Ben and David tackle their first failed acquisition: Facebook's 2013 offer to buy Snapchat. They cover the fascinating story of Snapchat's creation and growth, their blossoming business model, how it would be different inside of Facebook, and what the future holds.
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Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or just-plain-hilarious transcription errors)
David: I’ve noticed our episodes have been getting a little longer.
Ben: Yeah, they have.
David: Do you think that’s a problem?
Ben: Maybe a little.
Welcome to Episode 12 of Acquired, the podcast where we talk about technology acquisitions that actually went well. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. This episode, we’re going to try and do something a little bit different.
David: Today, we’re going to talk about one that didn’t happen at all.
Ben: Dun-dun-dun… This week we’re going to cover Facebook’s attempted acquisition of Snapchat for $3 billion a while back.
David: In November of 2013.
Ben: Yes, and it will be cool because not only the deal didn’t go through but we have the benefit of history to help us create what would have happened if that offer actually went through.
David: Well, we know for a fact what would have happened otherwise if Facebook didn't acquire Snapchat.
Ben: Yeah, that’s actually easy.
All right, a few things before we get into it. One, please rate us on iTunes. It’s how we grow the show and it’s how we gain more listeners like you. We also really appreciate any social sharing if you like the show. Please shout it out on Twitter or Facebook. And David has an update with a new thing we're trying.
David: Yeah, we have a new innovation here at Acquired. We just launched a Slack community that we're experimenting with. So if you’d like to join us on Slack, go to our website, Acquired.fm and from there you can sign up and join our community on Slack. And we’re going to have some fun with it and see where it goes.
Ben: Yeah, we plan on doing kind of like episode discussion in the week following. We get a lot of email from people directly to us and we figure that actually could be pretty beneficial to just have that in a group context. And Slack seems like a nice way to do it because a lot of us are already on it for our work day in and day out. We can just kind of passively subscribe and watch the conversation.
David: Yeah, and we’d love to see where it goes with the community. So you can use it, you can DM us with feedback or questions or just post in the community.
Ben: Yeah, yeah. And also a good place for if you have ideas for future shows that you want us to do. If you think you’d like to be a guest on the show, we’ve got a few great guests coming up that we're super excited about. So, more great stuff to come.
All right, time to get into it.
David: All right. Well, we tried to get guests for today but both Zuckerberg and Spiegel were booked up, unfortunately.
Ben: Yeah, or so we assumed.
David: All right, I’m going to dive in with acquisition history and facts. This might take a little longer because this is a long story here.
Ben: David, do not scare them away.
David: All right. So 2010, Evan Spiegel is a sophomore at Stanford and he has just recently moved in to the Kappa Sigma fraternity house, the fraternity he joined at the end of his freshman year. Across the hall, a guy named Bobby Murphy who’s a senior is living there. And so they started hanging out, they become friends, and Bobby recruits Evan to work on a social app that he had an idea for, inspired by Google Plus.
David: Unsurprisingly, that goes nowhere. Time goes on and Evan is still at Stanford and actually he’s doing great at Stanford. So he’s an undergrad and he ends up majoring in product design and David Kelley becomes his advisor. David Kelley is the founder of d.school.
Ben: IDEO, right?
David: Yeah, founder of the d.school at Stanford and professor there and founded IDEO before that. D.school, I have a bunch of personal history having gone to Stanford for business school, the d.school normally only admits grad students, like undergrads can’t take d.school classes. But somehow, Evan manages to get David to be his advisor. And that’s not the only cool thing he does as an undergrad. He manages to find his way into becoming an auditor for a class at the business school, Strategy and Management 354, I believe, called Entrepreneurship and Venture Capital, which was my favorite course in business school. It was awesome. It was taught by Peter Wendell who was one of the founders of Sierra Ventures and was a long-time venture capitalist and then co-taught by Eric Schmidt and Raymond Nasr who was Google’s first Head of Communications and worked for Eric both at Novell before Google and met Eric. And it was an amazing class. We had amazing guest speakers come. People like Meg Whitman, like Biz Stone, like Peter Fenton, Scott Cook. And Scott Cook, when he came, Evan was there. Actually he was so taken by the young Evan Spiegel that he hired him to be an intern to work on a project that he wanted to launch at Intuit.
Ben: Wow. So no doubt a special individual even before Snapchat.
David: Even this was years before Snapchat. You could tell this kid had talent. He was going places. So, that summer after Evan’s sophomore year, he and Bobby team up again. They start a new company. This time it’s a website for aspiring college… high schoolers navigating the college admissions process. It’s called Future Freshman.
Ben: Why does the story feel super familiar? I feel like I’ve seen a movie about it, like kind of a failed idea before the big idea that took off. Maybe went to college together. Something about somebody believing it was actually their idea laying claim…
David: So, there was some twins who…
Ben: Yeah, they might have used a super similar law firm to that one here. I’m jumping ahead.
David: Obviously referring to the social network here in Facebook. The similarities are eerie. Okay, so the Future Freshman, that goes nowhere again.
April 2011, so it's Evan’s junior year and Bobby is graduating. And Evan’s hanging out one day and his fraternity brother also in Kappa Sigma, Reggie Brown who is a classmate of Evan’s and a close friend, he comes running up to Evan and he’s like, “I’ve got an idea for an app.”
