How to Turn Down a Billion Dollars

by Billy Gallagher

  White and Randall traveled to New York to convince advertisers of Snapchat’s potential. There was a steep learning curve during these initial meetings, as the advertisers and marketers were older than Snapchat’s core demographic, so they didn’t really use the app with friends and didn’t fully understand it. But White and Randall had relationships with advertisers from their days at Facebook, so they taught them how Snapchat worked, how to make accounts for themselves and their clients, and encouraged them to play around with it and see how they could envision advertising working on Snapchat.

  The biggest selling point of these early Snapchat sales pitches was engagement. Young people were using Snapchat nonstop, all day, every day. In 2014, seventy-one million people were using the app daily; 40 percent of eighteen- to twenty-four-year-olds in the US with a smartphone used Snapchat.

  And in a world in which young people had grown accustomed to advertising on websites and other social networks and ignoring ads on the web and TV (often by looking at their phones), Snapchat had teenagers physically holding their finger down on their phone screens. Every engagement on Snapchat was intentional—a user tapped on what they wanted to see and held their finger down while watching it. Snapchat was able to sell valuable advertising real estate because it had a captive audience of millions of young people who are hard to reach.

  Snapchat’s early ads were very basic and extremely costly compared to peers’ ad offerings—they charged advertisers hundreds of thousands of dollars for a very short spot, typically ten to thirty seconds. This was partially done on purpose to be prohibitively expensive and keep demand low, as Snapchat had a small team and was still building its infrastructure, both technically and organizationally. The early ad products offered advertisers very little in data or analytics.

  While other tech companies like Facebook and Google gave advertisers a world of information about how people were interacting with their ads and allowed them to target extremely specific groups of people based on intent (e.g., people who searched for garden hoses in the Philadelphia suburbs) or interests (e.g., people aged twenty-two to twenty-four who like both the NFL and Bruce Springsteen), Snapchat simply told advertisers how many people had seen the advertisement. Snapchat was more focused on advertisements being a good experience for their users than the team was on advertisers being satisfied and getting what they needed out of Snapchat ad products. This made for a tough sell with advertisers and limited the early market mostly to major companies that had big budgets and could afford to experiment with this new, hot social company.

  White and Randall emphasized to advertisers how Snapchat was unique compared to other social networks. There was so little branding or advertising on the platform that early advertisers would be able to have highly impactful advertisements.

  A few companies, most notably Taco Bell, realized Snapchat’s potential for marketing early on. Taco Bell had a brand that fit well with the young, unfiltered app’s aesthetic, and they were able to build a significant following for free. Users happily added Taco Bell as a friend manually, alongside their real-life friends, giving the company a valuable free advertising channel. But most companies could not entice users to add them as a friend on Snapchat.

  Unlike other social companies like Facebook and Twitter, Snapchat did not encourage brands to develop their own organic followings on the app. Facebook and Twitter had previously courted media organizations and businesses to create accounts and pages so users could “like” and “follow” them. In sharp contrast, Evan told reporters he found it annoying when brands tried to act like people on Snapchat by creating an account.

  Snapchat only wanted brands on the app if they were paying for ads. Snapchat didn’t ban brands from creating their own organic accounts, but they did nothing to help them grow an organic, free following. In one sense, this was good for companies and brands, as they knew exactly what game they were playing with Snapchat, unlike Facebook, Twitter, and others who spent years telling them to grow their followings only to turn around and charge them to have their posts seen by all of their followers. On the other, the game was quite expensive to play.

  White and Randall found a fit for Snapchat in brand advertising; brands succeed by building long-lasting loyalty, so that when you’re walking through the supermarket, big names like Gillette and Old Spice are on your mind, and that’s what ultimately ends up in your cart. Once consumers pick a brand, they offer strong lifetime value to the company because they keep coming back and buying repeatedly. And, importantly for Snapchat, because brand advertising is about repeated impressions on consumers rather than directly moving them toward a click or a purchase, brand advertisers didn’t place as much of an emphasis on data and analytics. Brand advertising is also an enormous business, estimated at $578 billion worldwide in 2016.

