When it comes time for a company to go public, they are forced to open their closet filled with secrets. Snapchat is now on the chopping block and there is a big miscommunication about a secret of theirs.
What was hiding in Snapchat’s closet?
Essentially, Snap has tied itself to the Google Cloud. The social media company has a $2 billion contract with Google for computing, storage capabilities, bandwidth, and other services provided by Google extending the next five years.
Initially, you’d think not owning a crucial part of your business is a terrible thing… but it isn’t.
Explained in simpler terms
Imagine Snapchat were a new restaurant that just opened. Limited by funds and time, they decided to rent refrigerator space from the liquor store next door. This allowed them to hit the ground running and not have to worry about building a safe, secure refrigerator that satisfied health code standards.
Solely focused on customer growth, building their own refrigerator infrastructure was continually put on the backburner.
Now, the restaurant is a national food distributor and the liquor store next door has grown their own refrigerator capacity to satisfy the restaurant’s growth.
However, because the restaurant’s growth has been so fast, many other refrigerator companies reached out to make better offers, allowing the restaurant to shop around for the best deal.
Why isn’t dependence on Google a bad thing?
Snap’s buying power is massive in comparison to any other company using third-party cloud services. For that reason, it can lower costs by playing different cloud vendors off of each other. They’ve already given about $1 billion in business to Amazon Web Services for message queuing – sending messages through their app.
By committing to a five-year contract spending at least $400 million a year with Google, Snapchat was able to lock in today’s market price and even garner a few discounts.
Not only are they getting a great deal on these services, but it’s also allowed Snapchat to focus solely on providing a better user experience and swiftly grow their platform.
What does this mean for Snapchat’s IPO?
Snapchat is making history as the biggest consumer internet company to be built from scratch on top of cloud computing infrastructure it doesn’t own.
Snapchat has set a precedence to all other startups that you can outsource your cloud infrastructure and still IPO eventually. Amazon, Microsoft, and Google – the three leaders in the public cloud industry – would like future Snaps to grow up on their clouds.
Within the technology industry, it is easy to misalign stories like this one.