Twitter must now face the hard, cold fact: innovate or perish.
It was Francis Bacon who said that great empires have been governed from the bed.1 And he was right in a way: Konrad Adenauer, the former Chancellor of Germany, did it for a few weeks in 1955 at the age of 79, when he had pneumonia.2 President Kennedy also did so too, since he was often in great pain and took more medications than any other president in U.S. history.3 But for Dick Costolo, the CEO of Twitter, governing from bed may not be a good idea if he wants the company to become one of the titans of digital advertising, just like Google and Facebook.
Obviously, Twitter is still a popular social networking site, and for good reasons. Since its founding in 2006, the company had played notable roles in breaking news, such as America’s raid on Osama bin Laden’s compound and in political revolutions, including those of the Arab spring.4 Twitter is also the darling of almost everyone, from celebrities(including political celebrities like Queen Elizabeth) to the commonest of commoners, such as the high school kids.
Broadly speaking, around 285 million people log on to Twitter each month. For a company that gets its content free of charge from “twittering” its users, and its revenue by charging advertisers for such things as inserting “promoted tweets” into users message streams, it is only natural to value big time consumer brands, who likes being able to direct messages at people according to their interests and locations. It is thus not surprising that Twitter attained a revenue of almost $1.4 billion in 2014 – a value that more than quadrupled its revenue since 2012. As a matter of fact, since 2012, Twitter’s valuation has ballooned even more, just like other technology firms. Even though the company recently experienced a fall in its share – a situation that was prompted by a muted earnings announcement – it has a $25 billion market capitalization as of November of this year.5
As advertisers pour more dollars into digital advertising, Twitter stands to gain more market share. The fact that Twitter is considered to be a “mobile native” because it started its operations by enabling users to receive their tweets as text messages on their phones means that it has a clear advantage over some of its competitors. This is because they (that is, the competitors) often requires their users to navigate through the complexities of moving from desktops to mobile devices in order to enjoy this feature. It is thus not an exaggeration to say that, as of today, as much as 75 percent of the advertising revenue that Twitter receives come from mobiles.6
Reversal of fortune
According to general accounting principles, Twitter has remained unprofitable, since it is still more of a cultural force than a commercial enterprise. And it may remain in this state for the next two years, unless something extraordinary happens. If the company did not pay out almost 45 percent of its revenues in stock-based compensation, it would have made some profit this year. But it has good reason for adopting this strategy: Because its employees could easily hop on the Google or Facebook bus or even quit for a promising startup, this strategy can be an incentive for retaining them in the company.
Today, Twitter’s user-growth had slowed, unlike its rival Facebook. This obviously was not what Twitters founders expected when the company went public a year ago. At that time, their goal was to compete head-on with the “goliaths” of digital advertising, mainly Facebook and Google. For now, there’s yet no indication that Twitter will hatch into such giants since Facebook, for example, has four times more active users than Twitter, almost 1.4 billion active users per month. And because advertisers loves platforms that can boast of a combination of scale and precision with respect to advertising, Facebook attracts more advertising dollars than Twitter. In quantitative terms, Facebook controls almost 10 percent of all digital advertising dollars spend in United States.7 Twitter cannot flex that kind of muscle because it does not have the largest number of users and lacks the most precise targeting capabilities.
From a functional point of view, issues related to complexity, competition and culture constitute the main challenges facing Twitter. Start with complexity. Those who are not accustomed to Twitter’s interface and communication style finds the platform difficult to use. So for Twitter to become mainstream, it may need to further redesign its operations, even though the company has in the past year made it easier for people to sign up and find other users to follow. It should be noted that because of the slight flaw in Twitter’s platform, the number of people who look at the website but never sign up is one to two times as large as the active user base.8
Next is competition: More precise targeting and data collection are the key requirements of effective digital advertising. Unfortunately, Facebook is an expert in both while Twitter lags behind. Advertisers who use Twitter reach their audience in the company’s website by figuring out each user’s inferred interests which, in most cases, involves finding out which firms and individual accounts the user follow and what they tweet about. Unlike Facebook, Twitter does not have the users’ detailed demographic data, such as birth year, university affiliation, and so on.
