By M H AHSSAN | INNLIVE
Twitter’s effort to find a new CEO is the latest struggle in a long list of challenges that the micro-blogging site has faced over the years. When the company launched its IPO in late 2013, Wall Street held out expectations that Twitter would one day rival social networking behemoth Facebook, which went public just 18 months earlier. But Twitter has stumbled and has yet to come close to rivaling Facebook on a number of key metrics and, more importantly, it appears increasingly unlikely that it ever will.
Twitter’s current travails are an interesting saga for a company that once was an Internet highflier and whose service is used by many notables including heads of state. But after a promising start, shares have tumbled below its IPO price of $26 per share as investors turned sour on the company. It did not help that some key executives have left, most recently its senior vice president of strategic investments, Mike Gupta, who also ran Twitter Ventures. Gupta follows other notable exits, including Rishi Garg, who led the company’s mergers and acquisitions team, as well as team colleague Jessica Verrilli, who is now at Google. The firm’s CEO, Dick Costolo, stepped down on July 1.
The pressure Twitter is facing largely revolves around its closely watched monthly average user figures, which is a key metric because Wall Street considers it a harbinger of the firm’s future financial outlook. Since the first quarter of 2013, Twitter has increased its user base by only 19.2% to 304 million in the second quarter of 2015, according to the company’s earnings report. Facebook, however, has soared 35.5% to 1.49 billion monthly users during the same period, according to its financial results. Its growth is reflected in the stock price: Facebook shares have ascended 132% since its IPO.
Indeed, Twitter’s challenges include monthly average user growth and user engagement figures that look anemic compared to Facebook, as well as an inconsistent increase in advertising revenue. Wharton marketing professor Jonah Berger says part of Twitter’s problem has been trying to uncover a strong revenue stream. “In addition to ads, Facebook has much more data on its users’ preferences, which allows the company to target more effectively.”
Difficulty in using the service, as well as mediocre adoption by the mass market, are some reasons why Twitter’s user growth has not taken off, said Anthony Noto, Twitter’s chief financial officer, during the company’s second quarter earnings conference call. He noted that Twitter does not expect to post meaningful user growth until it can offer more mass market appeal — something that will “take a considerable period of time,” according to a report by Evercore ISI analyst Ken Sena.
A reduction in user engagement on the site is also adding to Twitter’s challenges. During the second quarter, the ratio of engaged daily Twitter users to its monthly active users was 44%, compared to the preferred higher ratio of 48% last year, according to Sena’s report. Twitter’s Noto believes the micro-blogging site stumbled in the way it communicates to users regarding the value of using the service, according to a recent Reuters story.
Although Twitter’s second-quarter advertising revenue reportedly beat Wall Street’s expectations when it soared 61% year-over-year to $502 million, investors were concerned that the company’s user growth may have reached its peak, which in turn could affect its ability to push advertising revenue higher, according to the Motley Fool.
In May, Facebook debuted its Instant Articles feature — a rich mobile news service that is expected to compete with Twitter’s Amplify. Sena noted that Facebook was responsible for 25% of referral traffic from more than 200,000 publications at the end of 2014, compared to Twitter’s 1%.
Apples to Oranges?
While it is clear Twitter’s monthly average user growth falls far short of rivaling Facebook’s performance, some question whether it was ever a fair comparison to begin with. For starters, Twitter’s product appeals to a more professional audience, whereas Facebook’s product has more widespread appeal, says Kartik Hosanagar, a Wharton professor of operations, information and decisions.
Twitter is primarily limited to news-related tweets and professional exchanges, whereas Facebook’s offering is broader and allows users to organize their photos and memories, Hosanagar says. As a result, he adds, the monthly average user growth numbers reflect the companies’ product positioning to a large extent. “Given all that, there is no surprise in seeing Facebook’s superior numbers, and I would not necessarily blame Twitter’s management practices entirely. We just have to acknowledge that it’s not an apples-to-apples comparison,” Hosanagar says.
