Apple is at a disadvantage in Photos. Google has Picasa and YouTube. Yahoo has Flickr and Tumblr. Photo sharing is central to Facebook, as well as Instagram and What’sApp, both of which Facebook owns.
By contrast, Apple has iCloud, which has been a black eye for them over the last year. And though they have reasonably decent photo tools like Lightroom and iPhoto, they don’t have much in the way of a photo sharing service. Buying SnapChat might make sense for Apple, and they certainly have the money to do it.
However, let’s assume that the smart people in Cupertino are considering launching a new kind of web service for photo sharing. The service will be ad supported. Build a model for the property with the following parameters:
User Base: Adoption will come mainly from iPhone users. However, it will be a public service, and non-iPhone users will also be eligible to use the service. Assume that the user base hits 200,000 in the first days after launch, and then grows to 500,000 within six months. After 1 year, the service has 1 million users, and it hits 5 million at the end of year three and 20 million at the end of year five.
Storage space consumption: The service will allow users to share up to 7GB of photos. However, most users will share far less. Assume that the data required per user ramps up over time. The service will be architected for 100MB of space per user in year one, which will grow to 300MB of space per user in year two, and 500MB in years three through five.
Data Traffic: Assume that free users view 65 pages per month, and that there is an ad on each page.
Ad Pricing: The service will be free to all users. Free users will see ads served through iAd, Apple’s advertising network. Ads are sold in a variety of ways, but let’s assume that all ads are sold on a Cost per thousand impressions (“CPM”) basis. Specifically, for each 1,000 impressions, Apple will receive a payment of $0.75.
Headcount: This project will require 30 people to do the initial development, which is expected to take 18 months. After that point, the headcount requirement should drop to 14 people for maintenance and ongoing development. Assume that each person has a fully burdened cost of $150,000 per year, which is a lot, but includes salaries, benefits, options, office space, time off.
Hosting and Storage: Server capacity costs about $1 per gigabyte (GB) but this rate is falling per Moore’s law. Assume that hosting costs fall by 20% per year.
Marketing: The company is prepared to make a substantial marketing commitment to this product. They anticipate spending $15 million in the first year, plus $8 million each additional year.
Things to ignore: For the purpose of this exercise, please ignore anything to do with equipment, this includes the initial purchase of fixed assets and its subsequent depreciation. Please also ignore taxes and financing costs.
Project out the cashflows by month over the next 5 years.
Margins: What kind of margins is the venture likely to achieve?
NPV: Run a NPV of the future cashflows at Apple’s Weighted Average Cost of Capital (WACC). You may have to do some research and make some assumptions to calculate WACC. Do your best.
Recast the monthly cashflows that you’ve projected into a nice annual cash flow summary by quarter. Please also produce an annual summary? Be sure that the totals are the same.