What could possibly make Snap Inc., that nexus of ephemeral communication, worth the billions that investors have paid for its shares? The answer may be in its users' willingness to express themselves.
First, some crude calculations. At its IPO valuation of more than $30-billion (U.S.), Snapchat was worth about $200 a user – roughly the same as Facebook.
But it generated only about $2.56 of revenue per user last year, compared with $4.40 at Facebook. For both companies, the money comes almost entirely from ads.
This means Snap needs to get a lot more ad revenue per user to justify its valuation, assuming Facebook is fairly priced. I doubt it will happen, but I'm worried about what Snap might try to do to get there.
Note that I'm saying "user," not "customer." On social media platforms, users are not customers. They're the product. The customers are advertisers, who pay for access to the users' eyeballs. People who engage with social media are donating their time and contributing data for future advertising purposes.
The $200 value a user can thus be seen as an estimate of how long a typical person will stay on a given social media platform, and how much advertising he or she will engage with.
Facebook manages to deliver $4.40 worth of ads a user per year. So if Facebook can keep a user for 45 years or so, ignoring details such as inflation and assuming a constant rate of ad revenue, it'll capture the full $200 in revenue.
In Snap's case, a customer would need to be loyal for 78 years to make the crude math work.
Alternatively, the Snap user could become more valuable. How? The solution is the same as always: more and more targeted ads.
People have been fooled by the evanescence of Snap. They imagine that, since their friends can't see their messages after a few seconds, that information has disappeared for good.
All's fair in advertising, everything lasts forever, and you've been warned.
So that's the big-data play: Investors in Snap are betting that, because of the intimacy of the platform, people will expose their "true selves" more, which is something that gets data-hungry advertisers very excited.
That may be right: Although there's not necessarily any such thing as a true self, users will exhibit different and possibly more revealing behaviour on Snap than they would on Facebook.
And who knows – they're young, so maybe they really will have 78 years of free labour to offer.
Cathy O'Neil is a columnist with Bloomberg News.