LOS ANGELES | SAN FRANCISCO | NEW YORK | BOSTON | SEATTLE | MINNEAPOLIS | MILWAUKEE July 15, 2013 Michael Pachter Steve Koenig (213) 688-4474 (415) 274-6801 [email protected] [email protected] PRISM … Progress Report for Internet and Social Media In This Issue: Snapchat, Dropbox Snapchat Developer of the popular photo-messaging app, founded in 2011. Application allows photos to be sent between users. Photos can only be viewed for a few seconds, then self-delete. App has experienced rapid adoption, with 200 million pictures sent per day, up from 150 million in April of this year. Valuation has risen significantly, from approximately $70 million in February 2013 to $800 million today. Founders now in legal battle with a schoolmate claiming to be a third founder. Popularity may represent a cultural shift to less-permanent, more anonymous web services. Dropbox Announced at developer conference its intention to create a data platform for developers. Introduced new tools for deeper application integration. User count rises to 175 million from 100 million in November of last year. About Wedbush Securities Private Shares Group The Private Shares Group of Wedbush Securities is a leader in providing research and trading to the rapidly growing industry of privately traded securities, with an emphasis on companies in the social media space. We assist companies in raising growth capital through traditional private placements and provide liquidity options for existing and former employees through tailored selling programs. We also work with venture capital, private equity and hedge fund investors to help them adjust their holdings in some of the most dynamic companies. We endeavor to understand the underlying industries of the private companies we trade, in order to help our clients make informed decisions about their investments. We provide discreet customized solutions for our institutional and accredited private clients through a team of professionals located in New York, Los Angeles and San Francisco. THE INFORMATION HEREIN IS ONLY FOR ACCREDITED INVESTORS AS DEFINED IN RULE 501 OF REGULATION D UNDER THE SECURITIES ACT OF 1933 OR INSTITUTIONAL INVESTORS. WEDBUSH PRIVATE COMPANY STRATEGIES GROUP Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see page 10 of this report for analyst certification and important disclosure information. Snapchat Subsequent to Wedbush reporting on Snapchat last December, the comapny has continued its rapid growth, adding features and landing additional funding. The company’s employee count expanded from 10 to 17 (according to an article by Forbes), and the increased headcount (as well as persistent visits from users) has driven the two year old firm into a larger office in Venice, CA. A new round of funding, valuing the company at $800 million was announced on June 22nd of this year (according to TechCrunch); details on funding are found below. As described in our previous report, Snapchat is a mobile messaging app based on picture sharing. Similar to Instagram, Snapchat users can take a quick picture of something with their phones and send it to other users. The Snapchat’s logo sender can add a caption or draw a doodle on the picture before sending. However once the photo is delivered and viewed, it deletes itself after a period of time specified by the user, up to 10 seconds. Once erased, the picture cannot be retrieved, and is not stored on the company’s servers, ensuring that the interaction is confidential. If the recipient saves the photo with a quick screenshot, the sender is alerted. The experience is meant to be very quick, private and “frictionless.” To that end, Snapchat included a special feature when it added a video capture capability in December of 2012. Users take photos or video with the same button, rather than taking the time to switch from camera mode to video mode. This seems like a trivial tweak, but the firm asserts that a few seconds delay can mean missing a memorable moment. Management believes the technology is crucial Snapchat Interface enough to attempt to patent it, as reported by Business Insider. Source: Business Insider Along with the disclosure of the latest funding round, the company announced a new feature called Snapkidz. Previously, the app would operate only if the user enters a birthdate that indicates he or she is over the age of 13. The Snapkidz mode allows the app to be used to take, edit and save pictures, but they cannot be sent to other users. It seems to be a smart idea; individuals that could not previously use the app can now get a sample of it, and be ready to jump in as full users once they are of acceptable age. Controversy As the popularity of the app has grown, the company has been plagued by accusations that the service is mainly meant for “sexting,” in which the user takes an explicit picture of his or herself, and sends the pic to another user. The self-erasing nature of the application certainly lends itself to that sort of activity, though the founders have repeatedly denied that this is the main intent of the app. The issue was further complicated when a forensic researcher revealed that some photos could in fact be recovered from certain devices, though it takes extensive know-how (according to the Atlantic). A company representative told U.S. News that management was not concerned about the possible glitch in security. Also, Apple’s (AAPL) upcoming iOS 7 appears to bypass the mechanism for alerting a sender when the recipient has taken a screenshot of their picture (according to an article by Gizmodo). The final version of the operating system has not been released, and it is not known whether or not Snapchat will address the issue. In addition to these concerns, the founders of the company have become engaged in a legal dispute with a former schoolmate claiming that he was a third member of the original team. Reggie Brown IV asserts that he conceived the original idea for a photo messaging app with self-destructing images. According to an article by TechCrunch, after vehemently denying the accusations, CEO Evan Spiegel admitted in court documents that Brown was part of the original group. While the litigation is reminiscent of Winklevoss v. Zuckerberg, and may have an impact on ownership, there seems to be no sign that the case will impede the marketability of the product. Business Model Snapchat has not yet monetized its growing user base. However, after its recent funding round was announced, CEO Spiegel disclosed that monetization was on the horizon, and offered some likely strategies. In an article by Forbes, Spiegel says the firm will likely seek revenue from a combination of in-app purchases and native advertising. The report stated that monetization efforts would appear “in the coming year,” though it’s not clear as to whether this means 2014 or in the coming 12 months. Spiegel told TechCrunch that in-app purchases would come first, and that the firm is already experimenting with hidden features in the development of the monetization strategy. The author of the report hypothesizes that the purchased products would take the form of personalized features and customization tools. This concurs with statements made by Spiegel in the Forbes report, in which he points out the merit of Tencent, the Chinese Internet conglomerate that owns the messaging apps QQ and WeChat. These services dominate the online messaging market in China. According to an article by paidContent, Tencent receives the bulk of its profit from the sale of “virtual goods” in its instant messaging apps. More on Snapchat’s monetization and its comparison to Tencent can be found below. Leadership Chief Executive Officer Evan Spiegel and Chief Technology Officer Bobby Murphy began developing Snapchat during the spring of 2011. The two were fraternity brothers at Stanford University, and released the app to the iOS App Store in September of that year. Daniel Smith and David Kravtiz are the lead software developers under Murphy. Vice President of Monetization Phillippe Browning is a graduate of Harvard, and was formerly Vice President of Advertising and Operations at CBS Mobile, and developed some of the first efforts in mobile advertising at Electronic Arts (according to the Mobile Snapchat Leadership - From left to right: Software Marketing Association). Engineer Daniel Smith, Software Engineer David Kravitz, CTO Bobby Murphy and CEO Evan Spiegel. Source: Snapchat.com Market Snapchat is most popular with a young demographic, aged 13 to 25. However, the app is becoming increasingly popular with people over 40, as well as young professionals (according to an article by AllThingsD). A report from New York Magazine claims that it has become particularly trendy among young Wall Street employees, who are especially concerned about evidence of risky behavior finding its way back to a current or prospective employer. Snapchat has the deletion of a permanent record as its raison d’etre. A generation of youths have been raised within an environment dominated by social networks, where personal information flows freely, and an individual’s identity is tied as closely to his or her online facade as it is to his or her actual persona. As TechCrunch stated in a June article, “this group has been forced to grow up online, living in public.” This generation has become accustomed to representing itself extensively on the web, but is anxious to control its online image. A study by the Pew Research Center found that 59% of Internet-using teens had edited or deleted a post they’d made previously, and 53% had deleted comments from others.