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Sexting and Brexit: Things we learned from Snap's IPO filing

February 3, 2017 1:20 AM
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Sexting and Brexit: Things we learned from Snap's IPO filing

Snapchat, the disappearing-photo app founded by a college dropout, is growing up and looking to raise $3 billion.

This may be the first time the word "sexting" has been included in an SEC filing.

Snap, the parent company of Snapchat, just released its IPO filing, and included that tidbit about how it was first dismissed as an app for sending nudes. There's plenty of other juicy information about Snapchat shared about its business to take the five-year-old company public. The popular mobile app, known for its self-detonating photos and videos, said Thursday it aims to raise $3 billion.

Evan Spiegel, a 26-year-old Stanford University dropout, co-founded the app in 2011. Since then, teens and young people have flocked to it, to document everything from concerts to morning commutes.

The Los Angeles company has already built up its fair share of lore, as it emerges as one of the tech industry's newest power players. Spiegel has already stared down Facebook's Mark Zuckerberg, reportedly balking at his $3 billion takeover offer in 2013. The company was the target of a lawsuit by an ousted co-founder.

And, of course, it began life derided as nothing more than a "sexting" app.

Here's another one of Snapchat's trademarks: it's confusing. It's got a funky design, probably on purpose, like a user interface secret handshake. (In fact, that's listed as a risk factor.)

Who is Snap? This is how they describe themselves: "Snap Inc. is a camera company. We believe that reinventing the camera represents our greatest opportunity to improve the way that people live and communicate...In the way that the flashing cursor became the starting point for most products on desktop computers, we believe that the camera screen will be the starting point for most products on smartphones. This is because images created by smartphone cameras contain more context and richer information than other forms of input like text entered on a keyboard."

The money. Snap is valued at $20 billion to $25 billion. It's looking to raise $3 billion in the offering.

The man. Evan Spiegel, Snap's cofounder, owns about 22 percent of the company. When it goes public, he'll get another 3 percent of the stock. His annual salary starting in October was $500,000, but it will now go down to $1. He'll get a $1 million bonus each year (based on parameters he and the board agree on), and Spiegel's stock holdings make him a billionaire many times over.

"Delete by Default." That appears to be the company's new mantra. Snap explains that once smartphones -- and smartphone cameras -- became popular, photos themselves became less important to save. "When images became so easy to take and share with smartphones, it became easier to use images for communication," Snap said.

SNAP. It's going to trade on the New York Stock Exchange under the ticker symbol SNAP.

Not profitable -- ever? Snap has never turned a profit since beginning commercial operations in 2011. As of December 31, it had an accumulated deficit of $1.2 billion. The company warns it expects future operating losses, and "may never achieve or maintain profitability." To sum up: it's never made any money and maybe never will.

The board. Michael Lynton, one of Snap's earliest investors and the CEO of Sony Entertainment, is the board's chairman. He announced last month he's leaving Sony to work at Snap full time. Of all the company's non-employee directors, only one of them is a woman. That's Joanna Coles, chief content officer of Hearst Magazines. She's also appeared as a mentor on "Project Runway." Make it work.

Picaboo. Snapchat began life in 2011 as Picaboo, an iPhone photo messaging app.

Sexting. As in, that's what Snap was known for in its early days. But the company says even then, "we knew it was being used for so much more. We think this was because deletion by default was an unusual concept compared to what was standard at the time, so it took time for people to understand that we were trying to solve a problem that many people didn't realize they had."

Young'uns. Most Snapchat users are 18 to 34 years old, but it's people younger than 25 who spend the most time on the app. On average, users 25 and older visited Snapchat about 12 times and spent about 20 minutes a day. Meanwhile, users under 25 visited Snapchat over 20 times and spent over 30 minutes on the app each day.

A daily habit. In 2012, Snap says it went from 1,000 daily users to 100,000. A year later, it was at 1 million daily users. Now 158 million people on average use the service and create over 2.5 billion Snaps -- short videos or images -- every day. On average, more than 60 percent of the company's daily active users create Snaps with its camera every day. Users visit Snapchat more than 18 times a day, on average, and spend 25 to 30 minutes on the app. (I'm tired just typing that.)

By comparison, Facebook has 1.86 billion people on its platform -- two out of every seven on the planet -- and 1.2 billion use it daily. So the user points for now go to Zuckerberg.

Confusing. It can be hard to use Snapchat. You have to swipe and tap and there are no explicit directions on how to do things. The company knows that. The lack of intuition in its user interface is listed as a risk factor.

