Shri

Ram Case Competition On-Campus III

The Shri Ram Case Competition

On-Campus Round III: Face Offs

SRCC Business Conclave 2015

Shri Ram Case Competition On-Campus III

Instructions

This document consists of one case study.

Each case study comprises of two stands.

Communicate your stance as instructed in the email to the organizer.

The decision of the organizers shall be binding on all the participants.

Case It Till You Ace It.

Team Business Conclave
















In case of any queries, feel free to contact:
Mohit Jindal: +91-8800132129

SRCC Business Conclave 2015

Shri Ram Case Competition On-Campus III

Case Study 1: LA Startup PhotoLabs Turns Down $3.25 Billion Offer From Facespace

In the year 2013, News Journal reported that the US-based startup PhotoLabs Incorporation, a photo
messaging application founded in 2011, rejected a US $3.25 billion buyout offer from the largest
social networking company in the world Facespace Incorporation. While doing so, PhotoLabs
Incorporation joins a league of new-age companies that have turned down multibillion-dollar
acquisition offers from tech behemoths.

Another tech giant, SearchMe Incorporation, known for its aggressive acquisition policy of more
than one acquisition per week, faced a similar rejection from the deal-of-the-day website, Coupon
Inc. of its US $6 billion offer. Facespace and Tweeter, in their infancy years, rejected many
acquisition years, and had emerged successful later on. However, this has not always been the case.
Digging, a social news site founded by Kev Costner, received acquisition offers worth more than US
$300 million (its valuation stood at US $250 million), however, ended up being sold for US $500,000
to Alphaworks, upon subsequently losing its consumer audience to Facespace and Tweeter.

According to the analysts, for a company that had no revenue base and no competition, an offer of
US $3.25 billion was a good one. But with 400 million snaps shared every day as of 2013, and
investors who had trusted PhotoLabss business model with funds amounting to US $130 million, the
company believed it had a bright future ahead as it was providing services that popular networking
and micro blogging sites like Facespace and Tweeter were not. According to analysts, the huge
investment that SearchMe had made on developing features to encourage people to interact with
photos and the repeated acquisition offers from Facespace showed the potential PhotoLabss
business model had.

In the spring of 2009, two students of Stanford, S. Siegel (Siegel) and Bill Murphy (Murphy), planned
to design an online social network, but they were unsuccessful. Then in 2010, they developed an
online software suit Future Freshman for manning college admissions. Siegel and his classmate
Greg Brown (Brown), came up with the idea of developing an application with a feature of self
destructing snaps. The sender had an option of setting the length of time for which the viewer would
be able to see the sent snap, after which it would disappear from the receivers device. To develop
the application, Siegel and Brown took the help of Murphy, who had graduated by then. Initially,
they developed a website with the features, then they changed it into a mobile app and called it
Piccassoo. After 3 months of coding, they launched a prototype on major App stores in July 2011. In
the meantime, Brown left the company. To begin with, the application did not find many takers.

Piccassoo inevitably got rebranded as PhotoLabs. A percentage of the first clients of the application
were district secondary school students who took in of it from Siegel's cousins. As Facespace was
obstructed in school and the students were equipped with the iPad, this application ended up being
advantageous. By January 2012, it had 20,000 clients, which expanded to 100,000 by April 2012. The
fleeting nature of the application got the consideration of a lot of people as the snaps vanished and
there was no need to look great or cool. Inside a couple of months, it turned into a furor among the
young. It was made perfect with the Android working framework also. The application additionally
had a gimmick that advised the sender if the collector attempted to take a screenshot of the snap.
As indicated by Siegel, "One of the best advantages of the service, especially in early days, was that it
SRCC Business Conclave 2015

