Hot off the presses this morning is a report that the photosharing and messaging service Snapchat has rejected a $3 Billion all-cash buyout offer from Facebook. If you’re like me, you’re probably wondering how stupid can someone be to reject $3 Billion (that’s with a B) in cash. Well, apparently Snapchat CEO Evan Spiegel is extremely stupid.
It seems that for now Snapchat executives want to go down the Groupon road – that is, develop their business on their own. Of course, the problem with this approach is our rapidly changing technology world, where the latest hit service or app could be entirely eschewed in only a few years time. All you have to do is remember the rapid rise and fall of MySpace. And there have been countless additional examples.
Oh. And the little fact that Snapchat is hardly a business in the first place.
For those of you who have gotten this far without even knowing what Snapchat is, here is your very quick introduction. Snapchat is an app-based messaging service that you can use to send photos, plus a small bit of text if you so desire, to other Snapchat users in your friends list. The message remains for a very small period of time (around 5-10 seconds) or as long as you continuously touch the screen. Once the time period is up or you lift your thumb off the screen, the photo message is gone forever, though the app keeps tabs on any communications you have sent or received.
This received an all-cash offer for $3 billion, and that offer was rejected?
Clearly this is all about getting the swath of users that currently have Snapchat. However, there are numerous red flags when it comes to valuing Snapchat on users alone. First, Snapchat is estimated to only have 26 million users. That is far fewer that Instagram, Twitter, and Facebook itself. Second, its primary user base skews enormously toward the 13-18 year old demographic, with college aged individuals also heavily using the app. Essentially, the demographics with the least amount of disposable income to purchase products. Finally, the demographics that do use Snapchat are known to be very fickle when it comes to what apps and services they use. It’s a main reason why MySpace fell hard and fast.
Does that sound like an advertisers’ paradise to you? I don’t think so.
Based on the above, the executives at Snapchat are utterly stupid to not take the $3 billion cash offer from Facebook. Groupon spurned a $6 billion offer from Google in favor of having their own IPO, and it has cost the company significantly. The stock price is down 60% from its IPO price, the company is barely profitable (earnings of $0.03 per share) and still has loads of debt, and it seems the public has cooled on daily deals sites (at least those in the mold of Groupon and LivingSocial). The business model is flawed, the items they advertise for sale are Skymall quality, and there is minimal barrier to entry. It’s why even before the IPO launched I recommended people not to invest any money in Groupon, and more than two years later I’d say I was right.
I suppose the only way this will turn out well for Snapchat is if they are able to swindle another company into paying them even more money for their utterly useless app. And maybe they’ll get lucky. But when $3 billion is staring right at you for an app whose userbase is small, fickle, and without income to purchase advertisers’ products, you take the money and run. Unless you are incredibly dumb.
So congratulations Evan Spiegel, CEO of Snapchat. You are officially the dumbest person on Earth.