Interview with Snap's Former Tech Executive on Why Tencent Chose Snapchat
Duan Qianqian
DATE:  Nov 10 2017
/ SOURCE:  Yicai
Interview with Snap's Former Tech Executive on Why Tencent Chose Snapchat Interview with Snap's Former Tech Executive on Why Tencent Chose Snapchat

(Yicai Global) Nov. 10 -- Snap Inc. [NYSE:SNAP], developer of image messaging and multimedia mobile application 'Snapchat,' saw its share price fell below the issue price in less than four months after its initial public offering (IPO), and the stock has since been hobbling below the IPO price USD17. Chinese tech giant Tencent Holdings Ltd. [HK:0700] apparently believes that the American firm is near the trough and became a shareholder of it. All of Snap's founders are very creative designers, and Tencent's investment is obviously a strategic one, Wang Xiaoyu, a former technology executive at Snap, told Yicai Global in an interview. 

Asia and the US are mature markets, and it is very difficult for foreign apps to adapt to the local market. "You rarely see any Chinese product achieve complete success in the US, and the vice versa. There're still formidable cultural barriers, so it's more advisable to invest in a local app and help it develop than developing your own app from scratch," he opined.

"Tencent bought [Snap's shares], and me too," Wang said, adding that the firm's management has close connections with Tencent, and its founders admired Tencent for its successful products and visited the latter's Shenzhen office many years ago. Tencent has previously invested in Snap during one of its early funding rounds.

The Shenzhen-based internet behemoth bought 146 million A-shares in Snap on the open market. It was a very bold move considering the fact that the total size of Snap's IPO in March was just 160 million shares. In other words, Tencent bought roughly 90 percent of the total volume of shares offered, Snap said in a statement on Wednesday.

Tencent is a long-term investor for Snap and took part in the latter's B-series financing in 2013. It planned to lead the C-round funding but pulled out in the end due to a high asking price and the founders' hardline attitude. It now got what it wanted on the secondary market.

The most salient feature of Snapchat is that it is a communication platform, as opposed to 'broadcasting' platforms like Facebook and Twitter where user interactions and socialization tend to be less frequent, Wang pointed out. "Snap has chosen the right side," he said. The other advantage of Snap is that it is at the forefront of image and video messaging technology, which is considered the future for social media businesses. The rise of image messaging will bring radical changes to existing social media business models, and ads push algorithms relying on keyword search will disappear altogether. Snap does not have any rivals in this area.

Founded in 2011, Snap defines itself as a "camera company" in its IPO prospectus and third quarter report, despite its core product Snapchat being a social media app.

Data communicated on the app are images and videos, a service known as 'burning after reading' among Chinese users -- users can set retention time for photos and videos they send to friends, and the files will disappear after the time limit. Snapchat is very popular in the US, especially among teenagers.

However, Snap's third quarter report shows a slowdown in daily active user (DAU) growth. The number of its DAUs was 178 million at the end of the third quarter. Like many other dotcom firms, Snap has not established a well-defined profit model. It registered losses of USD443 million in the third quarter, almost four times higher than the total loss recorded for the same period last year. Spectacles, an intelligent eyewear product released last November, did not sell well, resulting in close to USD40 million in accrued losses at the company in the third quarter. For Wang Xiaoyu, however, all these are just part of a learning curve for Snap.

Wang was a member of the team that established the Snap Institute in 2015. He left Snap last month. 

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Keywords:   Snap,TENCENT,US,SHARES