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Twitter’s IPO: An Analysis of Opportunities And Threats

Charlene Li

Twitter IPOCo-written with: Susan Etlinger, Rebecca Lieb, Andrew Jones, Linda Saindon, Brian Solis, and Ed Terpening

The not-so-long awaited Twitter S-1 is out and now the intense scrutiny begins. At the heart of the analysis is what drives Twitter’s growth and value -- both today and in the future. As the last of the “Big Three” social networks (LinkedIn, Facebook, Twitter) to go public, retail investors’ interest in a Twitter filing will likely be intense. But while there is a lot of opportunity in Twitter for the future, it also faces significant challenges. To better understand the meaning of Twitter’s IPO filing, we pooled our combined research and experience at Altimeter to provide the following perspectives.

Opportunities and Challenges

  • Twitter is a must “be” for marketers, but not yet a “must buy”. For marketers, Twitter is a “must be on” channel, yet many struggle with using and/or understanding Twitter’s advertising model and how best to leverage it. Twitter’s base ad products – Promoted Tweets, Promoted Trends, and Promoted Accounts, leave a lot to be desired from the advertisers’ perspective and, because of a lack of demographic data, targeting capabilities have been limited.The recent introduction of “Twitter Amplify” advertising partnerships (here’s Twitter’s blog post on the topic) shows promise because it gives the user a clearly defined reason for engaging both with the content and with each other, and gives advertisers the participation and eyeballs they’re craving, whether the content is viewed on the web or a mobile device. The result: user engagement and participation, easily curated, value-added content for the user, and cross-platform ad dollars all in one place.
  • Most Twitter users passively read rather than post. Twitter reported having 218 million monthly average users as of June 30, 2013 with 500 million tweets per day. Twitter’s strengths of being real-time, offering simple sign up and interface, and ads directly in the newsfeed are also its weakness. Twitter is less personal than either Facebook or Linkedin, yet faster and focused on delivering breaking news and trending topics. Power users (in business, entertainment, politics and publishing) love Twitter and extract great value from the platform, but what’s in it for the average Joe? Many Twitter users simply observe and consume content -- up to 40 percent of registered users according to Statistic Brain. But without stronger engagement from more of the user base, Twitter risks becoming a traditional broadcast channel than a true social network. [Correction: We mistakenly wrote that Twitter had on average 500 million tweets per month -- it's actually per day and the post was corrected.]
  • Twitter’s monetization problem. At the core, Twitter faces some challenges when it comes to making money. While Facebook's investor relations crew has done a lot of the heavy lifting to explain to investors how social media advertising and marketing works — Twitter often remains an enigma to not only digital marketers but also to many users as well.To understand the difference in monetization scale, let’s take a closer look at Twitter versus Facebook. At $253 million in revenue in H1 2013, Twitter is tiny compared to Facebook at $3.3 billion -- which is almost 13X larger. Monthly average users (MAUs), the actual number of people on average using the service, is 218 million for Twitter and 819 million for Facebook as of June 30, 2013; here Facebook is 3.8 times larger. As of today, Facebook is able to monetize its base of monthly users much more effectively -- there are simply more options, especially with high value graphical display advertising and better targeting data that drives up average revenue per user.
  • It’s all about the data. In many ways, Twitter is the largest market research panel anyone could hope for. It’s a real-time window into the opinions, hopes, complaints and dreams of its users, and the insights that it aggregates can provide marketers, product developers, sales -- really, the entire enterprise -- with deep, rich and spontaneous feedback on virtually any topic.Twitter also doesn’t have quite the same privacy constraints as Facebook and LinkedIn, since the vast majority of tweets posted by users are publicly available (although this has led to some interesting privacy implications as tweets are used outside their original context). Finally, Twitter has invested significant time and resource in its public API, as well as in making its data broadly available to third-party developers via its Certified Products Program. Instituting a certified products program adds a level of predictability and stability to the way Twitter data is made available to its ecosystem. Having these certifications in place helps to protect the integrity of the data, support compliance with privacy laws and promote trust in the Twitter brand and its data -- all of which contribute to continued development and value creation.But the transactional nature of Twitter’s data presents a significant challenge from an ad targeting point of view. Facebook and LinkedIn are able to collect far deeper, richer information about user profiles and behaviors, partly because of their privacy protections, and partly because of the nature of their experience versus that of Twitter. To provide a similar level of richness, Twitter relies on third-party social data providers such as DataSift, Topsy and Gnip, which provide access to Twitter data, along with additional value-added services such as advanced filtering and -- in DataSift’s case -- audience demographics. For more on this topic, see Susan Etlinger’s “The Social Data Ecosystem.
  • Twitter’s potential as the First Screen. In the IPO filing, Twitter discusses the role it plays as the Second Screen, where it is “enhancing the overall experience of an event by allowing users to share the experience with other users in real time.” This includes not only live events like the Super Bowl and Oscars, but also big news events such as Hurricane Sandy.But at Altimeter, we see Twitter’s potential to be the First Screen -- a service that drives and revives appointment television and pulls shows with a social component (think Big Brother, Downton Abbey) out of time-shifted DVR purgatory. Television shows that invest in a heavy Twitter real-time experience will be able to draw more real-time users, get a premium for ad dollars, and develop greater loyalty with that user base.