Twitter’s culture is also been hampered by infighting. The company change their executives the way people change their clothes. As a matter of fact, Mr. Costolo was made the company’s third CEO when Twitter was only four years old. Now he is facing intensified calls to resign.9 Recently, the company’s chief operating officer, Ali Rowghani, left the company amid reports of clashes with the current CEO, Mr. Dick Costolo.10 Over the last three months the saga of executive churn has continued, with the company promoting Kevin Weil as the new product chief and demoting his predecessor.11 From a realistic perspective, this constant change of executives is obviously the outcome of competing visions among the executives about the future of the company – a situation that can cause a distraction in the company’s operations.
Turning on the charm
For Twitter, the handwriting on the wall is clear: innovate or perish. First, the company should continue to expand by delivering advertisements to users on other mobile applications and by increasing its own user base. Hence the company’s acquisition of Mopub (a mobile advertising exchange) before it went public last year was a laudable move: it allows it to place ads in real-time in other firms’ apps.12 Also the company’s recent introduction of Fabric13, a suite of products that will make it easier for developers of other apps to integrate Twitter content, is an acclaimed strategic move that would further increase its ad revenues.
If the experience of the past few years teaches us anything, it is that if Twitter’s growth stalls and its shares becomes cheap enough, a larger firm like Google might consider it eligible for acquisition. The company’s CEO and management also needs to watch out for younger messaging firms that appeal to young consumers and that could take attention and eventually advertising spending away, such as WhatsApp (which belong to Facebook) and Snapchat. To fend these firms off Mr. Costolo need to make Twitter more attractive and indispensable to the customers by, among others, introducing an attractive e-commerce service (so users can buy items via Twitter with a click) and by making room for more video advertising (which advertisers would like).
1 Dangerous even at low speed (2014). The Economist. Retrieved December 29, 2014 from http://www.economist.com/blogs/charlemagne/2014/01/angela-merkels-skiing-accident
2 Adenauer is idled by pneumonia attack (1955, October 12). The Stanford Daily, p.1
3 PBS News Hour (2002): President Kennedy’s Health Secrets. Retrieved December 29, 2014 from http://www.pbs.org/newshour/bb/health-july-dec02-jfk_11-18/
4 Wolman D. (2013): Facebook, Twitter Help the Arab Spring. Wired. Retrieved December 29, 2014 from http://www.wired.com/2013/04/arabspring/
5 Twitter’s Future – How High Can it Fly (2014). The Economist. Retrieved December 29, 2014 from http://www.economist.com/news/business/21631045-all-its-success-so-far-social-media-firm-may-not-achieve-scale-many-investors-hope
8 Ibid, p. 64
9 Atkinson C. (2014): Twitter’s CEO Faces Intensified Calls to Step Down. New York Post. Retrieved December 30, 2014 from http://nypost.com/2014/12/27/twitters-ceo-faces-heat-to-step-down-amid-leadership-worries/
10 Frier S. & Erlichman J. (2014): Twitter’s Rowghani Steps Down As COO After Clash With CEO. Bloomberg. Retrieved December 30, 2014 from http://www.bloomberg.com/news/2014-06-12/twitter-chief-operating-officer-ali-rowghani-resigns.html
11 Yarow J. (2014): More Executive Change at Twitter – The Head of Revenue Product Takes Over As Head of All Consumer Products. Business Insider. Retrieved December 30, 2014 from http://www.businessinsider.com/kevin-weil-twitter-2014-10
12 Cutler K., Ha A. & Lunden I. (2013): Twitter Buys MoPub for $350 Million to Up the Ante in Mobile Advertising. Tech Crunch. Retrieved December 30, 2014 from http://techcrunch.com/2013/09/09/twitter-said-to-acquire-mopub/
13 Russell K. (2014): Twitter Introduces Fabric, A Toolkit for Developers to Build Apps On Its Platform. Tech Crunch. Retrieved December 30, 2014 from http://techcrunch.com/2014/10/22/twitter-introduces-fabric-a-toolkit-for-developers-to-build-apps-on-its-platform/