David: Uh-oh. And he’s like, “I sent this picture to this girl last night.” Apparently, as we will discuss in a minute, this is all discussed in the courts and legal filings. “And I got this an idea for an app that you can make pictures disappear,” and supposedly Even gets really excited and repeatedly calls it a “million dollar idea.” One million dollars.
Ben: Which he denies, I believe, in the court proceedings that he ever said anything like the million, but did acknowledge he was very excited.
David: Yes. So they get really excited, the two of them, Reggie and Evan. They recruit Bobby again. At this point, Bobby has graduated, he’s got a real job. He comes back, he becomes the CTO of the company and Evan just conveniently happens to be in a design class at Stanford where they build a product and a company in the class.
Ben: Wait, was this actually part of his…like he worked on this in a class?
David: Yeah. So they submit this idea, this app that they’re building. They decided to call it Peek-a-Boo. They submit it as their project for the class as Evan’s project. And the final day of the class, there’s a panel of esteemed venture capitalists that judge all of these projects in the class. And so, you know, they work really hard during the quarter and they get the app. They get a prototype done. Actually at this point, it’s a website. It’s not even on a phone. You have to submit a photo on a website.
Ben: Right. You have to click the ‘choose file’ button on your computer. I mean, that’s a mess.
David: It was janky. And it goes over like a LED balloon. The app of esteemed VC judges hates it. Apparently, according to an interview with Evan suggest maybe they should talk to BestBuy about a partnership. I don’t know what that would be, maybe with cameras or something. So, not an auspicious start to the early days of Snapchat. But undaunted, they decided to keep working on. So they spend the whole summer after that quarter working on the app, and they worked really hard, and they grow with the app, and by the end of the summer, they have 127 users.
Ben: Which having worked on a couple of consumer things that didn’t work and actually working on one now, it is so terrifying when you see these super low numbers, and then everything you’re reading about in the press has insanely high consumer engagement and you’re like, “I need three to four more orders of magnitude before this is…”
Ben: And it’s almost inspirational that they only had 127 users.
David: Working on it all summer. So we’re now roughly six months into the life of what would become Snapchat. They have 127 users. At the end of the summer, there is also, unfortunately, a big argument occurs between Evan, Bobby, and Reggie. And Evan and Bobbie kicked Reggie out of the company. Then the summer ends…
Ben: And that argument came right around the time or part of the same discussion as when they’re figuring out their equity splits, right?
David: Yeah, I think it was prompted by figuring out the equity splits.
Ben: Which, boy, is that a lesson for founders out there to have thing really before people start to feel like they’ve already contributed and earned more than the rest of the group thinks.
David: I mean, unless your strategy is really Machiavellian and you want to push your co-founders out of the company and get more equity for yourself.
Ben: Yeah. Have that discussion early.
David: Yeah, we would recommend that. Pro tip: have the equity discussion early.
So, the app still goes nowhere. The summer ends, Evan heads back to Stanford for his senior year. Bobby is like, “Hey, I need a job,” so he takes a job at another startup in San Francisco.
Ben: Yeah, I read that. That blows my mind. They left the app in the store and went back to their lives.
David: They literally put it on ice. And around the same time, more bad news, they get a cease and desist order from another startup called Peek-a-Boo that I think is also in the photo space telling them they need to stop using the name.
So Snapchat or Peek-a-Boo is on the ropes at this point. They need to change the name. They brainstorm, they come up with Snapchat.
Ben: And they kept the ghost. I’m pretty sure Brown actually came up with the ghost logo. That was his contribution before he got kicked out of the company.
David: Yep, I think that’s right. So one other thing happens in the fall as Stanford classes are starting again and it turns out to be really important. And that’s that Evan’s mom, this is all according to articles on the internet including a big really good profile in Forbes on Evan Spiegel that there’s a lot of resource material here, Evan’s mom tells her niece who’s in high school in Orange County, so this is Evan’s cousin who’s a high schooler in Orange County about this app that Evan is working on and her niece downloads it and thinks it’s really cool and starts using it with her friends in high school. And one of the reasons that they start using it is that you don’t need to use it on a phone. You can use it on an iPad because it works on iPads too and with the iPads that their school there, Tony Private School in Orange County had given them… they had them locked down so you couldn’t use iMessage.
Ben: Yeah, I think I read something they also made it so you couldn’t install Facebook.
Ben: Which is actually incredibly ironic that the fact that those iPads didn’t have Facebook is why they needed a different way to communicate, so they installed Snapchat.
David: So they installed this random cousin’s app so that they could text each other during the day with their school iPads in Orange County.
David: Crazy. So it sweeps through the school, then it turns sweeping through other high schools in Orange County, then it moves up the state and then it moves into other high schools in Northern California and in Silicon Valley and the growth takes off. So by December 2011, Snapchat is up to just over 2,000 users. The next month, January, 20,000 users. Couple of months later in April, 100,000 users.
Ben: So that’s the order of magnitude growth in a month and then another 5x the next month?
David: In the next 2-3 months after that.
David: And this is the proverbial hockey stick. They have found it. So all of a sudden they need to pay the server cost because they’re hosting a lot of photos at this point.
