Snap pledged to purchase at least $2 billion of cloud services from Google, the company’s S-1 filing with the U.S. Securities and Exchange Commission (SEC) revealed on Thursday. The deal was made as the Venice-based social media giant signed the Google Cloud Platform License Agreement, the company said. The agreement is set to last for at least five years and Snap committed to purchase a minimum of $400 million of cloud services on an annual basis during that period. During the first four years of the agreement, up to 15 percent of the agreed amount may be transferred to the following year, meaning Snap may opt to purchase $340 million of cloud services from Google one year, and then pay for $460 million worth of services the following year. The company also agreed to pay for any difference in case it fails to meet its commitment. The agreement was signed on Monday, January 30.
The vast majority of cloud services Snap agreed to purchase from Google will likely be used for Snapchat. The company’s social media app was supported by Google’s infrastructure for over three years now, though it isn’t clear whether the two firms had a long-term agreement in place until now. Google’s cloud unit doesn’t post its individual financial performance, but the company’s portfolio including this business generated approximately $3.4 billion in revenue during the fourth quarter of 2016. Given that fact, it’s certain that Snap’s commitment to purchase at least $400 million worth of cloud services on an annual basis will significantly boost the financial performance of Google’s cloud business. It’s even possible that Snap will be Google’s biggest cloud client until 2022.
While Snap has been experiencing rapid growth in recent years, $400 million still represents a big investment for the Californian company which is currently in the process of preparing for an initial public offering (IPO). However, Snap doesn’t have a lot of choice but to continue investing in its business if it wants to continue experiencing startup-like growth. That’s also an important part of the reason why Snap decided to go public seeing how the company needs to raise huge amounts of liquid capital to continue its aggressive investment strategy.