Shri Ram Case Competition On-Campus III

was 10 times speedier than MMS. So many individuals like it on the grounds that its interface was so
straightforward. It sent photographs so rapidly. It was a great deal quicker than opening up an
instant message, going and taking a picture or picking it from the display gallery, uploading it which
took a truly long time and after that sending it to your companion.
By May 2012, Siegel and Murphy were out of cash and in need of funds. Meanwhile, venture
capitalists had been taking note of PhotoLabss increasing number of users. In April 2012, Godspeed
Venture Partners invested US $500,000 which Siegel and Murphy utilized to hire engineers and pay
computing bills. Later, Trademark Capital (Trademark) and JV Angel together invested US $12.5
million. After 6 months, a tech-focused hedge fund Coati Management contributed US $50 million
and valued PhotoLabs at US$ 2 billion.
Mark King (King), one of the founders of Facespace, had been keeping an eye on the developments
at PhotoLabs. In December 2012, King flew to California to meet Siegel and Murphy with a buyout
offer. By then, PhotoLabs was witnessing 50 million photo shares per day. When the founders
declined the offer, King experimented with an application called Poke which was an app for
impermanent messaging. But it failed to pick up.
PhotoLabss popularity continued to grow. In January 2013, it was named the Fastest Rising Startup
of 2012 by technology industry blog, Techblog, and by February 2013, it had become the second
most popular photo and video app on major App stores, behind YouChannel.
In October 2013, PhotoLabs introduced stories where photos did not disappear. Instead, a chain of
photos formed a digital album that would stay for 24 hours. It continued to attract users, and by
November 2013, 400 million snaps were being shared on its platform every day. In November 2013,
King made a whopping new US $3.25 billion offer, only to be turned down again. Some observers
were surprised at the offer that King had made, as the application had not earned any revenues till
then. According to them, revenue generation continued to be a major challenge for PhotoLabs. The
observers said that other apps made revenue through in-app purchases, mobile games, digital
merchandize etc., but none of these were compatible with the revenues model of PhotoLabs.
Similarly, revenue through targeted advertising was not suitable for the company as it relied on
privacy protection.
One of the challenges that PhotoLabs faced was that it did not collect any data of the users. Time
was another constraint for the company, according to many analysts. In the world of social media,
you could wake up the next morning to find that a new competitor had taken over your dreams to
rule the market as happened with SearchMes social networking platform Wire when Facespace
came into picture. Also, security was an area that seemed to have been ignored by Siegel. In
December 2013, an anonymous hacker published a database on PhotoLabs that contained millions
of usernames & their corresponding numbers. Security experts from an Australian company Gib
Security had been warning about PhotoLabss vulnerabilities. Security expert Nicolas Taub said To
create something self destructive for real is an in fact quite tough and obviously unfortunate, I would
only say PhotoLabs offers only the that illusion.
The ephemeral nature of the application attracted users in millions and the confidence of the
investors. Some believed that PhotoLabs could be the next big thing in social media and would last
SRCC Business Conclave 2015

Shri Ram Case Competition On-Campus III

for a long time. PhotoLabss growth as a mobile service is probably the most explosive we have ever
seen at Trademark. Its reach and level of engagement with users is significantly higher than we have

seen with other services at similar stages, said general partner of Trademark, Mitch Marsh. Analysts
opined that the company expected a huge increase in the number of users in the near future and
thus a better valuation Its not that they dont want billions of dollars. In part, its because they

