Snap is leasing space on Google Cloud for $2 billion
Snap (SNAP) has an arrangement with Alphabet’s (GOOGL) Google and Amazon (AMZN) to use their respective cloud platforms to host its subscriber data. Snap is paying $2.0 billion to house its data on Google Cloud for the next five years, which breaks down to $400 million annually to use Google Cloud.
Amazon is paying $1.0 billion to host its data on the company’s cloud platform, Amazon Web Services (or AWS). Looking at the cloud budget allocation, Google is Snap’s largest cloud landlord. Google, Amazon, and Microsoft (MSFT) are in a race to dominate the cloud computing market. Amazon’s AWS is the world’s largest public cloud.
Hosting consumes 58% of ARPU
Hosting subscriber data in the cloud is one of the large segments of Snap’s operating expenses. The company’s hosting cost per DAU (daily active user) for 2Q17 rose to $0.61 from $0.55 in 2Q16 and from $0.60 in 2Q16, as shown in the chart above.
Considering that Snap’s worldwide ARPU (average revenue per user) for 2Q17 was $1.05, this trend indicates that 58% of the company’s revenue per user goes into hosting user data.
Hosting cost drivers
Snap’s hosting costs are driven by increases in the number of subscribers and the time spent by those subscribers on its Snapchat app.
Snap revealed in its 2Q17 earnings report that Snapchat subscribers younger than 25 years of age spend an average of 40 minutes a day on the platform. That is higher than 30 minutes the same demographic spends on Facebook’s (FB) Instagram every day.