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Money News

How Snapchat Makes Money

November 17, 2017

3 min read

Snap Inc. is the parent company behind the wildly popular vanishing message app Snapchat, which allows users to send photos and videos – known as snaps – to their friends that disappear within a few seconds. The app has editing tools that can be used to overlay special effects, wacky filters or to swap faces on pictures.

As of the end of Snap’s Q2 earnings period, Snap has more than 170 million daily users and a quarter of smartphone users in the U.S., UK, and France use Snapchat every day. Around 250 million photos or videos are saved to Memories, a camera roll for saving snaps, on a daily basis. When the company went public in March 2017, it was valued at nearly $24 billion.

Snapchat is extremely popular with younger users and is the preferred social media platform for U.S. teens, which makes it attractive for ad buyers

Snapchat generates revenue through ads, partnerships with media companies, and the sale of its Spectacle glasses. Snapchat’s ads take the form of custom filters and lenses, branded geofilters, and ads on Snapchat Discover and Live Stories.

Earlier this month, the China tech giant Tencent, already an investor, purchased an additional 12% of Snap after the company reported less-than thrilling earnings.

A quick history of Snap

The founders of Snap, Evan Spiegel and Bobby Murphy, met as students at Stanford University, where they were part of the same fraternity. They named the first prototype of the app Picaboo but changed it to Snapchat in 2011 after they realized that a New Hampshire-based company already had that name. The founders set up shop in Venice, California and almost immediately saw explosive growth. By 2012, Snapchat had a million daily active users.

In March 2017, shares of Snap started publicly trading for the first time in what was the biggest IPO ever for a Los Angeles-based company. It raised $3.4 billion in the largest tech IPO since Alibaba’s $22 billion debut in 2014.

Evan Spiegel owns about 18 percent of the company and has a net worth around $2.9 billion. When Snap began trading publicly, Spiegel became the youngest public company CEO. His cofounder, Bobby Murphy, also owns 18 percent of Snap, and his net worth is $2.9 billion. Each of the cofounders made $272 million from the IPO.

How Snapchat makes its money

Snapchat is extremely popular with younger users and is the preferred social media platform for U.S. teens, which makes it attractive for ad buyers. On average, the company makes $1.05 of revenue per user.

  1. Ads

Because Snap faces tough competition from other social media platforms, it tries to make its ad buying easier by allowing customers to buy advertisements with credit cards, with prices as low as a few dollars. Snap helps customers measure whether their ads drive users to specific locations through its Snap to Store feature.

Users are able to buy custom, on-demand geofilters for special events, such as weddings and birthday parties. Companies can buy sponsored or branded filters, as Taco Bell did for Cinco de Mayo in 2016, garnering 224 million views through the campaign.

Advertisers can also place videos in Snap’s Live Stories, a curated stream of snaps taken by users at various locations and events such as sports games and concerts. Facebook rolled out a nearly-identical feature which encourages users to share videos and pictures that disappear after 24 hours.

Snap also offers ads in Snapchat Discover, a page that highlights videos and stories about news, sports, and entertainment. Advertisers can place ads in stories on Snapchat Discover, where a number of media companies, such as ESPN, BuzzFeed and The Wall Street Journal, have channels.

  1. Spectacles

Snap introduced Spectacles last fall. The $130 augmented reality sunglasses have an integrated video camera to allow users to create Memories as they wear them. In May 2017, the company said the glasses generated around $8 million in revenue during the company’s first quarter as a publicly traded company. Sales have since slowed, proving that tech enabled glasses are still a tough sell.

  1. Partnerships

In October 2017, Snap teamed up with NBCUniversal to create new digital content for Snap’s Shows platform. NBCUniversal, which had invested $500 million in Snap prior to its March 2017 IPO, will be creating original scripted programming for the social media platform.

Snap also signed development deals with Disney’s ESPN, Time Warner’s Turner Broadcasting, Vice, A&E, the NFL and others. Scripps Networks Interactive – which owns HGTV, Travel Channel and Food Network – also partnered with Snap to create exclusive original shows for the app, and CNN has a daily news program on Snapchat called “The Update.”

By Vildana Hajric

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