A recent report published by researcher Ovum, Social Messaging 2014 Trends to Watch, projects the number of messages exchanged on social messaging apps to grow more than 2.5 times next year from 27.5 trillion to 71.5 trillion by the end of 2014. The growth in social messaging will be driven by the adoption and availability of affordable smartphones and mobile broadband penetration in emerging markets.
Social media service Snapchat is making big news in this high-growth industry. Snapchat lets users send their friends photographs and videos of themselves that self destruct from the mobile device within a few seconds of viewing. The app has become a big favorite among the 13- to 24-year-old demographic, who particularly like the temporary nature of these messages. But for the same reason, Snapchat has attracted controversy from parents of these young users, who believe that the app is being used for the purpose of "sexting." Despite the controversy, the app has seen strong growth.
Snapchat had 100 million users sending more than 110 million snaps daily as of June 2013. By October 2013, that number grew to 350 million snaps per day.
Snapchat's Rising Valuations
Snapchat does not have a defined revenue model. The company is still toying between the ideas of earning revenues through advertising and virtual good transactions. But since their messages are available for viewing only for a very short time, the model doesn't lend very well to advertising revenues. I frankly don't see how virtual goods play in this usage model.
For now, though, Snapchat has managed to raise $73 million in venture funding from investors that include Benchmark, Lightspeed Venture Partners, SV Angel, Institutional Venture Partners, and General Catalyst Partners. The company's latest round of funding was held in June this year when they raised $60 million. Recent reports suggest that Snapchat is looking at another funding round to raise $54 million at a valuation of $2 billion.
Snapchat as an Acquisition Target
That $2 billion valuation is still lower than the amounts that several tech majors have been willing to put into acquiring Snapchat. Recently, it was rumored that Google (NASDAQ:GOOG) had expressed interest in acquiring Snapchat for a whopping $4 billion. The acquisition, if it went through, would have helped Google with its weak social networking efforts.
Google's move came in after Facebook (NASDAQ:FB) also expressed interest in acquiring Snapchat for $3 billion. Facebook's attempt to create a Snapchat-like service in Poke had also not fared well. Also, in the recently ended quarter, Facebook saw its young user base losing interest in some of its offerings. Snapchat's addition to Facebook's portfolio would have helped Facebook recover this lost ground. But Snapchat has refused that offer as well. Snapchat's management believes that by the end of this year, they will be able to cross the milestone of 400 million snaps per day, surpassing Facebook's statistic - helping them earn a bigger premium.
Snapchat has managed to deliver an innovative service to the masses. But without revenues in sight, this is a highly speculative situation that may blow up at some point. Investors, I am sure, are extremely nervous with the entrepreneur turning down opportunities to cash in on the bubble.
Disclosure: No positions