Friday, October 4, 2013

Twitter IPO: Is This Another Facebook Launch - or Worse

So, at last, the little blue bird has tweeted an S-1. Twitter's IPO was announced via the 140-character real-time message board's own service, a confirmation that Twitter has become a fundamental channel for investor communications in the few scant years that it's come into existence. Twitter has seared itself into the consciousness of major media outlets and world influencers both prominent and plebeian, confirming the leveling effect of Content Nation on global news and opinion-making.

Well, good for Twitter. It's done a remarkable job of both scaling to become the world's most prominent real-time information service and in trying to rein in the messy, experimental early phases of its management into something that resembles a going concern. But when you look at the numbers coming out of Twitter's initial data from the filing, one gets concerned about how far the going will go. Twitter loses money - and lots of it - and the losses are flowing bigger than ever, thanks to falling ad rates and apparently stalling user growth. The filings show that lost $79.4 million last year on $316.9 million in revenue and has posted $69.3 million in losses on $253.6 million in sales in the first half of this year.

Both the ad rates and the user counts should be of concern to potential Twitter investors, but let's start with the user counts, since this is the core of what's going to make or break Twitter's ability to scale its revenues. Twitter is reporting 215 million monthly active users (MAUs), certainly a number that any major media property would be proud to have. But looking at indicative site traffic sampling data from, that's not a number with a hockey stick right now. Compete's sample shows that the overall trend for Twitter is not good - and in fact has been so-so for more than a year. It appears to have strong traffic but stagnant traffic growth at best.

That would not be so great a concern if there were not the growth of the Google+ social out there as a major competitive factor for Twitter. By the same MAU metric, Google+ is now claiming more than 350 million users - with nary an ad in sight on the Google+ site. Unlike Twitter, Google has the entire Web at its disposal to monetize its ads via its AdWords search ad service and its AdSense ad service, not to mention its growing presence in broader forms of marketing via a widening range of mobile platforms, marketing services such as coupons and ecommerce transactions. So with Google+, the gathering of social signals remains largely separate from their monetization - Google+ gathers the social signals inobtrusively, triangulates them with people's broader data usage via its various platforms, and then enables marketers to fire up the right communications in a wide variety of contexts. It may turn out that Google will never have to fire up an ad in Google+ itself, because it will have provided so many other ways to help marketers elsewhere.

On the other side of the social  media spectrum for Twitter's competitive challenges is Facebook, which shows stable and gradually growing revenues and profitability. While with less overall flexibility than Google for monetization and more limited context for ad placements, its relationship-oriented data and deep timelines of relationships and behaviors provides a more rich context for advertisers than Twitter. Facebook may not shine as much as it used to, but for now it's likely to be a long-term survivor, either independently or via an acquisition should their growth hit a long, stagnant patch. Still, the untold factor for Facebook also remains Google+, which acts as a signal collection bucket stitched into the fabric of its Chrome and Android platforms that interacts with both third party apps and a wide range of Google services that provide rich context. Google+ does not have the media focus that Facebook and Twitter enjoy, but increasingly it has the everyday users' focus - and the growing focus of opinion-makers.

In my earlier post I laid out many of the pluses and minuses for Twitter, and the new data tends to confirm that analysis, but perhaps with more of a worrisome outlook. Twitter will continue to be the real-time headline champ of the Web for the foreseeable future, but increasingly it's not the place where people go to consume content - and interact with Twitter ads in the process. There were pluses and minuses to Twitter's general strategy of pulling back from third party platforms to secure those ad views, but the general problem is that Twitter does little to help people to focus on what's really important in their stream. Hashtags and top trends are generally far too coarse a set of filters for the "what's up that I care about" set that may want to spend some time there. And unlike Google+ or Facebook, value-add interactions to sustain engagment and signal-gathering are fairly limited and two-dimensional. So the problem remains for Twitter as to how to have the level of engagement that would attract both more ads and to keep users focused on content that's most relevant to them. Even if they have that information, their user profiles are very thin, so triangulating that attention with people's focus and intent is not very easy, so ad placements will continue to suffer.

None of these problems are easy to solve, but the key problem that Twitter needs to solve short-term is stronger traffic and engagement. Before these financial disclosures you could have argued that Twitter's move to cut off its feeds from realtime display in Google search was a good move, on the basis that it would make Twitter less of a commodity consumable in other places. But that's somewhat of an old media paradigm, ultimately; if your content isn't in the most valuable context that your users require, you're going to lose revenue, period. Ask German publishers who tried to boycott Google search in exchange for fees. That didn't work - and neither has Twitter's boycott of Google search. They've lost valuable traffic - and, ultimately revenues - from people searching for relevance on the key relevance machine on the Web. It's basically free advertising for portal engagement - and they threw it away about as foolishly as many news organizations have.

Twitter is and will remain indefinitely a powerful communication channel, and a great tool for spreading trends and brand value rapidly. But if I were an investor, would I jump at the chance of giving Twitter a billion dollars to sort out its future? Not so much. They're still in cash-burning mode, and not engineering a more clear path as to how to build revenues strategically over a long period of time. There are developments such as partnerships with TV program producers that could help to boost Twitter's prospects in the short term, but since many of their best hopes are with old media outlets struggling with their own audience growth and engagement issues, I am not sure that the combination of the limited context of Twitter and the even more limited context of traditional TV will attract the long tail of revenues from small and medium advertisers required to build up Twitter's revenues to the point of not being squeezed between Facebook and Google. My best guess: it has a problematic IPO, flounders a bit, bounces as TV alliances look promising and then sells out to Microsoft or perhaps even Samsung, companies in search of more mobile signals and engagement for its struggling product lines. You heard it here first.
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