.

          I am sure that your day job is paying you the $2 million or so need to keep SnapChat or a similarly sized service running.

          I am sure that "[n]ot everything [you] do is for profit" but y
          • You obviously missed my point, which is probably my fault for not stating it more clearly.

            I get that shit's gotta be paid for; my complaint is how, in our society, unless something is not just actively making money, but actively making more money today than it did yesterday, then it's considered a stupid waste of time. I dunno, somehow that irritates me... probably because there's lots of shit that wouldn't be very profitable but is still worth doing.

            Like curing disease, for example - it's a noble idea, and

            • by DaveV1.0 (203135)
              If a for-profit business isn't making at least as much money "today" as it was "yesterday" then it is a failing concern. All for-profit business want to make more money because it is the measure of a businesses success.

              You are using an overly broad generalization to makes something seem true that is, in fact, false. Specifically, which diseases can be cured but haven't been so only "treatments" exist? How do you know a cure is not only achievable but also viable?

              Let us look at HIV/AIDS. A patient with b
              • If a for-profit business isn't making at least as much money "today" as it was "yesterday" then it is a failing concern. All for-profit business want to make more money because it is the measure of a businesses success.

                You are using an overly broad generalization to makes something seem true that is, in fact, false. Specifically, which diseases can be cured but haven't been so only "treatments" exist? How do you know a cure is not only achievable but also viable?

                On NPR the other day, they were talking about a new drug that completely cures Hepatitis C in 12 weeks, without all the nasty side effects of interferon. So, effectively, we now have a cure for Hep C, and could theoretically rid the planet of a horrible, debilitating disease.

                Except the drug company that makes this treatment is charging $90,000 a pop. Thus, society has to deal with this life-threatening, quality-of-life reducing illness for lord knows how much longer, all because someone figured out they can

    • I suppose you work for free?

    • by bazorg (911295)

      Apart from the exit strategy lottery thing, there is the issue of ongoing costs.
      Since the app is free, the users don't pay per use or as subscription and there's no sponsor... who's paying for Snapchat to exist? At some point the investors will want their money back. As it is today, I don't even see how they cover running costs.

  • by argStyopa (232550) on Monday December 23, 2013 @10:38AM (#45766519) Journal

    "how do you make money off a free app that near-instantly vaporizes all content?"

    The annual payment you're getting from the NSA to make sure they're permanently on the cc list?

  • Who cares? (Score:4, Insightful)

    by DogDude (805747) on Monday December 23, 2013 @10:39AM (#45766525) Homepage
    Really, who cares if they can make money or not? That wasn't the whole point of Snapchat. Hell, it's not the point of 99% of tech companies these days. The point is to be bought by somebody else, not to make profit. Making profit is hard. Convincing some deep-pocketed sucker to buy you out is much easier.
    • Re:Who cares? (Score:5, Insightful)

      by Arrepiadd (688829) on Monday December 23, 2013 @10:48AM (#45766581)

      The point is to be bought by somebody else, not to make profit.

      Then... why reject 3 billion from Facebook? How many other companies, with more money to waste, are willing to buy these guys, from where you are looking at it?

      • They probably think there's an even bigger sucker around the corner.

        Unfortunately, they might be right.

        • Re:Who cares? (Score:5, Interesting)

          by QilessQi (2044624) on Monday December 23, 2013 @11:25AM (#45766841)

          There was. Google supposedly offered them 4 billion:

          http://bgr.com/2013/11/15/snapchat-google-buyout-rumor/ [bgr.com]

          Snapchat is gambling that they will keep growing to the point where they can get an even bigger offer.

          Meanwhile, how did that Instagram purchase pan out? Anybody know if it's been worth the $1B that Facebook spent on it?

          • But were they offered that amount in cash? Or restricted shares of some sort which would not be able to be liquidated for a long time in which the value of those shares can plummet?

            • by QilessQi (2044624)

              Good question. Most of the news regarding these deals is short on specifics. But the dollar amounts sound absolutely crazy unless the company making the purchase plans to do either/all of the following...

              (1) Leverage the popularity of the app to get the user to sign up for one of the buyer's flagship apps (like getting more G+ users), which by increasing the flagship app's user base will then entice more advertisers to pay for ads in the flagship app.
              (2) Use the user metadata from the app to display targe

              • by Kalriath (849904)

                I dunno about you, but most people would be pretty terrified of a package from Snapchat containing all their snaps for the month.

                Hell, maybe it would be "for only $9.99 per month, we won't send you glossy photo prints of all the snapchats you sent this month. Lose every moment!"

      • by DogDude (805747)
        There are plenty of companies with more money to waste.

        The rejection of $3B was greed, pure and simple. They're not expecting, planning, or probably even striving to make a profit. They're just gambling that somebody will buy them before the fad subsides.
  • by AmiMoJo (196126) * <mojo@NOspaM.world3.net> on Monday December 23, 2013 @10:42AM (#45766545) Homepage

    TFA answers its own question. You go IPO or sell the company to some other sucker for billions, then you are set up for life and can do what the hell you like. Making money is someone else's probably, your only goal is to look valuable because you have x billion cattle, sorry users, that someone might one day figure out how to milk.

    • by DaveV1.0 (203135)
      So, you are suggesting they should act like Enron, Madoff, and all the other financial ripoff artists. Interesting morals you have there.
  • They may not store the image itself, but I don't see anything stopping them from storing information describing the image.
  • SnapInvest (Score:4, Funny)

    by retroworks (652802) on Monday December 23, 2013 @10:51AM (#45766603) Homepage Journal
    It's a precurser to a future stock market, where buyers invest their money, the corporation's stock skyrockets, then crashes, and the money disappears without a trace.
  • by BlueMonk (101716) <BlueMonkMN@gmail.com> on Monday December 23, 2013 @10:56AM (#45766639) Homepage
    How is the content exchanged on Snapchat any more ephemeral ("vaporized") than a phone call? Or isn't it? Just because it's "vaporized" from your perspective doesn't mean it wasn't captured *somewhere*.
    • by AvitarX (172628)

      It's more ephemeral than an SMS etc.