think making a deal now would leave many billions on the table, said Jean Williams, a reporter with
News Journal.
Meanwhile, Facespace announced the acquisition of instant messaging service WhatsApp for US $19
billion in February 2014. Analysts said that with this acquisition, Siegel and Murphy did not have
many options left in case they wanted to sell the company. Whether Siegel had made the right
decision in turning down Kings offer, only time would tell. It remained to be seen if PhotoLabs
would be able to maintain the momentum and grow the Facespace way or wither away like many
other startups.
Monetization Strategy
It can make use of the follwing monetization strategies:
1) Brand Support/Native Advertising
Here, brands can send users pictures of their products and disappearing coupons that add a sense
of urgency to the purchase.
Basically, PhotoLabs is not going to resort to native advertising as Facespace until it has no other
choice. Everyone hates it and PhotoLabs knows it will drive people away from the service and build
resentment towards the brand. People tolerate Facespace native advertising because theyre
hooked to the addictive and competitive nature of the service.
However, others believe that PhotoLabs is not providing a unique service. The moment they start to
annoy their users with subscriptions or obtrusive ads, users can easily switch to another service or
simply stop using PhotoLabs. They'll avoid annoying their users at all costs.
2) Content Discovery
Our team is really interested in supporting people who dont have a marketing team and a big voice.
Upcoming artists, people who are trying to be actors, etc. That to us is a lot more exciting [than
brands. - Evan Siegel
However, the critics opine that though this is an altruistic way of thinking, it is also quite
unprofitable. They argue on who they are going to charge in this situation: the users who just wants
to send and receive free, low-quality pictures from their friends or the starving artists who have
nothing to their name but talent and dreams.
3) In-App Purchases
Weve looked to a role model of ours - Tencent - which is a really, really big company in China. They
make the vast majority of their revenue off of in-app transactions, and whats fascinating about that
is when Tencent really had to make money there wasnt really a huge brand advertising market, so
they couldnt just say 'heres this bucket of billions of dollars - Im gonna take 5% of it, were gonna
be a big company'. They had to build things that people wanted buy. I think thats a really scary
SRCC Business Conclave 2015

Shri Ram Case Competition On-Campus III

challenge, to sit in a board meeting and say rather than taking 5% of these billions of dollars in
display ads, were going to make things that people want and thats a question mark.
Again, Speigel reiterates that PhotoLabs is not looking to make money from ad revenue. He wants to
emulate the Tencent model: Tencent makes money by providing a free messaging service, then
peddling add-ons such as MMORPGs and avatar accessories to its gigantic messaging service user
base. Tencent has over 800 million active monthly users. Competition to see who can get the best
gear for their characters or the coolest clothing for their avatars drives purchases among these
hundreds of millions of users.
However, others argue that this element of competition would destroy the fun, easygoing nature of
PhotoLabs; the fundamental element of the service that makes it so attractive in the first place.



















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Shri Ram Case Competition On-Campus III

Stance I: __________
PhotoLabs should not have turned down the offer; instead it should have taken it gladly. This is
because people use PhotoLabs, as it is fun and easy unlike Facespace, which is competitive and
quantified (likes, followers, friend count).
The company can be used as a funnel to bring its large and growing user base to another website.
The company wishes to retain its attractive qualities and generate revenue, and this is the only way
it can achieve that. In other words, the reality that PhotoLabs faces is that it does not carry the
capability of generating revenue for itself; rather, it can create revenue for another company. In fact,
for such a company that receives a valuation of $3.25 billion, it should have immediately accepted it.
Since most of its user base is already on Facespace, you believe it is surviving on a dangerous
revenue model of earning revenues through advertising, a domain Facespace is already in. It is a
bubble waiting to burst.
Other also point out the fact that a service that is devoid of the nature of competition that is the
driving force behind every other profitable company in the world cannot survive. They opine that a
service that voluntarily throws away its own data in the todays era of data hoarding cannot last
long.
Given all these factors, PhotoLabs should have gladly accepted the offer.

SRCC Business Conclave 2015

Shri Ram Case Competition On-Campus III

Stance II: __________
You believe PhotoLabs has taken a brave call, and as always in the tech industry, PhotoLabs can
create a niche for itself in the commercial arena by building a sustained revenue model.
The advertising opportunity seems real. An average user (millions of such people) receives about 150
photos a day. The company has recently made an attempt of inserting a picture or video in the
interim (every 20 photos). The advertisers are happy about these prospects given the wide reach
including the coveted demographic (teenagers) which they trouble reaching anywhere else including
via Facespace. Whats more worthwhile to note is that the users dont mind seeing such occasional
ads, especially when they come from a brand, which they perceive as cool.
Given the PhotoLabss current user base, not to mention the future growth opportunity, it can tap
into the successful virtual sales. In other words, it can become one of the key platforms from which
the next generation of Internet users will use the Internet where it will launch an application
interface where third parties can build applications.
With all these factors in mind, you believe PhotoLabs has a reasonable shot at achieving its vision.
And in the tech industry, it is the reasonable shots that aggressive venture capitalists and digital
entrepreneurs care about.

SRCC Business Conclave 2015