Good news travels fast, but bad news even faster – especially if it’s the release of lacklustre results from Twitter.
That’s what happened on Tuesday last week when, through no fault of the company’s, its first-quarter earnings appeared on its website for just 45 seconds, but an hour before their scheduled release.
Twitter’s shares began falling within seconds of the release being spotted, bumping down 7% from the day’s start, and after the official release of the figures, kept going down, falling more than 18% on the day.
The social media site may be beloved of news organisations, celebrities, Islamist propagandists and trolls, but Twitter has a problem: it isn’t growing its user base quickly enough and it isn’t making enough money from those it does have to satisfy Wall Street. Analysts now follows the firm’s every move – and hasn’t liked what it has seen recently.
The main issue is that the growth in the number of “monthly active users” who sign in at least once a month – up 18% year-on-year to 302 million – didn’t seem fast enough. And revenues, at $436m for the quarter, up 74% year-on-year, haven’t risen as fast as analysts expected. Meanwhile the company’s $146m operating loss was bigger than the previous year’s $129m.
Twitter wasn’t the only social network to record poor results and offer discouraging guidance last week. In the following days both business network LinkedIn and reviewing site Yelp offered low-key numbers and outlooks, and also saw their shares sink. “The social media bubble has many similarities to the 1999/2000 dotcom bubble,” notes Richard Holway, an experienced analyst at TechMarketView. “Nobody doubts that social media is a mass market of huge potential … [but] overall the market has overvalued most of them.”
The key problem for such networks, which are principally advertising-driven, is persuading advertisers that they will get value for money if they use that service, rather than Google (where your searches indicate an intent that an advertiser can latch on to) or Facebook (which is increasingly sweeping up online brand advertising).
Twitter’s revenue mainly comes from showing “promoted tweets”, “sponsored tweets” and “cards”, which appear in the timelines of tweets from each user’s followers. Those tend to be static text or pictures – but Vine, for user-made six-second videos, and Periscope, for live video broadcasting to one’s Twitter followers, show its potential to move into more lucrative advertising fields.
The trouble is, it hasn’t done that yet – and costs, especially of sales and marketing, are still rising rapidly.
Dick Costolo, the social network’s chief executive since October 2010, clearly sees the problem. In a conference call after the results were published, he announced the purchase of TellApart, an ad targeting company; a regulatory filing revealed the price as $532m in stock, based on the lower price at the end of the day. The idea of buying TellApart is to better target specific groups of people on desktops or mobiles – as Facebook can do with the data users supply in their profiles and interactions.
Though Twitter is a household name in many countries – there are 15m tweeters in the UK alone – and is used for free promotion by thousands of brands, its problem remains getting users to act on the ads pushed into their timelines, and to persuade advertisers of its benefits.
But is the market overreacting, or does Twitter really have problems?
“There’s no place in the digital world other than Twitter where you can get the real-time information and interactivity that you get there,” says Debra Aho Williamson, principal analyst for social media at eMarketer, which analyses ad spending online. “Advertisers find that really, really useful. For ‘in-the-moment marketing’, Twitter is really well positioned to take advantage of that.”
But advertisers mostly aren’t set up to cope with abrupt increases in interest – to take advantage, for instance, of Twitter buzz about Poldark when the TV drama was on air and post promoted tweets for holidays in Cornwall. Brand advertisers in particular tend to react more slowly, and that leaves Twitter competing with slower networks, unable to take advantage of its unique selling point: speed.
As a result the company has also done a deal that has surprised many: it is letting Google’s giant DoubleClick ad network sell some Twitter ads. At first sight that weakens its control of advertisers, but Aho Williamson sees potential benefit in reaching the gigantic number of clients who already use Google. “DoubleClick is a distribution platform. It might not be as profitable for Twitter to sell an ad there, but it can add revenue Twitter wouldn’t otherwise have got.”
Under Costolo, Twitter is also taking more control of its network and seeking fresh revenue streams. Last month it summarily ended the contract that gave the British company DataSift access to the vast “firehose” of all tweets. DataSift had used it to perform “big data” analysis for clients in all sorts of fields. Companies wanting that insight will now have to turn to Twitter-owned Gnip, purchased just over a year ago. It has also made it increasingly hard for outside app makers to offer Twitter feeds. That means more people using Twitter’s own app, and so seeing Twitter’s ads.
Costolo’s strategy, however, has its doubters. Ben Thompson, an independent technology analyst, thinks the Twitter boss should “make way for new leadership that has improved credibility with Wall Street, with developers, and within Twitter itself”. On his Stratechery blog, Thompson comments that Twitter’s problem is “their active user growth is simply too small given their current size”. It’s smaller, Thompson points out, than Messenger and Instagram (both owned by Facebook) and barely bigger than Snapchat. If and when Snapchat passes it for users, Twitter will be at a disadvantage in attracting advertisers.
The solution? Thompson thinks Twitter should split itself up, rather as Facebook did into Messenger, Instagram, and others, and capture users in different areas – messaging, video-sharing, photo-sharing – so that advertisers can get more targeting than they could in the general noise of hundreds of millions of tweets per day.
Aho Williamson, however, does not see any great necessity for dramatic change. “What they have built, in terms of a place for real-time information and news, is unique,” she says. “It’s a valuable and interesting company; getting $1bn of advertising per year is quite an achievement by any standards.”
Despite its losses, the idea of Twitter vanishing doesn’t seem possible; there are plenty of big companies that would be happy to buy it (and rumours continue to swirl about Google). Holway, though, thinks that, for investors at least, the key is timing: “Just like the dotcom days, you can have a great time as an investor until the music stops. Knowing when to go home is much more important than going to the dance in the first place.”
It’s a simple but brutal competition. Twitter is trying to pull in advertisers but is up against fierce online competitors – principally Google and Facebook.
Worldwide digital advertising spending last year, according to eMarketer, which tracks online ad spending, was $145bn. Twitter captured just 0.87% of that, up from 0.49% in 2013. Facebook grabbed nearly 8%, up from less than 6% a year earlier. Google had more than 31% - or 36 times more than Twitter.
While Twitter claims just over 300 million users, the total internet population excluding China (where Google has effectively zero users) is 2.6 billion. With Google getting 36 times more cash on eight times the users, it’s about four times better at making money from users than Twitter.
Twitter is also jostling with other social networks seeking ads. Besides Facebook, there are Instagram, Snapchat, Pinterest and Tumblr. They are all competing for the most lucrative adverts, which come in the form of video, where Facebook dominates. Twitter is making headway there with its Vine offshoot - which allows users to make six-second videos - and its new Periscope self-broadcasting app.
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