My thoughts on the Twitter IPO: An overrated user base and an underrated business model
Last December I wrote an article arguing that Facebook was much more valuable than the market was giving the company credit for, based on the company culture and nature of the business. Since then Facebook and it’s Social Media peers, LinkedIn and Pandora, have skyrocketed, lighting up the stock market and significantly outperforming the benchmark S&P 500 index. It is in this bullish Social Media landscape that Twitter recently made the decision to file for its IPO in a $1.5 billion share offering that will value the company somewhere between $15 billion and $16 billion.
Amid all the furore was this article by NYU Professor of Finance, Aswath Damodaran. He argues that pricing a stock for an IPO is a different game than valuing the company on it’s fundamentals. Twitter’s IPO underwriter, Goldman Sachs, needs to find the right balance of raising the maximum amount of capital for their client and ensuring the stock does not perform poorly post-IPO (as seen with Facebook). Damodaran suggests that Goldman are likely to use ratios from comparable companies such as Facebook’s Enterprise Value/Sales or LinkedIn’s Market Cap/user to justify its price for Twitter. Under these assumptions, Damodaran guessed that Twitter would be priced between $10 billion – $15 billion.
While I don’t doubt the ability of Goldman Sachs to pull off a successful IPO for Twitter, I am concerned about lumping Twitter into the same category as Facebook and LinkedIn. Yes on the surface it appears as though the 3 companies are high-growth, ad-funded online communities, but I would like to argue that Twitter has a fundamentally different user demographic, and is building a different business model to Facebook and LinkedIn.
A micro-blog for social influencers?
Twitter currently has around 240 million monthly active users, a sizable number by any measure; however, their user base growth rate appears to be falling below expectations, and I am not sure Twitter will ever reach the size of Facebook’s colossal user base. In order to understand why, it is important to look at who is using Twitter, and why they are using it.
Twitter’s user base is dichotomized into 2 clear user types: Power users and passive users. Yes, the same is true of both Facebook and LinkedIn, but the distinction between Twitter users is much more pronounced – Twitter power users may check their account 20, 30 or even 40+ times per day; passive users may check their account less than once per month. This disparity is due to Twitter’s value proposition varying for each user-type. Twitter is a powerful tool for spreading information and having a voice be heard by the largest possible audience, and its early adopter demographic reflects this: Twitter was embraced by journalists, celebrities and other societal influencers (including Barack Obama) who stood to gain from having their voice heard by a vast audience. This is in contrast to Facebook, whose connections form an online community for offline friends, an appealing and relevant characteristic for virtually every person on the planet, or LinkedIn, which is applicable to the 1 billion+ community of professionals globally. Obviously, Twitter has grown far beyond a network populated entirely by influencers, and today includes many regular people who just like to vent their anger or post a picture of their breakfast to the Twittersphere; however, its highly engaged users will remain a relatively niche community who benefit from receiving hundreds and thousands of replies and retweets to each of their posts. It is no coincidence that Twitter’s Monthly Active User figure is well known, but it is near impossible to find their Daily Active User total.
So Twitter’s user base may struggle to emulate Facebook’s massive growth because the types of communities formed on Twitter are different. In fact, the type of community formed on Twitter shares much more in common with the communities found on WordPress or Tumblr than on Facebook. Twitter is a micro-blogging service, and its use cases reflect that: we use Twitter to voice our thoughts, share stories and ideas we find interesting, and follow users whose content engages us (whether or not we know them). By limiting the length of content and integrating seamless sharing functionality, Twitter has taken the blogosphere and helped to make it much more social and frictionless, but ‘success’ on Twitter (number of followers, number of retweets, replies or favorites) requires the same quality content and commitment to posting as a successful blog. With this context in mind it is worth noting that Automattic, the parent company of the preeminent blogging platform WordPress.com, recently raised a round of funding valuing the company’s 70 million blogs at $1 billion. Undoubtedly, Twitter’s social prowess and business model make it a more valuable business than Automattic (as I will discuss in the section below), but it is interesting to note that using Automattic’s Market Cap/User ratio of $14.29, Twitter’s Market Cap would fall just short of $3.5 billion. Unless Twitter sees exponential user growth and engagement in the short-medium term, it may struggle to justify its IPO value of $15 billion.
Promoted hashtags + TV: a recipe for success?