Slowing growth? Snap warned that its daily active user base may not continue to grow, and that its user growth showed a slowdown in the past couple quarters of 2016. In the beginning of the September quarter, its base increased 7 percent from the June quarter. But in the latter part of the September period, its user base was "relatively flat," which resulted in an overall 4 percent sequential rise. It also added only 4.5 percent more users from September to December (before that, the user base had risen sequentially in the double digits on a percentage basis).

iPhone effect. The "majority" of Snap's users have iPhones. "As a result, although our products work with Android mobile devices, we have prioritized development of our products to operate with iOS operating systems rather than smartphones with Android operating systems." Sorry Google.

Spectacles. Snap's first device, the video camera-equipped Snapchat Spectacles, went on sale in September for $130. They became a hot holiday gift, with people lining up for hours at Spectacles vending machines that popped up around the country.

Snap doesn't really make any money from them, though, and "substantially all" of its revenue comes from advertising. Despite making "significant investments" to make Spectacles, "we are not yet able to determine whether users will purchase or use Spectacles in the future," Snap said.

FDA. Its Spectacles are regulated by the US Food and Drug Administration and other state and foreign regulatory agencies. And it "may develop future products that are regulated as medical devices by the FDA."

Potty humor. The IPO filing includes references to party goats, pooping while on your phone and, of course, sexting. Not your average S-1.

Brexit. The UK's plan to leave the European Union isn't just causing turmoil for Europeans. It also could hurt Snap. The company plans to base "a significant portion" of its non-US operations in the UK, and it has licensed a portion of its intellectual property to its UK subsidiary. "No assurance can be given about the impact of the outcome and our business, including operational and tax policies, may be seriously harmed or require reassessment if our European operations or presence become a significant part of our business."

Net Neutrality. Snap says the open internet is important to its success. Because so much of what people do on Snapchat -- send high quality videos and pictures -- requires lots of bandwidth, the company favors net neutrality. That's the idea that all data on the internet is treated equally, and no company or website gets special treatment.

Control. Even if Evan Spiegel or Bobby Murphy are terminated from the company, they will "continue to have the ability to exercise the same significant voting power," and potentially still control stockholder decisions. The company also says neither co-founder can take on the duties of the other, and it wouldn't be easy for Snap to quickly find a suitable replacement.

Charity. Snap has been operating a new charity, the Snap Foundation, since the beginning of this month (yes, a whopping two days). After the IPO, the company and the co-founders have each pledged to donate up to 13 million shares of their Class A common stock to the foundation over the next 15 to 20 years. The group will support arts, education and youth.

Ad dollars. "Substantially all" of Snap's revenue comes from advertisers, but it doesn't have long-term commitments from most advertisers despite recent efforts to set up such deals. There's not a single advertiser or content partner that accounts for more than 10 percent of Snap's revenue. Many of its advertisers just started working with the company and only spend "a relatively small portion of their overall advertising budget" with Snap.

Google Cloud. Talk about frenemies. Google is listed as a competitor -- partly because of YouTube -- but it's also an ally. Snap relies on the search giant's cloud service for storage and bandwidth. The company said it made a $2 billion deal with Google over five years to use its cloud service.

The competition. Other big competitors (who are sometimes friends) include Apple, Facebook (and its Instagram and WhatsApp businesses), Twitter, Kakao, LINE, Naver and Tencent. "Many of our current and potential competitors have significantly greater resources and broader global recognition and occupy better competitive positions in certain markets than we do," Snap warned.

Who aren't listed as competitors? Camera makers like Canon (even though Snap calls itself a camera company.)

Instagram. Snapchat called out Facebook-owned Instagram for ripping off its marquee features, Stories, which lets users post a string of videos and pictures that disappear after 24 hours. Instagram Stories "largely mimics" Snapchat's own feature, and it "may be directly competitive." Yeah, we can see that.

The media. Snap warns that negative media coverage could affect its brand, and therefore the success of the company. They've already had their share of bad press, including a lawsuit from an ousted co-founder. Basically, Snap's message to the press: Please don't write bad stuff about us.

Growing team. The company has 1,859 employees, up 600 over the past year. And that's just the beginning. It plans to add to headcount "rapidly" through hiring and acquisitions. That's where the $3 billion it hopes to raise will come in handy.

CNET Magazine: Check out a sampling of the stories you'll find in CNET's newsstand edition.

Batteries Not Included: The CNET team shares experiences that remind us why tech stuff is cool.

Source: cnet.com

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