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Snapchat’s IPO Shows How Expensive It Is to Compete in Silicon Valley

Among the most familiar myths (or, maybe, hopes) of Silicon Valley are that the tech industry is highly competitive and constantly in flux, that anyone can compete, and that the next great disrupting company is being created right now: Today’s Facebook is tomorrow’s MySpace, and tomorrow’s Facebook is going to be made by a few kids operating out of a garage.

Of course, anyone really paying attention to the tech industry can tell you how silly this image is. If you need any proof, take a look at today’s SEC filing from Snap, Inc. (which you may know as Snapchat), composed in preparation for its initial public offering.

One eye-popping figure: Snap lost $514.6 million last year. Its cost of revenue (that is, how much it costs to make money) is higher than its actual revenue — not unusual for start-ups, but unusual for public companies. But it’s not just that Snap is burning money; it’s that Snap is burning money to compete with highly profitable, significantly larger companies such as Facebook, which has more than ten times as many daily users (and can make real money off of them, to boot). Compounding Snap’s problem is that it’s currently heavily dependent on companies it may someday want to compete with: Google and Apple, to name the two most obvious. If there’s one thing that the IPO lays bare, it’s how difficult it can be to build a technology platform independent of … larger technology platforms.

One of the main risks for Snap presented to investors is that “Snapchat depends on effectively operating with mobile operating systems, hardware, networks, regulations, and standards that we do not control. Changes in our products or to those operating systems, hardware, networks, regulations, or standards may seriously harm our user growth, retention, and engagement.”

From the filing:

Because Snapchat is used primarily on mobile devices, the application must remain interoperable with popular mobile operating systems, Android and iOS, and related hardware, including but not limited to mobile-device cameras. The owners of such operating systems, Google and Apple, respectively, each provide consumers with products that compete with ours. We have no control over these operating systems or hardware, and any changes to these systems or hardware that degrade our products’ functionality, or give preferential treatment to competitive products, could seriously harm Snapchat usage on mobile devices. Our competitors that control the operating systems and related hardware our application runs on could make interoperability of our products with those mobile operating systems more difficult or display their competitive offerings more prominently than ours. We plan to continue to introduce new products regularly and have experienced that it takes time to optimize such products to function with these operating systems and hardware, impacting the popularity of such products, and we expect this trend to continue.

Snapchat is hosted on Google’s Cloud Platform, and on Monday, according to the S-1, Snap entered into “an initial term of five years and we are required to purchase at least $400.0 million of cloud services in each year of the agreement.” Put simply, Snap is paying Google, a larger tech company, $400 million a year until 2022. If they want to shift away from Google, they can go to … Amazon?

If you want to build a popular app nowadays, you need to be able to play nice with Google and Apple, even as they notice your products and ape their best features. Facebook and Twitter have desktop websites that they have complete control over, and which were the preferred way to access the platform for a time; they also have sufficient market penetration to assure some degree of leverage with the companies they might depend on. Snapchat is and has always been entirely mobile — making it much more perilous for them to cross mobile platform holders.

Just as dangerous for Snapchat is that the big companies it’s directly competing with — Facebook and its subsidiary Instagram — are biting many of Snapchat’s features, like the video-diary “Stories,” leveraging their already enormous audiences to eliminate Snapchat’s feature advantage. (Instagram’s self-professed Stories clone gets a single-sentence acknowedgment in the filing.) Snapchat naturally declines to attribute its slowdown in user acquisition in the latter of half of 2016 to the simultaneous introduction of Instagram Stories — but if the reason is technical hiccups with its mobile apps, as they claim, it just reflects their dependence on Apple and Google.

No wonder, then, that Snap does its best to come across as a nimble, almost scrappy enterprise, quick to pivot and try new, weird things like Spectacles, the camera-adorned sunglasses that you can expect to see available much more widely in the coming year. Spectacles, of course, can be bought and used independent of Google and Apple; they offer an experience that Facebook doesn’t have. Is that enough to make Snap really competitive with the lumbering giants of Silicon Valley? Investors — and consumers — are going to have to hope so.

Snapchat’s IPO Shows How Pricey It Is to Compete in Tech