Until late 2012, Twitter’s monetization strategy seemed to lack ambition and creativity. Was the company that had helped to kick-start the Arab Spring and elect a President really going to make money with Promoted Tweets and Promoted Hashtags? The $30m purchase of short-form video platform Vine in October 2012, however, signaled the emergence of a business model built around video and TV that has flourished in 2013. Since purchasing Vine, Twitter has acquired social TV analytics company Bluefin Labs, mobile app monetization platform MoPub, and has also launched a partnership program called Twitter Amplify which allows content producers (i.e. TV Networks and advertisers) to embed short video clips into their tweets.
Twitter is now the default second-screen platform, which has added a social layer over the TV viewing experience. Audiences engage with one another to add context and commentary to the big-screen action, offering valuable eyeballs to advertisers. ESPN were one of Twitter’s first Amplify partners, offering instantaneous college football bowl highlights through sponsored tweets, and this opportunity has marketers buzzing with excitement: not only can they increase their ROI by enhancing the engagement of users who are currently watching the show/ad, but they can reach a whole new audience of people who may be interested but are not currently watching. The opportunity here is huge: suddenly advertisers are seeing Twitter not as a social media spend category, but as a complement to their TV spend, which continues to make up a much higher percentage of their overall budget. Emarketer places 2013 TV spend at $66.4 billion, while Social Media is just a fraction of the $42.3 billion spent on Digital marketing, so Twitter stands to benefit greatly from this shift in attitude.
Over the next year I expect more and more advertisers to embrace Twitter in conjunction with their TV campaigns. The potential for personalization and targeted advertising is phenomenal as we enter the era of Smart TV’s, with advertisers able to target the exact people who are watching or not watching a certain show, thanks to users logging into their Twitter accounts on their TV. Second-screen real estate during big events such as the Super Bowl or 2014 World Cup will be extremely valuable, and Twitter will be the happy beneficiary.
In addition to focusing on TV partnerships through the Amplify program, Twitter have also suggested that they will continue to allow MoPub to function as an independent mobile ad network. Combined with Twitter’s vast data pool about each user, and suddenly we have a very powerful mobile ad network that can target specific users (to understand exactly how big this is, read Antonio Garcia’s post on the MoPub acquisition). Twitter is now at the forefront of mobile advertising, the hottest trend in the digital advertising world right now, and well placed to monetize its user base.
Finally, on top of Amplify and MoPub, Twitter has another attraction for brands: their presence on Twitter offers the potential for much more exposure than on Facebook. This is due to 3 reasons: firstly, the ‘cost’ of following a brand on Twitter is extremely low – you can fit 8 tweets on an average laptop screen and 5 on an average phone screen vs. just 1 or 2 Facebook posts – which means that Twitter users are more likely to follow a brand; secondly, when you Tweet it is visible to all of your followers, rather than on Facebook where only 10-15% of people who like your page see your post in their newsfeed; finally, retweeting a brand’s post is a much more natural and acceptable action than sharing a brand’s post on Facebook, which offers a brand increased exposure for free.
Twitter is estimated to generate $583 million in revenue in 2013, through Promoted Tweets (which includes Amplify), Promoted Trends and Promoted Accounts. That has been forecast to double in 2014, but I have been so impressed by Twitter’s push into the TV and mobile ad space that I think that on a per user basis they will outperform expectations.
Effective user monetization without the users?
So where does that leave us? Twitter appears to be struggling to meet expectations on user base growth and user engagement metrics, but is doing a fantastic job at developing a business model to capitalize on the existing user base. While I applaud Twitter CEO Dick Costolo’s monetization strategy, ultimately marketers will to place their money where there are eyeballs to view their ads, and if Twitter’s user engagement fails to improve then the ad money could move elsewhere. If, however, Twitter continues to dominate the second screen experience, I think more and more of the passive users could begin to engage with Twitter on a daily basis, and Twitter’s robust business model will ensure healthy revenue growth.
My personal expectation is that Twitter will explode immediately following its IPO given the massive gains other social media companies have seen this year, retreat as investors fear about lower than expected user engagement, then improve as Twitter’s revenue beats expectations quarter after quarter.
Despite their shared features, I hope you can now see why Twitter should not be valued using Facebook and LinkedIn as comparable companies, at least without taking into account Twitter’s differences in both the user base and business model.
Until next time!