Ben: Well, and the incredible thing too, I mean, a lot of the time you’re trying to make that product tweak to get you to that hockey stick. But this is truly like the product was stagnant and it was like…
David: They really didn’t change anything.
Ben: Finding the right market and it’s not like they even found it. It’s like in the city is it found its way.
David: Literally, Evan’s mom found the right market for them.
Ben: Wow. I mean, these things, it’s almost like you shouldn’t try to learn lessons from these things as founders because they’re such extreme outliers that it’s almost like chasing a unicorn to try and duplicate the sort of success.
David: Good choice of words. So at this point, it's now April, they’re at 100,000 users. I don’t know if they’re using AWS, or Snapchat now uses Google Computer Engine, if they were using that at that point. But they got to start paying the server bills.
Ben: Yeah, they’re by far the largest tenant I think.
David: Yup, on GC today. So they raised a seed round, $485,000 from Lightspeed at $4.25 million valuation. I think that was the pre-money. But effectively Lightspeed gets about 10 percent of the company for less than $500,000.
Ben: At which point, Evan is furiously refreshing his Wells Fargo app I think in class, as the story goes. And as soon as he watches it hit, he walks down, he says goodbye to the professor and he drops out of class or drops out of Stanford months before graduating.
David: Yup. It’s April. Graduation is in May/June. He literally drops the mic in the middle of class – this is according to Evan – once the money hits the bank account and walks out the door and never comes back.
Ben: Yeah, and if you were in that class, we’d love you to join the Slack team and let us know how it really went down.
Ben: But that’s what we're going off of.
David: That’s what we’re going off of. So walks out, moves down to LA, convinces Bobby to come down. They shack up at his dad’s house in LA. They convince a bunch of their friends from Stanford to also drop out of school months from graduation, come down, join the company and start working on it. And then for basically the rest of 2012, that’s when the core of Snapchat as we know it today gets built.
So they shack up in LA, work for the whole summer. In October, they launched on Android. And when they launched on Android, they announced that they are now serving 20 million Snaps per day in October of 2012. December of 2012, they add the next big pillar of Snapchat which is video and then also in December of 2012, Marck Zuckerberg has heard about this app and he sends an email to Evan Spiegel.
Ben: He has. And it does seem that he had heard of it a little bit earlier since kind of quietly – I was at Microsoft – Facebook had been working on app called Poke. They were reviving the the old name of the feature that we all know from early on in Facebook use that really never gets used today to basically create a clone and actually from a UX perspective, a very excellent clone of Snapchat.
And when Zuck does meet with Evan, it’s kind of an interesting story of how he gets there, Zuck says, “Hey, why don’t you come hang out at Facebook.” Evan says, “Oh, next time when I’m up in the Bay Area.” Evan I think follows up and says something like, “Why don’t you come down here?” So Zuck actually flies down to meet Evan at Snapchat’s headquarters. I think there’s a whole story about them like they were renting a private apartment to have this thing. But Zuck walks in with a plan and he basically says, “Hey, here’s how I would do Snapchat and sort of how I see your role in the world, and how I could see this all playing out.” And it’s this grandiose vision and it’s quite impressive. And he ends with saying, “And we're going to be launching Poke next week.”
Ben: It’s not an offer to buy them. It’s like “we are going to crush you.”
David: This is not the acquisition offer.
David: This is not the acquisition offer you’ve been looking for.
Ben: Is not. And so, Zuck flies home. I think Evan, as the story goes, and I feel like this might be overdramatized but the book is the Art of War.
Ben: Evan gets his whole team of a copy of The Art of War.
David: Sun Tzu’s The Art of War.
Ben: Yeah. They all read up.
David: It’s Evan Spiegel’s Carve-out for the Week.
Ben: Yeah, that is, I guess, for Evan. And they watch carefully as Poke launches. Evan had deleted his Facebook account. So he goes to Bobby and has him check out Poke and sure enough, it's great. But the thing that’s even greater is all the buzz that happens for Snapchat by Poke launching.
David: Yeah, and I believe Evan then is quoted as saying like “this is basically like Merry Christmas to Snapchat when Facebook did this” because it had brought so much attention to the platform like the second word out of everybody’s mouth when talking about this huge launch that Facebook was publicizing was Snapchat.
Ben: Yeah, and so a couple of interesting observations here. One, that’s a super common thing. I think that a lot of the times… I know this actually firsthand. I made a to-do list manager similar to reminders for the iPhone before Reminders launched. And when Reminders launched, we were like, “Oh my God, we're dead. Apple Sherlock does…” And Sherlocking is a reference to Apple back in the day launching an app built into the platform called Sherlock that put all the other search apps out of business. I think you have that story, right? Yeah, Apple called it Sherlock and then Apple built Spotlight. Anyway…
David: Yeah, yeah.
Ben: Something like that. But what it did for us as a to-do list was making a lot of people realize they needed a to-do list manager and maybe they didn’t like the generic one that Apple launched. Same thing with Instapaper when Apple launched the, what is it, “read later” service that’s built into the OS in Safari.
David: Yeah, that nobody uses.
Ben: And sales for Instapaper spiked. So it’s kind of interesting, like don’t be afraid so of the big guy launching your feature.
David: And in this particular case as there’s so much evidence, I mean, the reason we're spending so much time on the history and facts here is like this is amazing, like you couldn’t make this stuff up.
