Snap Future Shaped by Complex Ties to Google as Supplier, Rival

Mark Bergen and Sarah Frier (Bloomberg) -- Every year at its annual I/O conference, Google gives away stuff. Last May, the trinkets included a tiny pamphlet with a code that let attendees follow the company on Snapchat.

At one point earlier that year, a much bigger alliance was in the works. The companies discussed a feature that would have let a Snapchat user point the app's camera at an object, hold down her thumb briefly and get information about it from Google's search results, according to people familiar with the situation. They asked not to be identified discussing private deliberations. Google and Snap representatives declined to comment.

Pairing with Snapchat would have been a boon for Google, whose efforts in social networking have foundered, while giving Snapchat a needed early revenue boost. But the deal has yet to materialize. Instead, Snap has been developing its own search tools.

The episode underscores the knotty courtship between Snap Inc. and Alphabet Inc.'s Google. As Snap prepares to go public, most of the attention will be on how many eyeballs and advertising dollars it can pry away from social media behemoth Facebook Inc. Yet Snap's fate will also hinge on how it navigates its ties with Google, an investor, cloud-computing provider and potential adversary.

The two are friendly. In 2011, some Google staff were feverishly scouting young companies to sign up for its new cloud-computing service. Google salesman Max Henderson found a small Southern California team working on an app with messages that disappeared. Evan Spiegel, Snap's Chief Executive Officer, took the offer.

As Snapchat exploded in popularity, Spiegel's business with Google expanded apace. Google has grown its cloud unit fast in recent years, but Snap remains one of its top customers, people familiar with the companies have said.

On Jan. 30, the companies inked a deal for Snap to spend $2 billion with Google's cloud over five years, according to Snap's public offering filing on Thursday. Snap also listed its dependency on Google as a risk factor.  Snap's cloud spending was likely a big reason its cost of revenue was $47 million higher than total sales in 2016. About $400 million of annual cloud expenses in coming years will put pressure on Snap to keep grow its advertising business, which already grew seven-fold last year.

Google's cloud chief Diane Greene recently hosted Snap engineering executive Timothy Sehn on stage at Google's Horizon conference as one of her marquee customers. "We would not have been able to do what we we've been able to do without Google cloud," Sehn said.

CapitalG, Alphabet's private-equity arm, disclosed an investment in Snap in November. That backing typically comes with access to other Google resources, from marketing advice to privacy expertise. Spiegel has cited Eric Schmidt, Alphabet's chairman and former Google CEO, as a mentor.

Still, Snap may quickly become a rival, particularly as it feels its first pressure from public shareholders. Snap's grab for digital video marketing dollars pits it against Google's YouTube. A similar pattern is playing out at Uber Technologies Inc., which counts Google as an investor but increasingly competes against the internet giant in maps and autonomous vehicles.

Spiegel's emphasis on making Snap a camera company presages rivalry on other fronts. In its filing, Snap told investors it plans to expand into additional hardware products beyond its video-capturing Spectacles. Some may even warrant regulation from the Food and Drug Administration, hinting at products using health sensors or advanced displays. Those are the sort of futuristic devices Google is also tinkering with.

A bigger standoff could come in software. Snapchat users upload an inordinate amount of personal photos and videos with the app's camera. In theory, Snap could tap this data to offer granular targeting information to advertisers.

Search would play a big part in this. Last year, Snap hired top search engineer Wisam Dakka from Google and acquired a mobile search startup called Vurb. Snap could mine the search data and offer more targeted user information to advertisers, like Google does. Other companies have similar data, yet few have Snap's obsessed users.

"None of these companies are using it today to understand intent and people," said Ankit Jain, vice president at digital research firm SimilarWeb. "That's something Snapchat could do."

Snap could also start to use data-driven ads to spur more sales at physical retail stores, a big demand of marketers. The company has been testing internet-of-things prototypes including sensors and beacons, according to people familiar with the matter. Google has been working on similar projects for years, too.Building search tools and pursuing these other ambition projects will likely require artificial intelligence skills. However, Snap's head of research overseeing these efforts, Jia Li, left the company in November. She went to Google.