  Traditionally, brand advertising has found its home on TV, where annual global advertising is a $213 billion business. The Super Bowl is the, um, Super Bowl of advertising. But with streaming services, most of which are ad free and more popular than ever, fewer and fewer young people are watching TV. And when they are, they aren’t watching the commercials—they’re usually fast-forwarding through them on DVR or looking down at their phones during them, if not the entire time they’re actually in front of the television. Snapchat offered advertisers a way to reach those young people and know that they’re engaged—they would literally be touching the ad onscreen with their finger.

  On October 17, Snapchat put up a post on its website, “Advertising on Snapchat,” explaining that the company was putting ads next to Stories content for the first time. “It’s going to feel a little weird at first, but we’re taking the plunge,” the company explained. The post continued:

  We won’t put advertisements in your personal communication—things like Snaps or Chats. That would be totally rude. We want to see if we can deliver an experience that’s fun and informative, the way ads used to be, before they got creepy and targeted.

  The first ad was a twenty-second trailer for a horror movie, Ouija. It showed up like a friend’s story would, and you only had to watch it if you intentionally clicked on it. And you could immediately swipe out and leave it. Millions of Snapchat users voluntarily clicked on the twenty-second trailer.

  Advertisers were happy to fill the newest, hottest medium with experimental advertisements. But Snapchat would quickly need to show its effectiveness to earn long-lasting ad spend. Team Snapchat quickly tested different new ad formats. In November, Snapchat rolled advertising into Our Stories, producing a Samsung-branded story for the American Music Awards. The story flitted from user-generated content from the red carpet and audience to behind-the-scenes shots that featured geofilters with Samsung’s name or logo attached. The total revenue figures were small, in the low millions, but encouraging.

  Meanwhile, Chloe Drimal and Nick Bell continued driving Live Stories forward, signing partnerships to get better behind-the-scenes access. More eyeballs meant more content to potentially pair ads against; and growing user engagement and daily active users meant the advertisements were not deterring Snapchatters. Snapchat signed deals with sports leagues like the National Football League, Major League Baseball, and the NCAA. They worked with Vanity Fair to cover the Oscars and the magazine’s exclusive afterparty. Some of the deals involved a split of advertising revenue between Snapchat and a partner, while others just allowed Snapchat better access in exchange for better, free coverage. All of the content was still shot via Snapchat on smartphones, never on professional cameras. Snapchat users loved sending in their submissions to Live Stories, hoping their snap got picked for the show; fans sent in almost sixty hours of content for each NFL game during the 2015 season. Some Live Stories for college football games even featured college players themselves posting to Snapchat from the locker rooms.

  Live Stories started regularly racking up 10 to 20 million views each. According to Nielsen ratings, the 2015 Oscars averaged 36.6 million views, while Breaking Bad’s famous finale
averaged 10.3 million views. Over 40 million people watched Snapchat’s Live Story from the Coachella music festival over a weekend in April 2015.

  Snapchat continued experimenting with ways to monetize the communication side of the app. In November 2014, they rolled out a feature called Snapcash that let users send and receive money from friends. Users simply type out a dollar sign in Snapchat’s chat function, and the send button turns green and they can quickly send money.

  One of Lasky’s partners at Benchmark, Peter Fenton, a Twitter board member, introduced Evan to Square CEO and Twitter cofounder Jack Dorsey. In May 2013, Dorsey was testing out a new payments feature called Square Cash; he emailed Evan $25, which Evan could easily transfer to his bank account without any signup.

  “Okay this is actually genius,” Evan wrote to Dorsey.

  Evan later said it was “the most fun and exciting product” he had seen in the last few years. He and Dorsey talked more about collaborating, and Square ended up powering Snapcash, saving Snapchat from building out their own payments infrastructure.