Ben: And this is wonderfully dramatic and it couldn’t have been scripted any better.
David: We know it all from both court cases and interviews that Evan has given with media outlets.
Ben: Yeah, and here’s the part that gets me. Snapchat, you could argue it already today but could at one point be an existential threat to Facebook. The reason they got installed on those iPads was because Facebook was being blocked and they needed something else. And then, the reason that they got this huge boost in downloads right before Christmas that year was because Facebook gave them a gift. They launched Snapchat and then made everyone go to…
David: This was such a legitimizing moment for Snapchat because until then to the extent anybody talked about it, it was like, “Oh, that’s just for sexting.”
Ben: Right, right, I remember that. And I remember the turning point too where I started realizing, okay, we’ll talk about this in tech terms, but okay, my friends were using this for really telling me a story of their life as it’s actually happening without trying to make themselves look perfect. And this was before Snapchat stories. But I remember getting Snapchat and realizing these are pictures people would never put on Facebook and yet I’m engaging with these people all day every day. And maybe I’m not cool, I don’t know, none of them were sexting. Like every single one that I would get from someone is just like this is a candid casual peak into my life. And I kept trying to tell that narrative and even later some people were trying to tell me that narrative but I wanted to make the joke. I remember trying to tell that narrative to people at work and my family and everyone’s like, “Ugh.” It was taboo to have it installed on your phone because it was known as the app for sexting.
Ben: And you’re right, it’s totally legitimized it.
David: Totally legitimizing it. So, just two short months later, February 2013, three huge pivotal moments for Snapchat. First, they announced that they’re now seeing 60 million Snaps per day going through the platform. Second, they raised their Series A. They raised $13.5 million from Benchmark at about $70 million valuation. And interestingly, there was actually Matt Cohler at Benchmark who first kind of identified Snapchat and started making inroads with them and then Mitch Lasky ended up leading the deal and turning the board for Benchmark. ButMatt had been… well, first he was a very early employee at LinkedIn but then he was I think one of the first 5 employees at Facebook and then when he left Facebook to join Benchmark, his first deal that he did was Instagram.
Ben: And not a terrible track record.
David: Not a terrible track record. So here’s this guy, this firm, and this group of people that have such intimate history with Facebook and Zuckerberg, and then Facebook’s first foray into their next suite and their constellation of mobile apps with Instagram now leading the Series A in Snapchat.
Ben: This Shakespearean drama continues.
David: And so then the third event that happens in February of 2013 is that poor Reggie Brown, the erstwhile third co-founder suddenly… he’s moved back home to South Carolina at this point. Again, you can’t make this stuff up. And he realizes that Snapchat might be worth a lot of money and he sues the company and claims that he’s due 1/3 ownership stake in Snapchat.
Ben: Which actually does work out pretty well for him and it ended out getting resolved. It was seeking damages of, I think, half a billion dollars and they settled out of court, but I think it was in the hundreds of millions.
David: Rumored to be, nobody knows.
Ben: Yeah. That is one court case that did not leak.
David: Yeah, yeah. Well, thank you to that court case for happening though because we got this great story to tell.
Ben: Much like the same thing with Youtube –Sequioa memo.
Ben: We're getting all kinds of great stuff here from the courts.
David: So then after that it’s kind of inevitable. So, April 2013, 150 million Snaps a day. June 2013 which is just, what is that, four months after they released their Series A, there is a Series B of $80 million led by IVP at an $800 million valuation. So literally over 10 times the valuation of the Series A four months later.
Ben: And I remember at this time people were not sure this was sustainable. People were like, “Oh, it’s a fad.”
David: People thought it was crazy.
Ben: And I remember making the argument that the UI was terrible and what they were doing was commodity and I remember people talking about are they going to charge for it, are there going to be ads for it. And I remember thinking what they’re doing is so simple and easily buildable in the weekend that as soon as somebody clones it and builds one that’s free or there’s no ads, everyone’s just going to move to that. And that made sense to me at the time that it seems like…
David: Ah! Young Ben, you were not yet schooled in the power of the network effects.
Ben: Yup, yup. Boy, that’s a mighty moat.
David: Oh boy, is it ever. So that was June. August of 2013, Facebook is getting desperate at this point. They released a feature in Messenger that allows you to post to Instagram from Messenger.
Ben: Oh, yeah.
David: Like this is going to take down Snapchat. September 2013, 350 million Snaps per day. Snapchat announces, October 2013, they launched stories which are incredible that we’ll get into later.
Ben: And that was game-changing.
David: Totally game-changing. And then finally, November 2013, rumored but leaked to many, many press outlets including the Wall Street Journal, Mark Zuckerberg makes an offer to buy Snapchat for $3 billion.
Ben: He does. Nobody knows exactly where the leak came from there. I think Zuckerberg sort of alleged, and we know this from the Sony email leaks, Zuckerberg alleged that it was a tactic by Evan. Evan throws back that it could have just as easily been Zuckerberg to try and dampen their fundraising efforts rather than bolster them. But anyway, it never really comes to fruition and all we know is that the offer was made.
