Snap Inc. (Image Credit: Snap Inc.)

What My Investigation Into Snap Inc. Revealed

Introduction

Snap Inc., originally Snapchat Inc., is a social media company founded by Evan Spiegel, Robert (Bobby) Murphy and Reggie Brown on September 16, 2011. Based out of Venice, California, it rebranded itself as a camera company last September as part of its efforts to go public. Snap Inc. is mostly known for its teen-friendly mobile application called Picaboo (later renamed as Snapchat) that can be used to send messages, photos and videos which are ephemeral in nature. The product came out of Stanford University, where Evan Spiegel was a product design major. Shortly after launching the app from his dorm room, Spiegel dropped out of Stanford before graduation to focus full-time on the application.

User Growth and Other Stats

• Since its inception, Snapchat has grown steadily. Based on data from Statista, the number of daily active users has jumped from 46 million in Q1 of 2014 to 158 million as of Q4 2016.
• Number of mobile video views on Snapchat increased from 2 billion in May 2015 to 10 billion in May 2016.
• Number of user data requests made to Snapchat from U.S. federal agencies and courts jumped from 375 in 2014 to 1,472 in 2016.
• 6,944,444 videos were watched by users on Snapchat per minute as of June 2016.
• Snapchat registered the biggest jump amongst teens, with close to 40% of them using the social network in Spring 2017 when compared to Facebook (~11%) and Instagram (~24%).
• Number of full-time employees increased from 600 in Dec. 31, 2015 to 1,859 as of Dec. 31, 2016.

Competition

As Snapchat grew in popularity, it received several offers of acquisition, including from Facebook, which went on to acquire popular social messaging services like Instagram (in 2012) and WhatsApp (in 2014). But Snap Inc. has instead chosen to forge ahead its own path in the social media space. Snapchat also popularized the concept of Stories in 2014 as a way of sharing photos and videos with friends. Stories live for 24 hours and can be viewed again and again during that time period. Once the 24-hour window elapses, the story gets automatically deleted.

After its failed attempt to buy Snapchat in 2013, Facebook began incorporating the same Stories format into its apps starting with Instagram last August, then to WhatsApp, Facebook Messenger and its flagship application earlier this year. The move appears to be working successfully for Instagram where Instagram Stories hit 200 million daily active users (as of Apr. 13, 2017), thus making it more popular than Snapchat.

The S-1 filing with United States Securities Exchange Commission (SEC), under the section Advertiser Reception, also shows it has pitted itself against YouTube, Google, Instagram, Facebook, Twitter and Pinterest when it comes to vying for advertising dollars.

Revenue Model and New Strategies

Snap Inc. filed for an Initial Public Offering on Feb. 2, 2017 and started trading on the New York Stock Exchange under the symbol SNAP a month later on Mar. 2, 2017. A look at its S-1 filing with SEC in the weeks leading to its IPO reveals the below -

• Snap Inc. makes money by selling branded ads, where advertisements are run in the form of Stories created by various brands and companies who want to promote their offerings.
• Brands also release Sponsored Geofilters that can be overlayed on top of users’ photos depending on their current location. The filters can be to promote an event, a business or generate awareness for a product across the nation. It also rolled out a new tool for advertisers called Snap to Store that tracks the number of times a Sponsored Geofilter, such as one for a restaurant, was viewed and how many of those viewers in turn visited the restaurant themselves.
• Advertisers can also provide Sponsored Lenses to its users to boost product awareness.
• Snap also began selling Spectacles, a pair of sunglasses to create Snaps. The glasses are connected to the Snapchat app and can be used to share videos captured from users’ perspective.
• On Apr. 18, 2017, it released augmented reality lenses called World Lenses that can augment existing videos with fun 3D experiences. It’s safe to assume that this feature will soon make its way to advertisers as well.

In addition, the filing shows the following in terms of its revenues (accessed via Orbis, BvD ID number: US455452795) -

• Snapchat made its first profit in Q4 2016, the quarter before filing for IPO.
• Net revenue was $404.48 million in 2016, up from $58.66 million in 2015.
• Net losses widened from $372.89 million in 2015 to $514.64 million in 2016.
• Its global average revenue per user (ARPU) for the quarter ending Dec. 31, 2016 was $1.05, compared to $0.31 for the same period in 2015. In North America, the ARPU stood $2.15 at the end of Q4 2016 when compared to $0.65 for the same period in 2015.

Privacy Policy and FTC Investigation

In addition to collecting users’ personal details like email addresses, phone numbers and their date of births at the time of creating an account, Snap Inc. also provides an option to allow users to upload a profile picture and add a credit or debit card number to make purchases associated with the account. Snap also collects usage information, which includes the type of content users share, information about the device itself, in addition to gaining access to users’ contacts, photos and location whereabouts.

Their privacy policy allows for targeted advertising, a form of online advertising to target users with ads based on their offline purchases such as supermarket loyalty cards. It also announced Snap Audience Match, a tool that lets brands to match their email lists with Snapchat user pool to show targeted ads. However none of this is explicitly stated in their privacy policy that was last revised on April 12, 2017, although under the section “Information we collect from third parties”, it says “[w]e may also obtain information from other companies that are owned or operated by us, or any other third-party sources, and combine that with the information we collect through our services.”

In 2014, Snap Inc. invited scrutiny of Federal Trade Commission (FTC) after it was found to be violating the ephemeral nature of snaps shared on the messaging service. While Snap promoted the feature by saying that photo and video messages would disappear after a designated time period, the complaint found different ways this could be circumvented by a receiver to save the snaps permanently.

