On March 2, 2017, Snap Inc. (“Snap”) went public on the New York Stock Exchange (“NYSE”).[1] It was the most anticipated IPO in the tech industry since the Chinese E-commerce guru Alibaba went public on the NYSE three years ago.[2] The company’s flagship application, Snapchat, has been a popular name in the tech world, especially appealing to the younger population as the latest trend in social networking. The messaging application allows its users to share with friends’ personal photos, which are automatically deleted after a specified brief amount of time upon posting. This feature, combined with Snap’s emphasis on enhancing user privacy, reduces the potential risk of privacy breaches compared to other social media platforms.[3] Snap initially predicted its shares to trade at $17.[4] However, due to such hype, Snap had a strong start on its first day of trading in the market with its stocks trading at 41% above the issue price.[5]
On the other hand, skepticism exists regarding the company’s further success from a long-term perspective. Snap’s profit model is questionable, which is evidenced by the fact that expenses soared more than revenues generated since it started expanding aggressively and investing more on its growth.[6] The user subscription rate has started to stall. Although this was expected, it raises further concerns about the company’s sustainability considering its reliance on user growth.[7] The biggest controversy surrounding Snap, however, may be the management’s total control over the company. The owners buying Snap’s Class A shares have no voting powers, effectively giving Snap’s Founder and CEO Evan Spiegel and CTO Robert Murphy absolute power to run the company as they own over 88% of the company’s voting structure.[8] This marks the first time in the U.S. stock market’s IPO history that a company is exclusively issuing restrictive stocks. Snap’s venture triggers a debate whether shareholders are dissatisfied with deprivation of their power to check on the management, or if they prefer the management to be the decision maker for them since their reliance on management’s business judgment may be the very reason why they chose to invest in Snap.
The company may feel the pressure to “step up the game” since it has no clear substance within their business model, especially considering the slowdown in user growth and increased competition. While this is true and expected for many social media platforms, Snapchat targets a more specific niche compared to its rivals; the service it provides consists primarily of taking pictures with various filters with enhanced privacy settings, which seems to appeal mainly to a younger generation who does not have much spending power.[9] In contrast, Facebook provides various forms of content and information, including pictures, videos and news, to its users with a minimum level of distraction or annoyance from advertisements, successfully balancing optimal user experience with profit generation.[10]
Snap’s management is clearly aware of the possible limitation of its current business strategy, and has started venturing out to other relevant industries such as releasing experimental products like Spectacles that feature video recording functions, labeling itself as a “camera company” on its prospectus.[11] It has been a norm for tech giants like Google and Groupon to hoard governance power away from shareholders.[12] However, Snap’s attempt to have total control of corporate governance from its shareholders may pose an excessive risk, exacerbated by its uncertain future. The continuing issue of upholding shareholder’s interests that are not necessarily aligned with the direction of Snap’s management, together with the inherent difficulty of identifying such interests, may be the key factors of predicting the company’s future outcome.
[3] U.S. Sec. & Exch. Comm’n, Form S-1 Registration Statement Under the Sec. Act of 1933: Snap Inc. (2017).
[11] U.S. Sec. & Exch. Comm’n, supra note 3.