David: It didn’t happen. We know the offer was made and we know it didn’t happen. I mean, you both have to put yourself in Mark Zuckerberg’s shoes here. Less than a year ago, he flew down to LA and he basically sat there, according to what’s been disclosed and what we can read about, he sat there and he told Evan how to build Snapchat and how he would do it and what the right way to do it is. And oh by the way, Facebook was just going to do it. So, good luck with your little app. And then less than a year later, he’s again sitting there offering to pay $3 billion in cash for this little app.
Ben: Which is three Instagrams. Keep in mind WhatsApp hasn’t happened yet. So this seems absolutely preposterous. I mean, I’m just sitting there thinking later on we're going to judge like should they have offered more or what should Zuck have done after it was declined. But it seems crazy and at that time, you got to think like, okay, why does Facebook need to do this? What is Facebook’s core competency that is the mighty moat that they can’t have upended? That’s effectively owning your attention because then they get to choose what to do with your attention, how much to use for advertising, where to point it in terms of articles or friends, how to weigh all that. But Facebook, their number one Holy Grail metric is engagement and how much can they keep you engaging and hold your attention in a day. And Snapchat is just like the perfect storm of more engaging.
David: Yeah. Well, we’ll jump in the acquisition category, how it happened in a minute. But fast forward to today and in May of 2016, it’s interesting, Snapchat is growing super fast and I’m sure will reach a large number of users at some point. But their DAU, the daily active users that they report is about 100 million now.
Ben: Which is about a tenth of Facebook.
David: About a tenth of Facebook and is I believe smaller than Twitter. Well, Twitter’s MAU I think is 300-400 million maybe.
Ben: It’s 300 and whatever it is, it hasn’t grown meaningfully in a while.
David: Yeah. But Ben, hit on engagement. And that is the key here with Snapchat. So today, they’re closing with 100 million daily active users. They are closing in on at just about 1 billion Snaps every single day. So that’s for every active user on the platform, that’s ten Snaps per daily active user per day.
Ben: And 60 percent of people who use Snapchat daily Snap every day, themselves.
David: Yeah. So Snapchat totally blows up the old paradigm that 90 percent of your users on a social platform won’t create content and 10 percent will and 1 percent will be super users. Like 60 percent are super users.
Ben: Yeah. If you think about like Reddit-type website or something, you’re going to get 90 percent lurking just being the consumers, 9 percent are commenting, and then 1 percent are actually originating the content that creates the conversation on the site. And they just completely upended it by making it stupid easy to create.
David: Literally stupid easy.
Ben: Yeah. It actually worked to their advantage that it still looks like this and it’s sort of their brand. But I remember thinking that it was kind of hack-ish and amateur-ish that the best way they could think to overlay text over any image was by just make the whole line dark behind there, and like ship it. It just felt so crummy to me. But now, if you see that anywhere, you’re like, “Oh, that’s a screenshot at Snapchat.” They should just do billboards of that because that’s their brand at this point.
David: Yeah. Well, it’s interesting, I mean, this is one of the reasons why we spend so much time on the history (A) because the story is amazing, but (B) I mean it’s clear that Evan is an incredibly talented product visionary. Snapchat’s look and feel and brand in a lot of ways is, Ben as you were saying, super janky but it’s intentional. Right?
Ben: Or is it pioneering, David?
Ben: I mean, really all these UI paradigms are so foreign the first time you use the app and we’re having so many people now that they’re kind of breaking north of their stereotypical age group into more adult usage. People are saying, “I don’t know how to use Snapchat. I need my kids to teach me.” That’s always true with any new technology. But putting on my iOS developer hat, the easiest thing to do when creating an app is to create a table view with a navigation bar at the top and then a little drill down just like when iPhone OS launched in 2007. And what Snapchat has really done is say like “nope, you open it up and it’s in camera mode and then everything is just rolled from there.” Once you learn it, you get incredibly fast to that and it’s like its own language and grammar.
David: Yup. One of the things, there was a great article – shoot, I can’t remember where, we’ll find it and link to it in the show notes – that just came out, another one of the many profiles of Evan and of the company. And one of the things it talks about, it’s notoriously been hard to work for Evan and there’s been a lot of employee turnover at Snapchat. But one of the things it says in there is that any discussion of well, we have problem X or we need to do thing Y, and so we should just look at what other people have done on that. Like what did Google do? What did Facebook do? What did Instagram do? That will get you fired right away. The culture they have and that Evan tries to cultivate there is like “I don’t care what other people have done in the past. We’re doing things our way here.” Which I think you really got to admire, it’s what’s gotten Snapchat to where it is.
Ben: Yeah. I’m going to pull forward my tech trends. But there’s some interesting things there because they’re doing a lot of things mobile first in a way that I wouldn’t have known the current users or the current products weren’t doing mobile first. One of their big sells, and we’ll talk about their revenue model right now, is vertical video advertising. And for the first time, they’re forcing content creation to appear in a way that is the most immersive on your phone. And I think if they’re looking at others, they say, “Okay, well, how do people do add units? So it’s a feed,” or “oh, they repurposed letterbox video,” or they make people turn it sideways. And that wouldn’t be as engaging. I mean it’s a harder path to go this way but I think it’s fair to say product visionary that everything is completely rethought in this absolute level first way.
David: In vertical, yeah.