Twitter’s Future

What can we expect from Twitter moving forward? Some clues come from past and recent acquisitions (excellent recap here) and may point towards where the platform is heading.

  • Mobile Advertising: MoPub. Given Twitter’s strength in mobile, their purchase of MoPub means it will become much easier to actually buy Twitter’s products. For example, advertisers could present ads targeting Twitter users based on their activities. If they are watching and tweeting about college football, Domino’s Pizza may tweet them a coupon. MoPub will remove much of the friction that exists today when it comes to executing mobile advertising campaigns.
  • Social News Aggregator: Summify. If most of Twitter’s users don’t actively tweet, then it makes sense to embrace this behavior and push the activity stream into a news aggregator and curator like Summify. It will also likely open up greater access to advertising dollars that center on specific topic and channels that are personalized to users’ reading profiles.
  • Social TV Analytics: Trendrr and Bluefin Labs. Trendrr is a company that tracks social engagement around television content across multiple sites, while Bluefin Labs is a social TV data analytics suite that analyzes the social commentary associated with TV programs. These acquisitions demonstrate the tremendous opportunity to mine all of the social TV data for insights, but also the potential to targets ads on both TV and Twitter based on what users have viewed or commented on. In addition, Twitter’s partnership with Nielsen (announcement here) and their goal of developing a “Twitter social TV rating” seals the deal on featuring TV as a large part of the Twitter experience.
  • Music Discovery via Social Graph: We Are Hunted. Similar to music discovery services like Spotify and Pandora, Twitter’s acquisition of We Are Hunted will drive the new Twitter #music Service (more details here), which will deeply integrate artists’ Twitter feed into the experience. Along with their investments in social TV, Twitter is clearly investing in services and products that leverage their foothold in popular culture and celebrity.
  • Organizational Learning and Development: Marakana. On a completely different tangent, Twitter plans to use this open source training company to power the new Twitter University, which aims to attract and keep top engineering talent. While companies will host hackathons or hold developer events, Twitter is investing in the everyday skills that engineers need to learn to keep up their knowledge and expertise. Smart move -- if you can’t find qualified engineers to hire, then grow your own.

We’ll Be Watching Developments Closely

We’ll continue to watch the developments related not only to Twitter’s IPO but also what their announcements mean for the developing social ecosystem. Look for additional posts soon from Altimeter Group analysts who will address the Twitter IPO based on their specific to their areas of expertise:

  • Susan Etlinger on social data and analytics.
  • Charlene Li on the IPO’s effect on Twitter employees, culture, learning, organizational development and leadership.
  • Rebecca Lieb on native advertising and content strategy.
  • Brian Solis on consumer engagement and the digital ecosystem.

And we’re always happy to share our observations with the media. Get in touch with us at press@altimetergroup.com.