Why Snapchat Was Silly for Turning Down Facebook's $3 Billion Offer

Snapchat, a social media start-up, has suddenly become one of the hottest new acquisition targets in the tech world.

The company, founded by Evan Spiegel and Bobby Murphy in 2011, carved out a niche in the competitive world of social media with a messaging app that allows users to send self-destructing photos and videos that disappear after being viewed.

Source: Sourcefed.com

Naturally, the service initially became notorious for becoming the app of choice for sending suggestive photos and videos, but it later gained popularity as an alternative messaging service to apps like WhatsApp, LINE, WeChat, Kik, and KakaoTalk, among others.

Snapchat recently made headlines after it reportedly rejected a $3 billion dollar buyout offer from Facebook , which is struggling with retaining the interest of fickle teen users.

Snapchat apparently believes that bigger offers are on the way.

Big plans ... followed by a reality check

Snapchat's founders believe that they can develop a business model unsupported by traditional ad revenue, citing the success of Tencent's WeChat in China and LINE, the Japanese chat app that is immensely popular across Asia. Both WeChat and LINE have also grown from mobile chat apps into mobile social gaming networks, generating revenue from sales of virtual goods and sponsored promotions.

Spiegel and Murphy's ambition is admirable -- but I think it's time for a reality check.

After all is said and done, Snapchat is simply a business model built on self-destructing selfies -- a feature that can be easily replicated by competing services. Like most other social media start-ups, Snapchat has no source of revenue or a concrete business model for generating stable growth in the future. Nonetheless, it has generated $94 million in funding so far.

Analyzing Facebook's mid-life crisis

First and foremost, messaging apps are revolutionary -- and they could soon topple two older technologies -- text messaging and email.

This is a fact that Facebook, the world's largest social media network, has been well aware of. Spotting the growing popularity of dedicated messaging apps, Facebook launched Messenger in 2011 in an effort to convince users to stay inside its social media ecosystem. The following year, Facebook quietly gave users a Facebook.com email address and added the ability to add file attachments to messages.

Earlier this year, Facebook added chat stickers, in an effort to replicate the popularity of LINE's stickers shop. It also tried to lock mobile users within its walled garden with the poorly received Facebook Home.

In short, Facebook started exhibiting all the behavior of a fading diva, trying to buy up or replicate all the new features that mobile users were attracted to. The $1 billion purchase of Instagram last year was the crown jewel in the diva's tiara. The problem, however, was that the attention span of the average social media user was getting impossibly shorter by the day.

Therefore, it makes plenty of sense that Facebook would offer billions of dollars for Snapchat, a flash in the pan app that could easily be forgotten within a year or two.

The ugly truth about SnapChat

Of course, that's not to say that Snapchat isn't a popular app. The main number that the company keeps touting is the 350 million "Snaps" that are sent each day from its service -- a 3,400% jump from the previous year.

The company hasn't disclosed how many users it has, but an estimate by Forbes puts the figure at 26 million unique users.

That number shouldn't impress anyone, and here's why:

Source: Statista, Industry websites.

It took LINE and WhatsApp nearly 300 million users to generate annual revenue of $100 million, and that was by using established business models. WhatsApp generates revenue by selling a paid, ad-free version of its app, and LINE sells stickers, in-game virtual goods, and other mascot merchandise.

LINE has built a Disney-like toy empire with its mascots across Asia. Source: Ratuken.co.jp

It's very tough to see how Snapchat justifies being worth over $3 billion with such a small user base with no system of generating revenue in place.

More importantly, WhatsApp stated that it rejected a $1 billion takeover offer from Google earlier this year.

Let that sink in for a moment -- a $1 billion offer for 250 million users generating $100 million in annual revenue, compared to a $3 billion offer for 26 million users generating no revenue. In my opinion, Snapchat's founders seriously shouldn't be holding their breath for a better deal.

Why overpay for a one-trick pony when there are cheaper clones on the market?

In addition, it's tough to see Snapchat adopting the business model of LINE's cute cartoon mascots, considering that its original business model was built on sending self-destructing risque photos. It will also be next to impossible for Snapchat to break into the social gaming market -- a market that grows more fragmented and saturated by the day.

Snapchat's one-trick pony is also an easy one to replicate. Imitators like ClipChat, Wink! and Squawk all do the same thing -- and any of those might be willing to sell themselves to Facebook for a much cheaper price.

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The article Why Snapchat Was Silly for Turning Down Facebook's $3 Billion Offer originally appeared on Fool.com.

Fool contributor Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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