Ben: They also have basically, I mean, they changed the way that they do user growth and in adding your friends with Snap codes. I mean, that is the first time I’ve seen QR codes used effectively in the wild, and I think that if you go get a Facebook product manager or you go and get someone who’s worked at LinkedIn or Google, you ask like, “Oh, how should we do an invite system and then an adding friend system?” There’s a template way to know how to do that. This is so different. It’s like, “What do you mean? They’re probably right next to each other so will it be easy to just show the screen to the other screen?” Yeah. Okay, cool, Snap code accomplished.
David: Yeah. Interestingly, that was an acquisition. They acquired the technology behind the QR code.
Ben: Oh, nice. I guess good on them for seeing the opportunity to do something new and novel there rather than re-implementing the playbook.
David: But it’s a really good point, Ben, and I think that’s something that you could almost say it’s like a dirty little secret of Silicon Valley, like there’s actually not that much innovation that happens. It’s really rare.
Ben: Yeah. The PayPal mafia figures it out once then everyone comes after –
David: Then that playbook gets disseminated to everybody and it’s really hard. I mean, I was emailing with the founder I work with today and we’re facing a problem. And I was like, “Oh, let’s look at how Stripe dealt with this because they dealt with this problem so we should probably do what they did.” And it’s really dangerous thinking, but it’s also difficult to know how to do what’s right when you’re doing something new and how much to take from the playbook because it is the right thing and how much to be the innovator.
Ben: Yeah, yeah. Okay. So I think for the structure of the show what we’ll do know is we’ll dive into category. What would have happened otherwise, we can talk through a little bit. And we’ll kind of wait all the way until we get to render conclusion to talk about their current business. Does that sound good to you?
David: Sounds good to me.
Ben: All right. Sweet. So, acquisition category. I was torn on this and here’s how I’ll frame it. If they had actually gotten the acquisition done when they did or when they made the offer, that would have been a product acquisition. They were buying one single product that people all over the place were using in the exact same way. At this point, it would be a business line. It is many products rolled into one. I mean, they’ve got stories and discover and the traditional Snapchat model and they have several different add units that they sell in there and those are all different products for advertisers. And I think that at this point is it would be like the Snapchat business unit of Facebook rather than “hey, we bought this one-off app, it has a lot of people using it like WhatsApp.” It would truly be like they would need their own ad sales team. They would need a lot of things that wouldn’t be able to be factored in to Facebook.
David: Yeah, I think that’s right. The only counterpoint I’d offer is maybe had this actually happened and had Facebook done its thing and just left it alone and all the growth and innovation that’s happened at Snapchat had also happened, I think you can almost argue that this would be a new category which would be like a wholly independent company within another company.
Ben: Yeah, and then okay so…
David: Because it’s all of it, right, like it’s the people, it’s the technology, it’s the product, like the way the business operates. All of these things are just wholly different from Facebook.
David: In a way that Instagram and WhatsApp really aren’t.
Ben: Yeah, so let’s play that out. So now we’re into what would happened otherwise. If the acquisition had gone through, this is pre-revenue for Snapchat, does Facebook kind of have their way with it and start gathering more information about the Snapchat user, or even better yet, they’d probably find a way to just tie those together on the phone where they say, “Oh, this person’s logged into his Facebook here,” they ask you to log in with Facebook once in the Snapchat app so they can tie it together, much like with Instagram then an advertiser can target you in multiple ways and can say “I’m going to use the same ad dashboard, I get the same targeting capabilities and I’m going to target this Snapchat user as if they were any other Facebook user, but I want to reach them when they’re having this aha moment instead of when they’re in the Facebook app reading about X, Y, Z.” I think that’s absolutely what would have happened because they would have used that common ad platform and continue to leverage it and make it even easier for advertisers to advertise on multiple mediums. And that is very different than the ad strategy that Snapchat is doing now.
David: Yeah. This is what makes this… well, listeners are the judge of whether this is interesting or not. But to me, what makes this so interesting is like since the spurned acquisition offer, Snapchat has really totally gone off and become the anti-Facebook. And that goes not just through the product and the consumer-facing aspects of it but through the whole advertising platform as well.
I mean, Evan talks about and promises that they will never do creepy targeting. That Snapchat is a brand advertising platform and they will not track users, they will not collect data. Privacy is core to what Snapchat is. And that’s just anathema to the Facebook and in a lot of ways the Google way of doing advertising.
Ben: Yeah, and as you bring that up, something we were talking about earlier, it makes me think about okay, so they’re not going to have a million checkboxes and drilldowns like I can use on a Facebook ad dashboard. And I was looking into it, all you can target on Snapchat is geographic location, age. You get reporting on how many people opened your Snap and then you get to choose if you appear in a Live Story or what Discover Channel you appear on. So you basically get Live Story Program, Discover Channel Program, Discover Channel, Location, and/or Gender, and then you get Number of People Who Opened. It’s pretty primitive.
So if I’m trying to do any conversion-based advertising, that’s right out. It's extremely expensive and I can’t quantify it, and I don’t know if I’m actually reaching my core customers. But if I’m Coca-Cola, that sounds like a killer brand advertising platform. I can make sure people see it. They’re like in this moment of discovery when they’re looking for it. It’s fully immersive on their screen. I design and I can –
David: And I can target based on content.
Ben: Right, that’s the other thing. So you have contextual targeting.
David: And location.