  But adoption of Snapcash was slow. For the same reason that people used Snapchat as a fun, lightweight way to escape Facebook and the permanence of the Internet, they did not want to give the company—which also had been hacked several times—their credit card information. But Snapcash’s failure did not negatively affect users’ experience—it was not a major design overhaul or bet-the-company change. Users simply ignored it. And Snapchat was cleverly designed so that it was easy for users to ignore features they didn’t like. Because of this, when Snapchat missed, they missed small. That is, misses didn’t cost them users. And when they hit, they hit big, with wild successes like Stories and Live.

  CHAPTER TWENTY-THREE

  BLANK SPACE

  JULY 2014

  VENICE, CA

  Evan Spiegel loves music. If he hadn’t founded Snapchat, he may have created a music-related app. Nonetheless, music continued to play a central role in his life inside and outside of Snapchat—who he took meetings with, what marketing campaigns he dreamed up, and even what features he wanted Snapchat to build.

  From his days organizing parties for Red Bull to DJing at Kappa Sigma to blasting music at the Snapchat offices, Evan has always loved music. He loves discovering new music, sharing music with friends, and going to concerts and festivals. Many of the early hires at Snapchat are similarly music buffs themselves. But he thinks most of the current music services are nondifferentiated and offer consumers a bad experience. Digital music isn’t social in the same way that music is in real life. Evan had a burning desire to fix that.

  Steve Jobs changed the music industry forever in the early 2000s with the iPod and iTunes, but music innovation has stagnated since then. Most new entrants, from Pandora to Spotify, are more business model innovations than changes to the actual way people discover, share, and listen to music, not to mention interact with artists. Evan dreamed of picking up the mantle from his idol and improving an industry that meant so much to him. Snapchat was the best idea Evan had come across when he started working on it, but photo sharing was never his passion. But revolutionizing the way people shared and consumed music? That would be a dream come true.

  “Music is really appealing to us right now because it has some of the same attributes that communication had when we were working on Snapchat in the beginning,” Evan told an audience of USC students. “Right now on your mobile phone, music is largely nondifferentiated, so you usually search for a song and you can play it. It plays from four or five different places, they roughly cost the same, but it’s also high frequency. After communication, [music is] the highest frequency behavior on your phone, and so that, in our view, makes it a really interesting opportunity, and it’s something that we are thinking about.”

  Before Snapchat, communication felt undifferentiated—you texted in iMessage or Facebook Messenger or WhatsApp but used largely the same tools in each one. With Snapchat, pictures became the communication medium and delete became the default, which unlocked new behaviors. Evan hoped to create a music app or feature that similarly unlocked new behaviors. And Snapchat was a cultural tastemaker. Evan understood what real, normal users liked and thought was cool, unlike many Silicon Valley tech companies. As an LA company, they could have a comparable advantage in music.

  “When we look at the music industry today, a lot of the conversation about music is really about business model and distribution,” Evan said on stage at Recode’s Code conference. “The transition from a transaction-based model to a subscription-based model, cloud versus download, those are really what I’m hearing about the industry. And we always try to apply the product perspective: What really do people want from music? What’s a great album? What makes a great album? So we’re really approaching music from … is there some music product that’s better than a track listing? There’s got to be, and I think that’s something that we’d be interested in working on.”

  Evan runs Snapchat in a very top-down fashion, setting the strategic goals for all of his employees to carry out. He wanted to expand the Snapchat empire beyond communication and social media, so he looked at what people spent their time doing and how he could capture some of that time and value. Luckily, what people spent their time doing, listening to music, lined up perfectly with Evan’s passion.

  Snapchat board member and Sony Entertainment CEO Michael Lynton used his deep music industry connections to set up influential meetings for Evan all over town with, among others, Grammy winner Meghan Trainor, then-Epic Records president L. A. Reid, and Vevo CEO Rio Caraeff. Rock and Roll Hall of Fame member Lou Adler’s sons, Manny and Ike Adler, started working for Snapchat running music partnerships after Lynton introduced them.

