Monday, September 16, 2013

The Twitter IPO: Not as Bad or as Good As You May Think

As leaks surfaced about the Twitter social media network preparing an IPO stock offering became fact via a tweet from the company's own account on the service, there has been a veritable twitterstorm of opinion regarding a publicly traded Twitter. One camp of the tech press and investors seem to be trumpeting it as a harbinger of new rounds of tech IPOs. Another camp trumpets the plan for Twitter to become a more de facto mainstream media outlet as the result of this offering, as Twitter tries to become the default social media of choice for TV programmers. Others are rather glum, it would seem, offering investors warning flags about a round of hype obscuring a sober assessment of the company's potential.

I'd have to say that overall I am in the latter camp in looking at a Twitter IPO. To say that Twitter's situation creates likely demand for other tech IPOs seems to be somewhat akin to rubbing a magic lamp that last let out a big genie more than ten years ago. Twitter has been at it for about seven years, now, to the point where it's safe to say that it's a fairly mature media company. That's not to say that it doesn't do some amazing things or that it doesn't have significant growth potential, but for the most part Twitter has become pretty much what it will be for the foreseeable future - an ad-driven real-time social messaging service of a significant size embraced by mainstream media and a significant portion of the public. It's likely to be able to pay its bills for some time as the result of this equation, and may yet expand into complementary services that could expand its revenue potential.

But for the most part, as with Facebook, it's not clear that there's a significant second act for Twitter. If you didn't like Google because it wasn't diversified enough in its revenue streams, then I cannot imagine that you're going to like Twitter any better - especially since, unlike Google, the only property that really matters for them in ad revenues is their own. That is, to say, it's a media portal rather than a technology company, not so different in its business model than any newspaper, magazine or entertainment company's online offerings. From this perspective, Twitter is a completely conventional media company - and it shares the same problems of ad inventory availability and cyclical revenues that any other media company has.

The key difference that distinguishes Twitter from other mainstream media companies is that its engagement comes from the audience and not from a central programming source. The key similarity, though, is that Twitter relies on an interaction with its own offerings and mainstream media offerings to create an "echo chamber" effect for people and organizations that want to amplify trends to their own benefit. So while the "long tail" of content exists in Twitter for smaller and emergent audiences and topics, increasingly Twitter acts as a megaphone for entities who are already equipped with megaphones - or who want to buy one cheaply.

If you doubt, this, it will take you only a few moments of poking around to find thousands of consultants who are ready to help you unlock the secrets of how to become popular on Twitter completely out of proportion to your actual importance in the greater scheme of things. In other words, if you want to get attention in the media, it's not so different a process to do that on Twitter than it is on any other medium - it's just that you fill out the checks for different entities to do so. In an era of reality television stars making millions of dollars based on no particular skill, that shouldn't surprise us. So, mission accomplished - Twitter helps to validate the ersatz amplification system of mainstream media very well.

So whatever basis you may have for judging the success of Twitter as a stock offering, increasingly you will have to compare it to other mainstream media companies. The scope and nature of their content is different, but their monetization of content and their general curation of content increasingly corresponds to the overall goals of other mainstream media companies. In other words, the big help to enforce the big, and the little fend for themselves - regardless of the sources of their content. Is an episode of everyday people in TV shows like "Ice Road Truckers" or some other TV series all that different from that people say or do on Twitter? Increasingly, the answer is no - it's a careful curation of content towards the things that mainstream advertisers cherish the most.

This is not to say that Twitter does not play an important or unique role in the media industry - it does, and it's not likely to be dislodged from that role any time soon. That's the good news for investors - you can think of Twitter as a real-time media cash cow, a Dow Jones news ticker generated by millions of people worldwide. The media will quote Twitter and Twitter will quote the media for a long time to come. But as for growth, I am much more uncertain that Twitter will be a skyrocketing investment of the likes of a Google or even a Yahoo.

In fact, the challenges of Yahoo from several years ago are not so dissimilar from Twitter's. Yahoo took on media-oriented management and decided that it's main mission was to complement mainstream media for the benefit of mainstream advertisers. This pleased investors at the time, who decided that it was a very "grown up" approach, unlike those folks at Google who had these "odd" notions about content that comes from any where. Obviously this exaggerates and simplifies the realities of both Twitter and Yahoo, but it's not too far off the mark when it comes to how things actually played out. Yahoo stagnated as it chased a broadening marketplace for ad inventory - a marketplace broadened only further by the likes of Twitter and Facebook.

There's little in Twitter's business plan that will quell the main problem that many ad-based online media businesses have today - namely, the need to provide more unique services that overcome the infinite supply of ad inventory for online advertising. The real-time aspect of Twitter's core offerings is valuable, but being able to translate that value into more valuable opportunities for advertising is quite limited. Twitter learns relatively little about its users as the result of its 140-character formats, and even less about what they do beyond their use of Twitter. They do learn some key things such as geographic coordinates, but even their profile pages for users are almost completely bereft of any personal information that could help to contextualize ads more effectively. And even if you could, getting good matches to an audience whose focus moves from one tweet to another in relatively random order is extremely difficult.

This may be one of the reasons why Google has so far not even tried to insert ads into its +Google+ social media service. It's a given that when you're looking at social media streams that you have no idea as to which content in that stream may grab their attention. It's only when people choose some specific content that you get a clue, and that clue may mean nothing in terms of its value within a social media service. It may turn out to be fodder for other services, though, such as search engine - and no surprise, that's where Google places most of its bets for retrieving the value of Google+. Its advertising value doesn't depend a whit on amplification of mainstream media, though it certainly benefits from placing it in context.

So yes, I do think that you need to be cautious when approaching an Twitter IPO. The company will do fine as a real-time social ticker, but I don't know that its focus on mainstream media is going to do much but to help pay back its initial investors via the IPO cash. The folks who get the stock will get reasonably steady returns, but don't expect huge growth on the order of transformational technology companies. Tech made Twitter what it is today, but unless it can find more ways to create value outside of traditional advertising, I don't think that it's likely to become a much more valuable property.
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