• FTC also questioned its deceptive data collection practice of surreptitiously accessing the location of its users through its Android app and contact information from iOS users’ address books without explicit consent.
• The complaint also alleged that the aforementioned practice of collecting contact information was instrumental in a massive data breach of 4.6 million usernames and phone numbers in December 2013.

As a result of the investigation, Snap Inc. settled the case with FTC and agreed to 20 years of privacy monitoring.

Lawsuits

Snap Inc.’s S-1 filing with SEC reveals only two co-founders — Evan Spiegel and Bobby Murphy. But according to a bitter courtroom battle that transpired behind Los Angeles Superior Court in 2013 (Frank Reginald Brown, IV vs. Snapchat), it emerged that Evan and Bobby conspired together to cut Reggie Brown from the founding team. The lawsuit also alleged that it was Brown who originally “devised” the idea of an application to send disappearing messages. The S-1 filing goes on to state that they settled the case with Reggie Brown in 2014 for a total of $157.5 million, in addition to acknowledging his contributions in conceptualizing the application -

“In February 2013, an individual filed an action against us, our predecessor entity and two of our officers in Los Angeles Superior Court, alleging that we were using certain intellectual property that the individual jointly owned with our founders. In September 2014, the parties entered into a settlement agreement that resolved all claims among the parties. Under the agreement, we agreed to pay the individual a total of $157.5 million and such amounts were recorded in 2014. We paid the individual $50.0 million in 2014. As of Dec. 31, 2015, $107.5 million was included in accrued expenses and other current liabilities on the consolidated balance sheet. We paid the individual $107.5 million in the year ended Dec. 31, 2016. There are no further amounts required to be paid in the future.”

Furthermore, searching the LA Superior Court for the case (case number: BC501483) shows that it was dismissed on September 9, 2014 -

Case Number: BC501483

FRANK REGINALD BROWN IV VS SNAPCHAT INC ET AL

Filing Date: 02/21/2013

Case Type: Other Contract (General Jurisdiction)

Status: Dismissed — Other 09/09/2014

Board of Directors and Stockholders

The S-1 filing reveals 14 members on the board of directors, seven who are part of the executive team comprising of two co-founders (CEO Evan Spiegel and CTO Bobby Murphy), a Chief Strategy Officer (Imran Khan), a Chief Financial Officer (Andrew Vollero), a General Counsel (Chris Handman), an SVP of Engineering (Timothy Sehn) and a VP of Engineering (Steven Horowitz), and another seven comprising of non-executive directors.

Joanna Coles, who is the Chief Content Officer for Hearst Magazines, is on the board since Dec. 2015 for her “extensive experience working with content providers and advertisers.” She is also the only female among the board of directors.

• Taken together, the 14 members on the board own 300,621,548 shares.
• Co-founders Evan Spiegel and Bobby Murphy each own 21.8% of the total share.
• Mitchell Lasky, a partner at venture capital firm Benchmark, is the only non-executive shareholder who also owns the largest share, the same number of shares as the venture capital firm itself (65,799,720 or 12.7%).
• An Orbis search also shows Yahoo Inc, Digital Sky Technologies, and retail giant Alibaba Group Holding Limited among others to be shareholders in the company, a fact missing from its S-1 filing.

Executive Compensation

• The S-1 filing surprisingly doesn’t reveal co-founder Bobby Murphy’s annual compensation, although it lists Evan Spiegel’s to be $503,205 in 2016, a 38.3% jump from 2015.
• However under the section Offer Letters, Snap Inc. says it entered into a revised offer letter agreement with Bobby Murphy. “Mr. Murphy’s annual base salary as of Dec. 31, 2016 was $250,000,” the filing states.
• Chief Strategy Officer Imran Khan received $145,292,145 in stock awards in 2015. This is as part of his transition from Credit Suisse where he served as a Managing Director before joining Snap Inc. in January 2015 (as revealed in Management summary).

Acquisitions

Snap Inc. has acquired seven startups so far, a search on Orbis reveals. They include the following -

• Bitstrips Inc., the maker of Bitmoji app
• C3D Augmented Reality Solutions Ltd. (I couldn’t find any reference to this company with the exact same name, but it appears to be the Israeli startup Cimagine. An Orbis search for C3D also reveals its base location to be Israel.)
• Flite Inc., an ad-tech startup.
• Life Foundry Inc., Snap Inc.’s first publicized acquisition that powers its video chat feature.
• Looksery Inc., maker of animated lenses
• Obvious Engineering Limited (also known as Seene), a computer vision startup that allowed users to make 3D selfies.
• Scan Inc., a barcode/QR code scanner app developed by Brigham Young University Garrett Gee.

Missing from the list is a mobile search application called Vurb that Snap Inc. acquired last year in August.

Consumer Complaints

A search of Better Business Bureau shows a total of 10 user complaints starting from Feb. 6, 2015 to Apr. 3, 2017 -

• One which concerned a problem with Snapcash, a service that can be used to send or receive money between Snapchat users. In this case, Snapchat asked the concerned person to contact Square to resolve the payment issue.
• Remaining nine others concerned the service itself, ranging from queries related changing user name and asking for Windows Phone support.

Concerns

While Snap Inc.’s advertising strategy seems to be paying off, it chiefly expressed concerns about -

• Stagnating user growth, which it attributed to “technical issues that diminished the performance of our application.”
• The fact that “our competitors may mimic our products and therefore harm our user engagement and growth.” With Facebook already copying its main Story feature across all of its apps, Snap Inc. faces a legitimate threat from the social network.
• Its inability to attract new advertisers, and conversely lose advertisers, or face a reduction in the amount of money advertisers can spend on Snapchat.

(An investigative assignment undertaken at Columbia Journalism School)