  Then, Evan wanted to either buy or build a record label to discover and invest in upcoming artists. Snapchat could use its product to promote artists that it signed to its label; Evan wanted Snapchat to have some sort of equity or revenue sharing so that it could participate in the upside of the stars it helped launch. After advisors and Lynton told him that wasn’t feasible and would distract from Snapchat’s core focus, Evan sensibly shelved the idea.

  Evan pushed for relentless experimentation at Snapchat. He much prefers toying around with a prototype to watching a power point, so designers and engineers will build five, ten, twenty versions of a chat app and let Evan play with them all to see what he likes. Team Snapchat was constantly building features and products that were never released. If Evan could succeed with a music product, it would have a massive impact on Snapchat, for both users and revenue.

  Evan had a team build a Snapchat music product that combined Snapchat’s penchant for communicating through media with Evan’s vision for how music should work digitally. However, it was never released, likely because the rights to the music were too complex and expensive.

  Employees were happy to work tirelessly on Evan’s experiments, music or otherwise. Evan’s benevolent dictatorship is not uncommon in tech. Many visionaries like Jobs, Elon Musk, and Jeff Bezos have been described in similar, and even more draconian, ways. But Jobs, Musk, and Bezos have accomplished such spectacular achievements that employees will follow them no matter what. Evan seemed to be following right in their footsteps, but we have only seen him at the helm when Snapchat is thriving and growing spectacularly well. While he obviously deserves the credit for this, every company goes through periods of intense pain and scrutiny. It is during these periods that Evan will need to prove he is worthy of these lofty comparisons.

  “I think our team would say that I’m very decisive but I change my mind a lot. Which is sort of a unique combination,” Evan once told Recode’s Kara Swisher. “But it really means that we care about making decisions really, really quickly, but we care about the flexibility to change our mind, and we want to make sure that is the key component of our business. So someone on our team would be like, ‘Give him six hours.’”

  Evan’s inclination to changing his mind can frustrate empl
oyees. While inexperienced, he can be confident to the point of cocky, and many employees believe he is unwilling to accept their input and advice. He is completely unfiltered, loves cursing, and can be extremely blunt when he thinks something is a bad idea.

  Evan constantly experimented with music products at Snapchat, some of which were for marketing, some simply for fun, and some as potential features. Snapchat released advertisements for new features like geofilters and Live Story that put a spotlight on artists like Goldroom, Smallpools, Guards, Vance Joy, and Tiesto. When Snapchat announced Stories, the Team Snapchat account messaged users with a Smallpools music video; after the video finished, users saw an icon that said, “double tap to listen,” which sent users to the Smallpools iTunes page.

  Popular DJ Zedd made the sounds and ringtone for Snapchat’s chat 2.0 update. In February 2015, Madonna premiered the first music video from her new album Rebel Heart on Snapchat, letting users watch “Living for Love” for a day on the impermanent app. Later in 2015, Goldroom released his new EP It’s Like You Never Went Away via Snapchat. Over five days on Snapchat, Goldroom released four music videos, each of a different song, followed by all four combined into a longer continuous story. He shot all four videos vertically, formatted specifically for Snapchat and the vertical orientation of a smartphone, rather than the traditional widescreen format you see on YouTube or on TV that typically requires users to turn their phones sideways to fully see. While these videos fit under the music umbrella, they were also an interesting testing ground for future series of content on Snapchat.

  While Evan’s passion projects in music haven’t cost Snapchat much money or lost them users, they have not added much to the company’s bottom line—either in revenue or in user growth. A culture of experimentation is important in a startup, but it’s arguably more important to have an intense focus that Evan and Snapchat may be lacking. One of Evan’s role models, Steve Jobs, put it this way: “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.”