What’s in a tweet? Twitter’s business model and operating model
Twitter is an online social networking service that enables users to send and read short 140-character messages called “tweets” via mobile, online, or SMS. The platform generates value for its core users as follows:
- The platform serves as a community where users can get updates on and interact with other users, both real-world acquaintances as well as celebrities;
- Users can access and search an instant information/news feed for the latest events happening near them as well as in the world at large.
By Q3 2015, Twitter was serving 320 million active monthly users. Similar to any social networking site, Twitter’s user base and the engagement of those users is the lifeblood of the company, as the users generate most of the content on the platform.
For advertising, Twitter creates value by enabling them to purchase “Promoted Products”—mostly on a pay-for-performance basis—that are integrated into the platform as native advertising and are designed to be compelling and useful to users as organic content. Promoted Products consists of:
- Promoted Tweets that target particular users by using Twitter’s proprietary algorithm and understanding of each user’s Interest Graph;
- Promoted Accounts that provide a way for advertisers to grow a community of users who are interested in their business, products or services;
- Promoted Trends where promoted tweets can be displayed to the user at the top of search results relating to the trending topics of the day.
According to Twitter’s 2014 annual report, their technology platform and information database enables them “to provide targeting capabilities based on audient attributes like geography, interests, keyword, television conversation and devices that make it possible for advertisers to promote their brand, products and services, amplify their visibility and reach, and complement and extend the conversation around their advertising campaigns.” The platform also allows for advertising across the mobile ecosystem throughout the user lifecycle, “from acquiring new users through app installs, to engaging existing users who already have the advertisers’ apps on their device.” Twitter’s 2013 acquisition of MoPub, a mobile-focused advertising exchange, enabled the company to offer one comprehensive monetization platform that combines ad serving, ad network mediation and a real-time bidding exchange.
#Fail – Where did things go wrong?
Even though Q3 2015 financials were on target, the company lowered revenue projections for Q4 due to major issues with user growth: Twitter’s 320 million monthly active users represents only a four million increase over the last quarter, compared to the 49 million new monthly users added by Facebook. Industry observers attributed this user growth slowdown to product stagnation. This is particularly worrying as declining user engagement could translate into user defections to competing platforms, and advertisers are likely to follow suit.
There are two major challenges with the operating model which undermined Twitter’s ability to deliver on its business model:
- Lack of a steady leadership team: In 2014-2015, Twitter changed out its CEO, COO, CFO, head of product (twice), head of news, and head of engineering.
- Teams were too bulky and inefficient: By the end of Q2 2015, Twitter had 4,100 employees, more than double the ~ 2,000 employees it had in Q2 2013 just before the IPO. Compared to Google and Facebook, Twitter was underperforming on the revenue it drives per headcount. Industry observers believed that the company had too much fat, was moving too slowly, and was too bogged down by bureaucracy. In October 2015, Twitter cuts 8% of its workforce in an attempt to move to smaller, more focused and nimble teams.
#WhichWayIsUp – Where will Twitter go from here?
Under new CEO Jack Dorsey, Twitter has made substantial progress in advancing the product, releasing several new innovations such as Moments, NBA Live timeline, interactive ads and click-driven pre-populated tweets. Acquisitions like Vine and Periscope offer opportunities to further expand the platform’s features and attract a broader base of users. In addition, the company has expressed an interest in diversify beyond its core “Twitter product,” and explore opportunities such as monetizing non-users through re-targeting of advertisements (sending advertisement to potential users who have visited the Twitter platform but have not yet made an active profile) and hosting commercial e-storefronts à la Amazon or eBay.
The big question remains, however, as to whether or not Twitter can strengthen its operating model to effectively execute on its many ambitions, and do it quickly before it loses further ground in the competition for digital ad dollars. Given its track record over the last two years, Dorsey might need to narrow the company’s focus in the next 12 months to prove out its business model before expanding in too many directions.
- “Is the Twitter Business Model Broken? (TWTR)” August 17, 2015. Investopedia. http://www.investopedia.com/articles/active-trading/081215/twitter-business-model-broken.asp#ixzz3uGHF7HNc
- “The Circles of Twitter.” February 5, 2015. Backchannel. https://medium.com/backchannel/the-circles-of-twitter-838f44fda4f#.44c9cnspt
- “Jack in a Box: Can Twitter Be Saved?” October 16, 2015: The New Yorker. http://www.newyorker.com/business/currency/jack-in-a-box-can-twitter-be-saved
- “Twitter Drops 7%: Can Rumored Staff Cuts Close Efficiency Gap?” October 12, 2015. Barron’s Tech Trader Daily. http://blogs.barrons.com/techtraderdaily/2015/10/12/twitter-drops-7-can-rumored-staff-cuts-glose-efficiency-gap/
- Twitter Q3 2015 Earnings Report slide presentation. https://investor.twitterinc.com/common/download/download.cfm?companyid=AMDA-2F526X&fileid=856827&filekey=0351A89E-5465-46CD-AC5C-4E089220CDC3&filename=2015_Q3_Earnings_Slides.pdf
- “Will Twitter Inc Ever Be Profitable?” April 11, 2015. The Motley Fool. http://www.fool.com/investing/general/2015/04/11/will-twitter-inc-ever-be-profitable.aspx
- “What Twitter Says, and What Investors Hear.” June 18, 2015. Lowercase Capital. http://lowercasecapital.com/2015/06/18/what-twitter-says-and-what-we-hear/
- Twitter Annual Report, 2014. http://www.viewproxy.com/twitter/2015/1/annualreport2014.pdf
- “Twitter Stock Tanks on Stagnant User Growth, Lowered Expectations.” October 27, 2015. Re/code. http://recode.net/2015/10/27/twitter-expects-lower-sales-current-quarter-as-user-growth-stagnates/
- “Twitter shares crash as user growth stalls.” October 27, 2015. Business Insider. http://www.businessinsider.com/twitter-earnings-q3-2015-2015-10