Snapchat is Intrinsically Worthless

I disagree and agree. I agree there will not be another Facebook. I disagree, because Facebook is not the end of the line for social networks, just like Altavista and Inktomi were not the end of the line for search engines.

No one in the social network space has yet hit the quality Google hit with search. I fully agree that once that place is hit, it will be very, very difficult to dislodge whoever does it.

One of the common themes in investing is "what am I missing?" and this piece is a great walk through through a reasoned set of parameters that might make a company or project more or less valuable. The assertion that SnapChat is 'Intrinsicially' worthless is of course false. For something to actually be "worthless" in a free market would require that either no one would offer any value in exchange for partial ownership, or there would have to be outright fraud. We say a 'fake' Van Gough is worthless because it is worth much less than an original, but someone might buy it because they like the painting and they can't afford an original. As a painting it would probably be worth more than a print. But not actually "worthless."

So what is he saying? He says that Snapchat's recent valuation was much higher than he would have put it. And we can ascertain that like the forgery vs. actual painting the difference in the two numbers is large.

So what is the basis for this disconnect? It is this:

" $4bn for an easily replaceable service that is little more than Microsoft Paint duct taped to a disposable camera? A service that voluntarily throws away its own data in the golden age of data hoarding? A service devoid of the nature of competition that is the driving behind every other profitable company in the world?"

The focus here is on the tech and not the market. A pet rock was 'worthless' (the rock was just a rock) but the connection with a generation was valuable. So often in our business we look at something that we feel like we could build (or could be easily built) and a valuation, and focus on those two things. The parts we don't see we give little value to (350M snaps? Seriously? That is a boat load of engagement). Making anything that get 350M 13-23 yr olds engaged is a pretty huge deal. That is what is valuable with Snapchat, not the tech.

* 350m snaps per day + potential growth - At least 3 interaction screens per snap (pre-view/view/post-view): that's over 1bn places you could put, say, ads per day. Do the CPI/conversion math on that. * User data for 200m+ users + the ability to extend and refine * A direct line to 200m+ home screens via push notifications * Enough inertia to mitigate the threat of competition (Facebook challenged with the Poke app, that failed) * The potential to change/extend the feature set to more revenue oriented streams * All other possible things you could do with an enormous and massively engaged captive audience...e.g. walking past Starbucks - they're having a slow day. Receive Snapchat from Starbucks with scannable special offer code and super quick expiry. We've just made Groupon for the high street. * Rights to all the above until the end of time

Total: $4bn

Doesn't seem so crazy to me.

Here's some of my ideas and they all involve in-app purchases:

* Corporate deals that allow you to place products in your snaps, kinda like Photoshop. Example: you pay $0.99 to be able to place a character from South Park in your Snap.

* High-quality snaps, that take advantage of your camera's full resolution

* Sound snaps, so you can record 30 seconds of audio and send it to a friend. Great for sharing tracks you make or music you're hearing, or just to record some idiot yelling on the bus.

There are many more possibilities. Snapchat can almost be thought of as a "social game", a sort-of cross between FarmVille, Instagram and Twitter. You can still share basic things to your friends, but you can pay to send even better things. My ideas may or may not be shitty, but they still prove that the service probably can monetize, in my opinion.