Dan Niles, a founder of asset management firm AlphaOne Capital Partners, points out that Facebook is primarily about sharing what users’ friends and family are up to, so it is a form of two-way interaction. Twitter, however, is more like another news source, so it involves primarily the passive consumption of content — a one-way interaction. “There are a lot of other news sources providing content in the world,” he says. “There are not a lot of competing social networks like Facebook.”
As a result, Twitter is unlikely to achieve the same level of user growth rates and engagement as Facebook. “[Twitter’s challenge] is not an execution issue, but rather an expectations problem?Twitter ,” Niles says. “Twitter’s expectations are out of whack with reality. It struggles with thinking it has to be as good as Facebook and Instagram, but they are not the same product.” Consequently, some investors had high expectations that Twitter would become bigger than Facebook, which was a mistake to begin with because the two companies serve different purposes, he says.
Turnaround Tweaks
Innovation, the lifeblood of technology companies, could provide a path to redemption for Twitter as it hunts for its new CEO. Twitter co-founder and director Evan Williams told Fortune recently that the company’s next CEO should have the capability to form a definitive strategic vision for the company. Twitter’s engineers reportedly complained that former CEO Costolo was hardly a visionary.
“I agree with Evan Williams’s view that [Twitter] will need a strategic rethinking,” Hosanagar says. “That might involve repositioning Twitter as a crowd-sourced media company” — a risky move — “or looking at complementary assets that will allow Twitter to better monetize its user base. I’d personally look into the latter. Specifically, what acquisitions will allow Twitter to learn more about its users and improve its monetization efforts?”
Facebook, for example, has a lot more data about its users than Twitter, which means it has superior monetization potential per user. “Twitter’s acquisition strategy has been more typical and lacking the aggressiveness or long-term view that Facebook has had,” Hosanagar says. “Facebook has, in general, made several brilliant acquisitions. Instagram, Oculus and WhatsApp are excellent examples. Even before one could say that these have potential to be Facebook killers, they were already part of Facebook. … Facebook has been aggressive and willing to pay huge sums to acquire these companies that could have been threats to Facebook in the long-term.”
Evercore’s Sena, meanwhile, noted that while Twitter’s platform does not generate as much revenue as one might imagine based on its scope of influence, the company is looking to address the Facebook challenge. That includes launching growth-building initiatives such as a new homepage to serve people who do not log in and Instant Timeline, which makes it easier to find people to follow. Twitter also has video apps such as Vine and Periscope. But the video effort still pales in comparison to Facebook’s four billion video streams a day, which is up four-fold from a year ago, the analyst wrote.
At least, Vine provides two-way interaction, similar to Facebook’s photo sharing site Instagram. Vine also has a following among millennials and teens, a target market with advertisers. “Vine is something Twitter should focus on,” says Niles, adding that “Facebook is also focusing on videos, too, and video advertising.” But even with Vine, Twitter is unlikely to beat Facebook. “Vine is more of a product and not a platform. Facebook is a great product, platform and company,” he says. A silver lining, though, is Twitter’s Google partnership, which is poised to help the micro-blogging site build up its user growth as tweets appear alongside search results, he adds.
But Niles raises the question of whether Twitter needs to be fixed at all. After all, the company posted year-over-year revenue growth of 61% to $502 million in the second quarter. “That’s amazing growth,” he says, pointing out that Facebook grew 39% and the PC market’s revenues are shrinking in comparison. “Twitter has a great product, but people confuse a great product with a great stock,” he notes. “If the valuation and expectations are too high, much like with Cisco’s stock back in 2000, it does not matter. The last time Twitter was at this stock price, it was doing $250 million in revenue.” Revenue has now doubled, but not the stock.
Hosanagar says it is too early to be negative about Twitter. “Twitter and Facebook are different products, and [it doesn’t make sense] to compare their growth and revenues,” he explains. “I think Twitter has a good and viable business, but will likely be in Facebook’s shadow always in terms of the number of users and monetization per user.”
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