How Does Twitter Make Money?

Twitter is the Fox News of the internet.

Lots of extremely opinionated people? Check!

Delivered to the narrow group of people who are actually interested in their opinions? Check!

But also broadcast to everyone else who can’t stand the sight of them? Check!

How does Twitter make money like Fox?

Source: Ben W, flickr commons

Fox News’ insight is that there were millions of right wing Americans who were completely ignored by the major networks. Fox News and Rupert Murdock identified this gap and gave them a news source in tune with them.

The classic Fox News presentation is two news readers speaking to two talking heads. The Fox News favorite would be suave and articulate. And happen to be anti-abortion, against immigration and pro war.

Fox’s insight here is they did not narrow the message down to one viewpoint. Debate is valuable and the other side is important too. However it is preferable if the other side is delivered by someone crazy. Or bearded. Or in a best case both.

Speaking out loud

Twitter is a social network where people send messages of up to 140 characters.

Think of the three subsets of the twitterati by their actions. The tweeters who are broadcasting. The retweeters who are distributing. And those in the background who are consuming. Naturally these groups are mixed and blend into one another.

Within the tweeters are an elite that are the stars. They are the hosts and the talking heads.

Twitter speaks to every unrepresented community. And these communities favorite, argue, and troll.

Similar to how the Like button defined Facebook, allowing a form of distant social grooming. The follow button defined Twitter.

The follow button created and defined tribes of like-minded individuals.

Twitter is great because it is simple. Twitter is accessible to anyone with the most basic of phones, and requires barely a pause of your time to make your thoughts known.

Twitter is often a conversation. Where else can you message your idols like Lady Gaga or LeBron James? Where they might retweet your message and give you some love?

And the mainstream media loves Twitter. Have you met any journalist not on Twitter? Twitter is your fastest source of news bar none.

Naturally, Fox News wishes it was Twitter. Rupert Murdock infamously bought MySpace. He could see the next Fox News in social media.

If you want to make money from Twitter use it as your loudspeaker. Find your voice and speak to your tribe.

The money

Twitter is going to make over $2 billion in revenues in 2015. Like Fox, most of it is advertising. Companies can pay for promoted tweets, promoted accounts and promoted trends. They can pay for tweets into your stream, for their accounts to be recommended to you to follow, and for trends that highlight the company in some way.

Twitter is paid only for engagement. This means solely when you follow, retweet, reply, favorite or click on a promoted item.

As an advertiser, you are paying Twitter to grow your tribe and distribute your messages. Fox News could not do this.

Although Twitter does things slightly different, like selling data on tweets, its core revenue equation is still the same as Facebook’s.

Monthly average users (MAU) * average revenue per user per month (ARPU)

I’ve simplified average revenue per user to:

Number of feed items viewed in a month (think time user spends on Twitter) * advertisement load * user action * price per action

However check this comment from the chief financial officer Anthony Noto: “we have ample supply so it’s really about that real-time demand that comes through from advertisers”.

It is inappropriate to get stuck on the revenue equation above because the other side of the equal sign, the dollars advertisers are choosing to spend, dictates both price per action AND advertisement load.

How does twitter make money - save it!

Problems for Twitter, problems for investors

Twitter’s stock price peaked at almost $56 in 2014 and is now below $20. Zuckerberg once said about Twitter “it’s as if they drove a clown car into a gold mine and fell in”.

The main thing investors focus on is slowing average user growth. In September 2015 it was down to 5% growth in the US and 9% everywhere else. Although Facebook is only growing users 6% in the US, this is stable and not decelerating, and they are growing much faster internationally. This boggles the mind given that, in America, 23% of adult internet users are on Twitter, compared to 71% on Facebook.

Twitter is struggling to deal with Trolls. These trolls are making it too hard for the average person to stay committed to the platform.

Additionally, Twitter is not delivering a compelling return on investment to advertisers. I click on ads on Facebook because they are in tune with my interests. 23andMe? Interesting. Events in my city London? Interesting.

Twitter pushes anything a 30 something male might be interested in at me. Its advertising pays no attention to my interests and detracts from my feed.

Now, when I look at Vine, invented by Twitter, and Periscope, invented by Twitter, I don’t see clowns.

I see HTC.

HTC are a medium-sized smartphone maker that are getting smaller. When the iPhone came out in 2007, HTC had at the time the closest thing to a smartphone on the market. It had a small touch screen. It ran on windows. It was OK. But Apple were just better in too many ways. Better at marketing, better at user interface, better at execution.

Twitter is as if a “serial inventor got lost in a goldmine”. And Facebook copied their best invention the timeline and made it into the newsfeed.

Things aren’t over. Twitter should be stickier than a hardware product. But can you imagine what the management teams at Google and Facebook could do with this thing. I make no comments on recent m&a rumors, but Twitter is still a gold mine. They need to learn how to improve safety in the gold mine. They need to work on their spades.

By some bizarre coincidence, I think Gold is a great investment in 2016. Read more here.

Sources:

Twitter 3Q 2015 Earnings Report

Pew Internet, “Demographics of key social networking platforms”

 

Yuen Lo

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