Twitter’s unfulfilled potential

Now may be the time for Twitter to test new business models.

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Can you guess? Twitter has three accounts with over 100 million followers, they are all people. Who are they? Answers are at the bottom of this email. And no, Donald Trump is not one of them (he has 89 million). 

Like many of the topics I’ve covered previously, I’m generally inspired by reading other analysts and industry commentators who are frankly much more adept at this than I am. This week it was Professor Scott Galloway. Galloway teaches MBA students at NYU Stern, and is also known for his commentary on brands and the tech industry, which he has covered across a range of mediums such as YouTube, blogs and his debut novel “The Four”.

On Friday, Galloway’s “No Mercy / No Malice” weekly email focussed on Twitter, and broadly the view that their revenue growth is falling behind user growth (you can read Galloway’s post here). Galloway also has strong views about Dorsey’s leadership, but that’s not something I have any intention of worrying about. I do however think Twitter is leaving money on the table considering their mindshare with users. So I wanted to build on Galloway’s piece, and unpack why I think Twitter has unfulfilled potential, and with some changes to its product and business model it could be a much larger earner than it is today. 

Now before I start I should caveat this commentary with the obvious: Twitter has built a fantastic business. It brought in $3.5 billion last year, and has 187 million daily active users. There are few businesses bringing that scale of revenue in, and an extremely select few who engage with that many users daily. But, when you think that Snap Inc’s market capitalisation is double that of Twitter, and Facebook’s is around 25 times larger, you can start to see why I think Twitter’s investors could feel a little disappointed thus far.

Twitter celebrates its 14th birthday this year, and in recent years it has become a key medium for social discourse. The 2020 US Election is a perfect example of where Twitter’s speed and aggregation brought the public, media and politicians into a central place to share updates and debate outcomes. Twitter outpaces any platform in being first with the news, which does risk the spread of misinformation, but again that’s a different topic which other writers are better placed to cover.

Twitter’s business model is simple, and mirrors that of its peers in Facebook and Snapchat. Bring as many active users to the platform as often as possible, and sell advertising contextually into the news feed. This is the social media business model, and the task is to be the most attractive place for advertisers to spend their fixed ad budgets. Broadly, Twitter is about where you would expect them to be here, bringing in $20 per annum for every daily active user. This is double what the 9-year old Snapchat earns per user, while 16-year old Facebook with two key advertising assets (Facebook & Instagram), earns $47 per annum for each active user.

However what is worrying for Twitter is the trend line. As they grow active users on the platform, they’re struggling to maintain their revenue per user ratio. In 2018 Twitter earned $24.50 per annum from its users, now it's $20. An 18% drop in marginal returns. While you might be tempted to put this down to the pandemic, Facebook and Snapchat grew marginal returns on their users by 29% and 70% respectively in the same period. 

So what are some of the reasons why Twitter might be struggling to keep up with its peers in revenue growth? For me, there are a few things that stand out;

Twitter knows less about its users

Facebook, Instagram and Snapchat have become deeply personal platforms. Users are inclined to share much more about their lives than they might be on Twitter. While Instagram and Snapchat are places to share video of family life, time with friends and holiday content, Twitter has become a place to follow news publications, track business and sports, and broadly remain relatively anonymous, should you want to. The less Twitter knows about its users, the less targeted and effective its ad platform can be. 

Letting others win video

Twitter has made over 50 acquisitions over its lifetime. A number of them related to video experiences and video infrastructure, with one notable purchase being that of Vine in 2012. Vine, which set Twitter back $30 million, was a short video looping app which had the opportunity to capture the market for short attention span video. Twitter shut Vine down in 2017 after losing market share to Snapchat and Instagram. That same year, ByteDance launched TikTok, a 3 to 15 second video looping app which now has 850 million active users. Video has proven to be an attractive medium to keep users on the platform, and advertisers love it, as they can tell more compelling stories than in static text and photos. 

Twitter’s advertising infrastructure

On Twitter’s Q3 earnings call, they disappointed investors with further delays on their planned improvements for their ad platform. From the Financial Times;

“Twitter’s investors have become used to hearing about its long-promised upgrade to its advertising system, called MAP, which it has been trying to rebuild for more than a year. That update was delayed until well into 2021 on Thursday, due to Apple’s plans to tighten the iPhone’s restrictions on ad tracking.” (source) October 29, 2020.

The view amongst the industry is that Twitter’s advertising system has fallen behind that of its rivals. Considering this is fundamental to driving revenue, this is rightfully a little worrying.

A new business model

It should be said that the financial fundamentals of Twitter’s business are in very sound shape. It’s profitable, it has over $2 billion in the bank, its current ratio is 4.5 and they have spent over $600 million on R&D so far this year. Despite all of that its market cap is the same today as it was in December 2013, and that comes down to the market looking for Twitter to derive more value from its users. 

I think there are some great opportunities for Twitter to realise more value from the business it has built. Back in July, Dorsey shared with analysts that Twitter is exploring a subscription model, to compliment its ads business. But sadly, nothing was mentioned on the Q3 earnings call, so it feels unlikely that major progress has been made . 

As a user of Twitter for many years, the platform has no reason to ask for my credit card details. But I could see a few use cases which would warrant Twitter deriving income directly from me. First is media bundles. Many users of the app rely on Twitter to discover and consume news, however Twitter is simply allowing outlets like The New York Times and The Wall Street Journal to post organically on the platform and have users leave their timelines to read content. Much like Apple has built with News+, why doesn’t Twitter explore media subscriptions and become an agent to sell paid content?

This could branch out into other creator-to-consumer mediums as well. As platforms like Substack (where this newsletter is published) are allowing writers to sell newsletter subscriptions directly to readers, you can’t help but think that could happen on Twitter. It’s a key source of reader acquisition, why not bring provisioning into the platform as well? 

Meanwhile Zoom, the video conferencing app which has scooped up millions of new users during the pandemic, is in the process of launching paid for digital events. Industry conferences and music gigs are all likely to be ticketed events by Zoom very soon. Again, this feels like a really rich opportunity for Twitter, where so many live events are promoted and discussed in real time.

There’s no doubt that fundamentally changing or adding new business models is hard, and it comes with risk around spoiling parts of the user experience that has brought nearly 200 million active users to Twitter in the first place. But as Twitter lags behind its rivals in revenue growth, and shareholder return stagnates, now feels like the time to explore new ideas.

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Answer: Twitter’s three accounts with over 100 million followers;

  1. Barack Obama (125.7 million)

  2. Justin Bieber (113 million)

  3. Katy Perry (108.8 million)

I know, Katy Perry surprised me too.