- Facebook reportedly tried to buy Snapchat in 2013 for $3 billion to boost its appeal with younger users.
- Rebuffed, Mark Zuckerberg turned Instagram into a potential Snapchat killer.
- Now Snapchat's valuation is falling just before company insiders will be free to sell massive numbers of shares.
In late 2013, CEO Evan Spiegel reportedly rebuffed a $3 billion takeover offer from Mark Zuckerberg.
Now the CEO may be having the last laugh.
Snap shares fell sharply below their IPO price of $17 a share this week, after one of the investment banks that helped take the company public downgraded its stock over worries about Instagram.
The downgrade of Snapchat's parent firm by Morgan Stanley came one business day after Facebook's rival Instagram service introduced what it called its "fun new face filter."
The feature, which allows users to personalize photos with realistic-looking digital elements, was just the latest in a long list of tools Instagram has rolled out to blunt Snapchat's growing appeal to younger users.
In the time since Spiegel spurned Zuckerberg, Facebook has turned Instagram — a photo-sharing service it acquired in 2012 for just $1 billion — into a key growth driver and a Snapchat killer.
And it's done it with product updates — from photo filters to digital sunglasses — that appeal to the same youthful demographic Spiegel used to build up Snapchat.
"The death knell for Snapchat was Instagram Stories," said David Pierpont, vice president of performance media for Ansira, a digital ad agency with more than 100 clients, referring to a video-sharing feature launched last August.
"When we saw that, we said, 'It's over,'" Pierpont told CNBC in a phone interview.
It's not just that Instagram can mimic Snapchat features, Pierpont says, but that when combined with Facebook's own service, it can offer advertisers access to more than 2 billion users, as well as detailed data about their online "likes" and habits.
Instagram's growth has accelerated markedly in the last year.
It's also well ahead of Snap, which reported 166 million average daily users in the first quarter of 2017, for a year-over-year growth rate of 36 percent.
Apart from Stories, the overall Instagram service also has been growing fast. In April, Instagram said it had 700 million users, up from 500 million in June 2016. That's an addition of 200 million in 10 months.
For most of 2014 and all of 2015, Instagram had been adding roughly 100 million every nine months.
"There was a major push within Facebook to get more users on Instagram," said Patrick Moorhead of Moor Insights & Strategy, an industry analyst firm.
Facebook did so by sending messages to users telling them which of their friends were already on Instagram.
"It was the right strategy and it worked," Moorhead told CNBC.
Now even Morgan Stanley, which was one of the investment banks that helped underwrite Snap's IPO, is admitting in a note this week that "Instagram is likely to be more disruptive than previously expected" to Snapchat's prospects.
The stock downgrade and revenue-estimate cut was a rare move on Wall Street given that the giant investment bank helped sell Snap's IPO just four months ago.
And Facebook will keep turning up the heat on its smaller rival.
Some Instagram advertisers are now getting for free a type of sponsorship that they have to pay for on Snapchat, according to the Morgan Stanley note.
"It's going to be hard for Snap to become more than a niche player" in the online ad market, Pierpont said.
Disclosure: CNBC parent company NBCUniversal is an investor in Snap.
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