Last week, gawker.com ran a story around Twitter and its financials. You might have seen it. It had the not at all sensationalist headline “Twitter’s Secret History as the Worlds Worst Tech or Media business” and it had claims from ‘a source’ around Twitter’s revenue and spend levels.
To summarise the key takeouts:
– 100m global monthly users
– 750m+ in capital inflow
– $28.5m in total revenue in 2010
– net loss of $67m in 2010
– $8.4b valuation
It’s a pretty damning piece about the business. And to date, one can assume its fair enough. The revenue performance is limp. The valuation defies logic. The funding to date seems excessive. However, the market has allowed it to happen and some people must see the end game for Twitter.
In Australia Twitter has more than 1.8m monthly users (source: Nielsen Answers, Feb 2012), with decent engagement (5.5 sessions per month, source: Nielsen Answers, Feb 2012). And that’s just on the desktop – it doesn’t include mobile and tablet. This number has grown significantly since Twitter first emerged in Australia in 2007.
The author of the Gawker report, Ryan Tate, makes the following observation …
“Twitter has huge advantages. There’s the big user base. There’s Twitter’s role in enabling high-profile protest movements. There’s all the free celebrity content. There’s the fact that no viable direct competitor has emerged in the past six years. There’s also the fact that the service has convinced the vast majority of its users to share their thoughts, interests, and relationships publicly, a highly exploitable level of visibility that has even Facebook envious.”
A few things are worth pointing out. One – Twitter’s scale is now significant, and whilst not at Facebook levels, is on the radar of advertisers. Two – Twitter is a magnet for celebrity and that gives Twitter a steady stream of in demand content. Three – Twitter has access to a lot of information about a large amount of its users. The last point is perhaps the most valuable for Twitter.
Reach on the Twitter domain is great – but reach alone is not worth much. Reach requires impactful ad units to really become viable. Currently Twitter has not nailed this … ad formats are clunky and easy to ignore. Plenty of advertisers have lined up to trial the medium, but ad revenue shows these alone will not validate an $8b valuation. Facebook faces a similar problem – a problem that requires creative human thought … what is the strongest ad format that can connect advertisers and users without fundamentally interrupting the product experience.
The celebrity power of Twitter is great … but currently tough to monetise. This ties into the above point – formats. Reaching a fan of Heineken for a brand like Becks would be desireable – or reaching fans of Will Ferrell for a comedy targeting young males, but these require the right format to really have power. Twitter doesn’t want to throw banners/med recs on pages – which can be commended – but what it has devised to date has been less than awe inspiring. So – the celebrity power goes largely untapped financially.
But the data is where the power lies. Twitter knows a fair bit about me. Who my friends are, which celebs I follow, what content I share, key subjects I often message about. It knows friends of friends, my age, gender, location. For someone like me, only Google would have more data collected.
The challenge for Twitter is how it creates a business around this data. And what tact it takes in creating that business.
My thoughts are Twitter could create a relatively strong data driven ad business by using its user data to fuel ads elsewhere. The challenge they face now is creating an advertising business on a platform that works best without advertising.
But could Twitter data fuel advertising elsewhere – on other sites – just like Google’s store of user data fuels advertising on millions of sites worldwide. This is a booming business and one that seems destined to capture the lions share in display revenue in the next 10 years.
For a brand like Twitter, fuelling someone elses targeting business is not the best option. They need to acquire a large scale network and put their data store to good use. Or – someone needs to buy them and integrate Twitter data into their advertising suite. Imagine Apple’s iAd with Twitter data (plus Apple’s store of user data). It could create some incredibly appealing ad propositions across mobile and tablet, even desktop.
Or Microsoft leveraging this Twitter data into the Microsoft Media Network. Or Yahoo plugging it into their automated trading and data systems.
To me, it seems feasible that Twitter could generate a strong revenue business without compromising the core Twitter product and its elegant functionality. However, on their own it’s not obvious how they can turn the company into one that could be doing close to $1b in EBIT PA in the next 3-5 years. I don’t even know how they’d turn it into a business doing $1b of revenue using the current platform. The only thing that’s clear is they can’t do it by inserting ads into the timeline.
Another prime candidate for this approach of data extraction from the core platform, and data usage on others to monetise, is Facebook. Facebook has reasonable information on 800m plus people. Imagine it took that knowledge and started its own ad network? It would turn a one horse race (Google and Doubleclick) into a two horse race. With Twitter and its data, it could become a 3 horse race.
And that’s a good thing – more competition should mean more choice and more innovation. Google is absolutely murdering the competition around this space right now and has made phenomenal progress in data driven display based advertising in the past 2 years. It is simply leaving competitors in its dust, as no one now can even match their data pools and the speed at which they can innovate. Twitter, and Facebook, looking at this model and playing in the space could push it even further forward.
So, in reality, Twitter is far from the ‘Worlds worst tech or media business’. It may look that way when looking at it from a traditional perspective of serving ads on its platform … but if you look at it as powering a much larger ecosystem of ads it could prove to be one of the best in the next 10 years.