Ben: Yeah, contextual targeting. Location is like getting a little bit into the… it would be more interesting to me from a conversion perspective but also interesting from that perspective.
David: Yeah, I mean, things like Snapchat, one of the places where it’s really flourished is Coachella and places like that.
David: So I can target people who are at Coachella.
Ben: Right, right. And the big obvious thing here is there’s no links on Snapchat so I’m never leaving the platform. It’s not like they could link me out to go buy a product anyway. It’s purely one directional television style advertising.
David: Yeah, and this is the kind of stuff like let’s say I’m Coca-Cola again. I’m advertising on Facebook, I’m just blasting. I can target super granularly in the heck out of people but, like, they’re probably not that interested in drinking a Coke while they’re on Facebook. But if I target people who are at Coachella and it’s hot out, maybe they want to drink a Coke. Or when I target based on location which is secondary, but content-wise, so like all the Discover channel, ESPN or Tastemade, I want to advertise to people who are interested in cooking. I’m Betty Crocker or whatever. I can advertise on Facebook to people who lists cooking as one of their preferences but they’re not cooking when they’re on Facebook. But when they’re watching Tastemade and watching cooking shows, then they’re in the mood for…
Ben: I don’t know if the context is better. I look at it like the nature of brand advertising is that you’re not going to go and transact on that and close the loop at anywhere near the moment. It’s that it’s stored in your head. And I think that the context doesn’t matter, but the richness of the ad does.
David: You don’t think there are psychological associations between content and advertising?
Ben: I do. I just don’t think that seeing an ad on Facebook is contextually worse than seeing it on Snapchat. I’m already in entertainment mode. I can see that if you’re advertising to me when I’m on Google search and I’m on a quest for information and I’m like, “Coca-Cola, get out of here right now.” But on Facebook, I’m open to being entertained.
Anyway, I guess the point I’m making is I think the context of Snapchat isn’t necessarily any better but since they’re doing brand ads and you have the opportunity to create a much more rich advertisement that it makes it a more valuable brand platform because you don’t actually care about that granular of targeting.
David: Fair enough. I still think when I’m on ESPN and discover and I get Axe body spray, I would never wear Axe body spray, so I claim on the internet. But I don’t know, to the extent you can make an argument that television is still very valuable, this is the argument.
Ben: Which you absolutely can. We're getting into my conclusion, but I think Snapchat’s opportunity is enormous because brand advertising currently is and has always been much larger than transaction-based advertising. I’m not sure with conversion-based advertising.
David: A direct response.
Ben: Direct response. Yeah, there you go. And advertising stays relatively fixed as a percentage of the GDP. It’s between 1 and 1.4 percent of the GDP ever since the notion of advertising was invented in the United States. And so, with that staying about flat, the GDP will grow some but with that staying about fixed, it’s about allocation. And if brand advertising is and sort of will always be more significant than direct response, right now a lot more brand dollars are spent on television still than anywhere else. And now, it’s raised to what platform can effectively steal from television advertising. And that’s where I think Snapchat’s real opportunity is.
Ben: Can they be the television of the future?
David: There’s no good place really to do it online right now. I mean we did a past show on Youtube. Youtube’s kind of the best place to do brand advertising online right now and it’s still got a bunch of problems and people skip ads and all that stuff we know. Whereas, yes, you can skip ads on Snapchat but just the whole modality of the product is so much more immersive and so are the ads.
Ben: They’re 10 seconds and you want to skip them less. I want to skip an ad when I’m watching Discover as much as I want to skip one of my friend’s stories that I’m not interested in. Basically like I’ve got 10 seconds. If you can captivate me, I’m good for 10 seconds. Whereas on Youtube, running a pre-roll for a minute where I have to wait 5 seconds, I’m just going to skip after 5 seconds every single time I possibly can because it’s not designed to be watched all the way through for the impatient person.
David: Especially not on mobile.
Ben: Especially not on mobile. Great point. And Snapchat is totally piggybacking – now we're in tech trends – but totally piggybacking on our completely… our culture that is not able to pay attention to things for very long and we end up watching… I was talking to someone else today watching a Snap for 10 seconds, watching another Snap for 10 seconds. And maybe 10 minutes go by and you end up completely immersed in something where you could have watched a whole television show in there, but it was cut up in small enough content where I was continually entertained.
David: And again, even back to Instagram and as our listeners know we're big fans of Instagram, but you got to scroll through the damn feed.
Ben: You do. And as a completionist, it kills me that it snaps to the top every time. So, I have this fear of opening Instagram now because what if I get part way down and then there’s some pictures that I missed. Snapchat doesn’t have that because everything in it, the understanding it’s sort of unimportant and it will go away anyway so I can just check it at my leisure.
David: And literally you just open the app and maybe you open the app, you swipe left, you tap, and now with stories autoplaying to the next story, that’s all you got to do.
Ben: Yeah, I think their average time of ‘viewed an app’ right now is 30 minutes. They command a tremendous amount of a time.
David: Thirty minutes with two taps and one swipe.
Ben: Yeah. It’s the attention war. That’s what this really comes down to between Facebook and Snapchat. Actually, this is another great conversation I was having earlier this week. Instagram redesigned. And boy, is it gorgeous. It just shows off just the content, we won’t talk about the icon, but inside it is so nice.
David: You’re not taking the pink?