      It doesn't replace phone calls, it replaces texting, and status updates.

      • by BlueMonk (101716)
        And the assumption is that the NSA can record text messages, but not phone calls?
        • by AvitarX (172628)

          No, I don't think snapchat is about protecting from the NSA (the article is stupid), nor is it really about protecting from malicious actors (as they say, it's not perfect).

          It's about having conversations with friends that disappear when everyone is behaving. It's about not having a record of everything said for the last however long there forever. In a fit of anger, the messages are gone. In that regard it is like a phone call, but not a text. It's about having a conversation, then it's gone.

          I personally l

          • by BlueMonk (101716)

            Right, my comment was just concerning the summary's claim that Snapchat's popularity was due to NSA privacy concerns.

            Although there are conflicting claims about whether the NSA listens to phone calls, as outlined on the Wikipedia page covering the NSA's Utah Data Center [wikipedia.org]), I suspect the truth is that they maybe collect recordings of most of the activity taking place on the internet and phone networks (the haystack), but never have to search for a needle because they don't look through it unless they have a s

            • by AvitarX (172628)

              Yeah, the article (well the summary anyway) is pretty stupid.

              The main snapchat users aren't at all concerned about NSA. It's about lack of evidence for family, protection from revenge porn, and primarily (for me anyway), the feel of a conversation. It's simply more fun to squeeze in a short message with a goofy face, rather than a text. The short life of the snap makes it feel more, something intangible, and perhaps based on my own forms of crazy, but I think the creators were onto something when it feels b

  • More likely, Snapchat will probably launch some sort of display ad system, similar to what Facebook and Twitter have now—but given how it doesn't store user information on its servers

    They may make a point of not storing the images on their servers, but what's to stop them storing information on users? For that matter, what's to stop them displaying non-targetted ads?

    it faces a rather unique problem: how do you make money off a free app that near-instantly vaporizes all content?

    It sounds to me more like it faces a rather imaginary problem made up by the writer of the article.

  • by mpicker0 (411333) on Monday December 23, 2013 @11:11AM (#45766745)

    ...it's easy to see why: in these paranoid times, with the NSA allegedly sniffing around the world's collective inbox, and lots of software on the market designed to snoop into people's lives, it's comforting to have an app that'll vaporize your messages within seconds of their opening

    So, Snapchat's wild success is from people paranoid of the NSA who use it to send messages, even though multiple [slashdot.org] stories [slashdot.org] have appeared about how Snapchat messages can be saved without the sender's knowledge, and Snapchat's own website [snapchat.com] lists conditions under which messages will be preserved. Riiiiight.

    ...it doesn't store user information on its servers

    Even assuming it doesn't store images (which it does, see above), to use the application, you connect with people as in any other social networking application. This is definitely "user information," and this metadata (some might even call it data) has value.

  • by Sponge Bath (413667) on Monday December 23, 2013 @11:43AM (#45766997)
    I tweeted about a snapchat of myself playing farmville. Fame and fortune are sure to follow.
  • by Errol backfiring (1280012) on Monday December 23, 2013 @12:16PM (#45767225) Journal
    The question is not "How can a site make money?", but "how do I prevent a nice site to be bought by an evil company?"
    • by DaveV1.0 (203135)
      By "evil company", do you mean a company that charges for it's service or sells eyeballs? If so, how is that "nice company" supposed to pay it's bills?
  • They should have taken the $3 billion and run with it.

    SnapChat only works as long as it doesn't need to make money. Once advertising comes in, advertisers will be calling the shots, because they are paying the money. They will want to know more and more about users and what they are sending to each other. They'll eventually get what they want.

  • They can just stick a small ad before or after a picture is shown. If the content is amusing enough, people will click through.

    They have to watch out that they don't make it a pain in the ass to bypass the ad. They already know this - not very many people like ads in general.

  • Snapchat could emulate enterprise-centric vaporizing-message firms such as Silent Circle and start charging for subscriptions, but that would probably kill the service; a multitude of free rivals would likely spring up, with the express purpose of stealing irate customers away.

    So, the end-user ends up with two choices

    1. pay for SnapChat, where all there contacts currently on.
    2. move to one or more of the new free services and hope you choose well and they don't go bust

    Those new free services will still have a revenue problem. And, if one is better capitalized, then it may buy up it's rivals and have an even bigger revenue problem.

    Everyone needs to eat. Servers need power. It costs money to run servers, pay for bandwidth, pay for facilities, and have employees. If a company has no re

  • More likely, Snapchat will probably launch some sort of display ad system, similar to what Facebook and Twitter have nowâ"but given how it doesn't store user information on its servers, it'll probably be hard to monetize its users as extensively as those social networks.

    What they should be deploying is some kind of system that instantly vaporizes other companies display ad systems before they reach my retina. I'd pay money for that.

  • Or why Social Media and web sites just suck.

    All this predictable discussion about the economic necessities is just too easy and obvious. Of course you have to pay your bills. The trick is to do that and do some good as a by-product. If the argument you give to your investors is only about maximizing their profit, you and they aren't being creative or good citizens.

    I give you an example everything you have ever hated about social media, about Facebook, about Google, about Twitter, about millions of web

How many hardware guys does it take to change a light bulb? "Well the diagnostics say it's fine buddy, so it's a software problem."

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