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Inside Snapchat: The Biggest Tech IPO Since Facebook

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Snap Inc. (SNAP - Free Report) , parent company of Snapchat, recently made its historic market debut. It was the second-largest U.S.-based technology IPO ever, behind only Facebook , one of its key industry competitors no less.

Snapchat is one of the most popular messaging and social media apps on the market today. It humbly began as a class project by former Stanford University students Evan Spiegel (now CEO), Reggie Brown, and Bobby Murphy. (For an inside look at Mr. Spiegel, check out this Zacks article: Can Snapchat’s Evan Spiegel Be the Next Mark Zuckerberg?)

Launched officially in 2012, Snapchat allows users to take photos, record videos, add text and drawings, and send them to a controlled list of recipients. These photos and videos disappear within 1-10 seconds—the amount is up to the sender—after the recipient views them.

What Makes Snapchat So Popular?

You know you’re doing something right when huge tech corporations begin copying all of your ideas. Giants like Facebook and Microsoft (MSFT - Free Report) have spent the better part of four years trying to emulate Snapchat, debuting new tools and features that are shamelessly similar to what the startup is known for.

What makes the app so compelling?

Ever since its debut, Snapchat has steadily climbed the social media ranks, having gained the top spot among teenagers over Twitter , Facebook, and even Instagram (though the photo-sharing app is swiftly closing ranks). According to Mashable, who cited a Piper Jaffray study, 6,500 U.S. teens were polled “to see what they felt was the most important social network, and Snapchat took 28% of votes. Instagram came in close-second with 27%, followed by Twitter and Facebook.”

Over the last year or so, Snapchat has been launching new unique feature after new unique feature, introducing things like Snapchat Discover, expanding its video and picture filter library, and partnering with events like the Oscars, where the app let its users watch live behind-the-scenes footage of the red carpet and the actual show.

Teenagers love Snapchat, and teenagers are a coveted demographic for any tech company. The study both demonstrates Snapchat’s incredible ability in capturing this fickle group of people, as well as why teenagers prefer this kind of digital platform.

Ephemeral Engagement

Snapchat is a social, ephemeral experience that favors photos and videos over text-based media, and the company has made these qualities a priority in its development and business model. Engagement is not new for social media applications. In fact, it is very important to all social media companies, as engagement is the driving revenue factor, besides advertising. Snapchat, though, is approaching it in a completely different way.

Harvard Business School (HBS) Professors Marco Iansiti and Karim Lakhani offer an interesting perspective on this idea. In an introduction to the elective course “Digital Innovation and Transformation” presented in HBS’s Digital Initiative, Iansiti and Lakhani argue that Snapchat is “not just a messaging system, but also a social network, community, and an ad platform.”

Most importantly, Snapchat is an ephemeral social network, community, and ad platform. Their unique, yet increasingly popular application method is a major contributing factor to their success.

Iansiti and Lakhani continue, arguing that “Snapchat provides a window into this challenging question: what drives value creation and capture in today’s digital economy?” In other words, Snapchat offers a business model perfect for our current digitized economy, monetizing ephemerality in an innovative way.

Advertising & Video

Not only is Snap monetizing ideas, but it is also attempting to make money off its intensely high user base—the company has roughly 100 million daily active users—by introducing transient advertisements that disappear after a set amount of time.

This is a basic, yet clever, business move for the company. The combination of a large user base and high daily activity is a goldmine for advertisers. Snap recognizes this, and smartly charges an astounding $750,000 minimum for a day of advertising. By charging per day instead of the usual per click, the company is letting go of the typical internet advertising model.

The price may be staggering for some, but because of Snapchat’s huge, engaged audience, their early ad products have attracted big-name buyers like McDonald’s (MCD - Free Report) , Samsung , Macy’s (M - Free Report) , and Comcast (CMCSA - Free Report) -owned Universal Studios.

Video is another medium that Snapchat is capitalizing off of. According to a recent Bloomberg report, Snapchat is now getting around 10 billion video views a day, with more than a third from its “Stories” feature. This figure is impressive because Snapchat is mobile-only. In comparison, Facebook’s last reported video count was 8 billion daily views, which includes both mobile and desktop traffic.

The issue of what counts as a video, however, may be a potential problem for the app going forward. Snapchat’s videos are only a few seconds long, and most of the videos disappear once they are viewed. The company will need to clarify what they see as a video view in order to accurately paint a convincing picture.

Problems to Consider

Despite all of the company’s positive aspects, Snapchat does not come without controversy. Because of its ephemeral platform, Snapchat has been associated with sexting, a news topic that garners wide public attention whenever reported on. To some, the app is a perfect tool for sexting, as any inappropriate content quickly disappears.

The company has also been caught in racial controversies. On last April 20, the unofficial marijuana holiday, Snapchat released a new face filter meant to make users look like late reggae legend Bob Marley. The filter adds a Marley-style hat, dreadlocks, and darkens users’ skin town, which had some people dubbing the filter as a form of digital blackface.

And also last year, Snapchat released a filter lens that caused users’ faces to look like caricatures of Asian people, with shut eyes and rosy cheeks. Snapchat tole The Verge that “the lens was inspired by anime, and was meant to be playful.” It was eventually taken down, and will not be put back into circulation.

Snap also lost a number of executives after brief stays during its time as a startup. In 2014, the company lost Peter Magnusson, who was the VP of Engineering, after six months. And in 2015, revenue boss Mike Randall leaving after a short, seven-month stint, with COO Emily White and HR chief Sara Sperling departing that year as well. Shannon Petranoff, a former Paramount VP who joined Snapchat in March of 2015, returned back to Paramount that September, while Jill Hazelbaker, VP of communications and policy, left for Uber after a year at Snap.

An IPO for the Ages?

The hype surrounding Snap’s IPO was, to put it bluntly, insane. The company originally priced its initial public offering at $17 per share, which came in above the expected range of $14 to $16 per share and valued Snap at $24 billion. However, because of such high demand, SNAP stock started trading on the NYSE at $24 a share, rising as high as $26.05 at one point during the day.

More than 200 million shares, which was the entire size of the offering, changed hands over the course of the day and accounted for roughly 10% of the total volume of trading on the NYSE; Snap’s IPO ended up being 12 times oversubscribed, meaning there were 12 times more orders than there were shares offered. Shares of Snap closed their first day of trading up 44% to $24.48 per share, boosting its market cap to roughly $33 billion.

CEO Evan Spiegel has always recognized the importance of an IPO, and told Re/code at its annual conference back in 2015 that “[Snap] needs to IPO. We have a plan to do that.” He did not give details back then but stressed that “an IPO is really important.” Now that the company has made that giant step, its eager investors are wondering what’s next for the company.

Since its launch, Snap has molded itself as a company for the digital age and technology-grounded economy, and huge corporations wanted in from the get-go. Back in 2013, the company caught the attention of both Facebook and Alphabet Inc.’s (GOOGL - Free Report) Google division. They offered to acquire Snapchat for $3 billion and $4 billion, respectively. In a bold, but smart move, Snapchat turned down both offers, with attention from investors rising exponentially as a result from the decision.

Snap’s primary demographic, smart advertising strategy, and ephemeral business model made the company quite the IPO catch. Despite having made no money yet—Snap lost $514.6 million in 2016, and warns that it “may never achieve or maintain profitability,” according to its IPO prospectus—these things, plus its “cool factor,” lured investors in droves, marking an IPO for the ages.

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