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Snap Wants to Copy One of Its Biggest Investors

By Adam Levy - Feb 21, 2018 at 3:22PM

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Tencent may provide a model for how valuable Snapchat is to Snap.

Tencent (TCEHY 2.46%) has been an investor in Snap (SNAP 5.45%) since 2013, when it was still going by Snapchat. The Chinese company behind WeChat upped its stake significantly at the end of last year. Snap disclosed that Tencent had taken about a 12% share of the company.

Snap CEO Evan Spiegel has long regarded Tencent as a model worth emulating and expanded on that idea at a recent investors conference. "Tencent very early on understood the power of communication because it drives frequency," he said. "And if you can be the service that's most frequently used on someone's phone, you're able to develop a lot of other ancillary businesses around that engagement."

WeChat has turned into something of a Swiss army knife in China, supporting online and in-store payments, a feed of photos, videos, and posts from friends, and the ability to hail a taxi, all on top of its core messaging capabilities. It also feeds Tencent's growing gaming, video, and music businesses. Tencent generated nearly $10 billion in revenue in the third quarter thanks to its growing presence on people's smartphones.

Snapchat logo

Image source: Snap.

The most frequently used app

WeChat and Snapchat are both dominant forces on smartphones in their most popular markets.

Chinese users spend well over 60 minutes per day using WeChat and average over 10 sessions per day. Leaked data from Snapchat shows users averaged around 34 minutes per day last summer. Younger users spent more time -- Spiegel says users under 25 spend 40 minutes per day -- and they also open the app more often at a rate of 20 times per day versus 12 times for users over 25.

That frequency of use is extremely enviable. Facebook (META 7.19%), for example, might have users spending a bit more time in its flagship app, an average of 40 minutes in the U.S., but users only average 5 or 6 sessions per day. Facebook's messaging apps, Messenger and WhatsApp, likely see much higher frequency.

Following in the footsteps of Tencent

Snapchat has already taken some steps that clearly emulate Tencent's efforts to monetize a communication service.

WeChat Pay is a primary source of payment for many consumers in China. In 2014, Snap experimented with a way to send money to friends called Snapcash. The initiative failed to catch on, but no other messaging service -- including Facebook's -- has been able to emulate Tencent's success in payments, either.

Tencent also launched a video platform in 2011 as an offshoot of its popular QQ online portal. Snap launched Discover in 2015 as a platform for professional content publishers to reach its audience. Ads in Discover were one of Snap's earliest sources of revenue, and it paid out $100 million in revenue-sharing payments last year.

WeChat incorporated a feed -- Moments -- in 2013. It clearly drew a lot of inspiration from Facebook, but WeChat showed a feed can be part of a messaging app. Snapchat drew from that trend for its redesign, which features an algorithm-sorted feed of content from friends, mixing direct messages and the stories format.

WeChat doesn't have to deal with Facebook

Snapchat remains a relatively small platform; its 187 million daily users is dwarfed by WeChat's 902 million daily users. Even bigger are Facebook's WhatsApp (1.5 billion MAUs) and Messenger (1.3 billion MAUs).

That makes Facebook a major threat to Snap, one Tencent doesn't have to worry about because Facebook doesn't operate in China. Facebook has already had a major impact on Snap's operations by copying the Stories format in Instagram, and later expanding it to other apps. With hundreds of millions of users already using its apps, Facebook's ability to replicate features from Snapchat makes it hard for Snapchat to attract new users.

That said, the users Snapchat does have are highly engaged, which is, as Spiegel points out, very valuable. If Snapchat can expand like Tencent has, it could be able to generate a lot of revenue from its users. Tencent is generating around $10 billion per quarter, but it's worth remembering that most of its users are in China, where user monetization levels are well below North America and Western Europe -- which are the source of most of Snapchat's users.

The question for investors is, can Snapchat execute better and faster than Facebook? So far, it hasn't proven that's the case.

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Stocks Mentioned

Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$49.18 (2.46%) $1.18
Snap Inc. Stock Quote
Snap Inc.
SNAP
$14.70 (5.45%) $0.76
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$170.16 (7.19%) $11.41

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