Ben: No. But somebody raised a great point to me that the world’s sort of shifted and now Instagram is a museum. Instagram inherently, I put less content on it because it’s like a showcase and it reflects on me forever. And when you go to Snapchat, my response to Snapchat, it’s like a crowded bar. There is content flying everywhere; it’s lose, it’s fun. That just creates a platform that is just commanding of way, way more attention than that museum field.
David: How much relative time do you spend in museums versus bars?
Ben: Yeah, well, I might be non-representative of that. But maybe not.
David: Maybe not. Anyway, all right, let’s start driving this towards home. Okay. Tech trends?
Ben: I think we touched on it on mine.
David: Yeah, mostly mine too, but I’ll just call it out again. We’ve talked about it on this show. I think it’s maybe been one of my tech trends in the past. But, perfect example of “start small”. They started with nothing. But start small, nail it for one audience and grow from there. They didn’t even do this intentionally but the used case of “I want to text with my friends and Facebook is blocked on my iPad,” solved that. Then solved the next thing. Classic case.
Ben: Yeah. And as Paul Graham says with that, try and get to the next order of magnitude of customers and don’t focus on the far future because contrary to what you might think, in startups you can implement a hill-climbing algorithm and there are not local maxima. So don’t be afraid that you’re going to hit a false peak. Just keep hitting the next peak and you’ll be able to get to the higher peak.
David: Especially in consumer-facing companies.
David: Probably not the same in enterprise.
Ben: Yeah, I’m not sure I totally agree with that premise but I sure like it from an inspirational perspective.
David: All right.
Ben: Conclusion? So normally, we would throw out like was it a good decision to make this acquisition. So, I was thinking for this one, was it a good idea if you’re a Snapchat shareholder to decline this offer? David has a more interesting framework, I think, because that one’s just a sure thing. Right ? It’s like, oh, I’m a Snapchat shareholder. Do I want to be worth $3 billion or the $16 billion it is valued on paper today and will likely continue to grow? So David, what’s your framework?
David: So, I thought we could do: grade Mark Zuckerberg and Facebook for the decision to walk away after the $3 billion versus trying harder to make the acquisition happen likely at a higher price.
Ben: Yeah. This one’s interesting because I think it presents a little bit more than just obvious shareholder value. It gets into the more you’re sending offers back and forth, the more likely to leak. The more you worry about your team back at Facebook like we saw with the WhatsApp acquisition, being like “Wait, $19 billion? We paid for what?” and then sort of having to justify that. There might be a personal pride thing on the line there. At the end of the day, as I’m talking through all this, I think none of it really matters that much and, still, Facebook needed to offer more. I give Facebook an F on not going and bidding higher. I think this one is so clear cut at this point. I’d love to hear your thoughts, though.
David: Yeah. I’ve been thinking about this. Our listeners are going to love this. I’m going to be divisive here I’m going to give them an A. And the reason I’m going to give them an A –
Ben: Lay it on me.
David: Is because especially with the direction that Snapchat has gone, I was thinking about this when we were talking about the category and I was like, “Oh, it could be like a company within Facebook.” Never would work. These are just two companies that cannot exist together. And so if I’m Mark Zuckerberg and I’m Facebook, we're talking about the reaction within the company on Facebook like okay, he had bid Snapchat up to, I don’t know, $15 billion or $19 billion, WhatsApp territory, and then come back in. And then this guy Evan would come into the company and basically be like “F you everybody! I do things completely differently here. I stand for everything that you are not.” What would that have done? Facebook has been super successful in the 2 ½ years since this time. And I think in a lot of ways really crystallized what Facebook is and what their growth potential is going forward and they’re now, what, like a $300 billion market cap company. I don’t know.
Ben: Yes, I was thinking about digging in here. I’m trying to think through if Facebook did what I was talking about earlier and flattened it onto the same platform and made it easy for advertisers like Instagram, if to your point, what if they bid it up to $15 billion? Would they in any reasonable time period have gotten $15 billion of advertising revenue out of it? Or would there just have been this implosion beforehand like you say of culture mishmash. A lot of the value that people are attributing to Snapchat right now is because it’s on this unique and different trajectory that’s more like television advertising than direct response.
David: Yeah, and could that have existed within Facebook?
Ben: Right. That’s a really interesting question.
David: What would Snapchat be like if you logged in with Facebook? That would be weird.
Ben: Yeah. They’re projected to earn about $300 million of revenue this year. I mean their valuation is not based on their current revenues at all. It’s based on the promise of the future that it can replace television brand advertising.
Ben: And I don’t know what I would change my grade to, but I totally, totally see your argument that if Facebook continued to bid this up, they may actually not be able to get that much value of it internally or as much as they can do as an external company and that’s why we need new startups to come and create value that incumbents never could create.
David: Yeah. This seems like a classic case of… we saw it with Poke. They recreated it pixel for pixel and it just doesn’t work inside Facebook.
David: I mean, yeah, there was the network effect moat, too, but it was still so small at that point.
Ben: In the interest of time, skipping the Carve-Out today?
David: Yeah, we can skip the Carve-Out. If you want to discuss more, join us on Slack in our Slack community.
Ben: Yeah. Because God only knows my opinions are going to continue to waver on this. So, we’ll see you in there.
David: All right. Till next time.
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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