By leaving a $3-billion acquisition offer from Facebook on the table Snapchat showed huge confidence in its own ability to turn the ephemeral messaging service into a big business.
But it's going to need more than a user growth story if it's going to get big brands to experiment with paid advertising there.
Snapchat CEO Evan Spiegel has described both in-app purchases and native advertising as potential revenue streams for the mobile messaging service, which lets users send private messages in the form of photos and videos that vanish within 10 seconds of being opened.
In light of the amount of revenue it will have to generate to support the valuation it's seeking, Snapchat's eventual courtship of Madison Avenue seems inevitable. But if the product is anything like its current form when the two-year-old company does get around to wooing advertisers, it's going to have a lot of questions to answer, like just how prevalent "sexting" and cyber-bullying really are on the network.
"I struggle to think of any of our clients who would be willing to even pilot advertising on Snapchat," said Rich Guest, president of Tribal Worldwide's U.S. operations.
Another fundamental question is what Snapchat's actual reach is. To convey its growth, the company announced in September that its users were sending 350 million "snaps" -- or vanishing photo and video messages -- daily, up from 200 million in June. But it hasn't disclosed how many unique users it has or what portion of them are teenagers -- the demographic that's believed to dominate the service.
And then there's the issue of data. Snapchat collects users' email addresses, birth dates and mobile phone numbers when they register for an account, but aside from that, it doesn't know anything about them. As part of its privacy value proposition, it deletes users' messages from its servers after they've been delivered.
"What's compelling about Facebook or Pinterest or Twitter is that, by virtue of the way I use these tools, the network learns a lot more about me," said Scott Hess, senior VP-human intelligence for Spark SMG. "[But] Snapchat, through me consuming a bit of media, is not robustly profiling me."
While Snapchat is frequently described as a social-networking app, its utility is more akin to messaging services like WhatsApp and Japan-based Line. The point is to serve as a medium for private messaging between friends, not to be a diffuse social graph like Facebook or an interest graph like Twitter.
The intimacy of private messaging makes advertising more awkward to insert, and those competitors have sought other ways to generate revenue. WhatsApp gives its users a year for free, then charges them a 99-cent annual fee. Line makes money from sponsored "stickers" (essentially embellished emoticons), but the majority of its second-quarter revenue came from purchases within games that can be played in the app.
"None of [Snapchat's] competitors have demonstrated that there's a real viable advertising model in similar services," Mr. Guest of Tribal Worldwide said.
Snapchat didn't respond to a request for comment.
Brands on Snapchat
Madison Avenue is bound to put Snapchat through its paces if and when the company comes calling, particularly millennial-focused advertisers.
A handful of brands like 16 Handles and the New Orleans Saints have already created Snapchat handles and dabbled with organic messaging to users, but the most notable example of a big marketer to do so is Taco Bell.
From a paid media perspective, a brand that's versed in storytelling like a Red Bull, a Nike, or a Super Bowl advertiser looking to extend its story with exclusive content might find Snapchat compelling, said Chris Copeland, CEO of GroupM Next. That is, if the notoriously fickle teenaged user base that throngs to Snapchat stays put.
"If you're a brand that believes in great storytelling on creative canvases, I think there are a lot of plays here," Mr. Copeland said.
Meanwhile, a recently added Snapchat feature, "stories," could provide a more seamless entry for sponsored content.
Unlike snaps, which are sent from one user to another, stories (which can be stitched together from multiple snaps) appear beside users' handles in someone's list of friends, stay visible for 24 hours, and can be replayed as often as someone likes in that window.
There's the option of making stories visible to just friends, a custom list, or "everyone" on Snapchat -- an option that creates the semblance of a public profile on what's been a private service. It's a development that could give brands more of an incentive to have a presence on the network.
Stories might be an interesting ad product for a movie studio or record label that's looking to do a big publicity push in a short window of time, according to Tyler Willis, VP-business development at the social-ads company Unified. The notion of promoted snaps -- where brands could message users directly -- also seems plausible, although more likely to be an expensive buy in the vein of a home-page takeover, he said.
"I think a lot of early [advertiser] adopters will be musicians and movies and entertainment brands," Mr. Willis said. "That's the lowest-hanging fruit for Snapchat, given their user base is a little younger."
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