Today, a single tweet sucked $ 7.4 billion worth of market value from Twitter’s stock. When Twitter’s earnings report was published prematurely on its investor-relations site (Twitter later blamed Nasdaq), hardly anyone noticed until it was broadcast on Twitter.
The irony of this embarrassing episode isn’t lost on anyone, but what’s more notable is that it sums up, succinctly and dramatically, the challenge Twitter has faced all along: Twitter has become an invaluable source of new information, and yet investors continue to doubt its ability to translate that value into financial gain.
Twitter has long been compared to its more successful rival Facebook, yet content publishers have long known that the kinds of stories shared on the two are different. Twitter plays better with hard, breaking news. Back when newspapers and TVs dominated news, some people called themselves news junkies, jonesing for new information. Nobody uses that term today – they’re too busy drinking freely from the firehose that is their Twitter feed. Addiction is just another form of consumption.
But the old news junkies were always a small fraction of the overall news audience. In the same way, Twitter has become the content spigot of choice for people who crave new information enough they’ll spend months growing and weeding out a list of reliable accounts to follow, who retweet strategically and interact with power users to grow their own followers, and so on.
It’s a lot of work, and most people find it’s easier just to stay on Facebook. That has kept Twitter’s audience relatively small and still slow to grow. Monthly active users increased 18 percent last quarter to 302 million at Twitter and 13 percent to 1.44 billion at Facebook.
CEO Dick Costolo has tried a lot of new tricks to change that, catering more to logged-out users on Twitter’s home page, providing new users a readymade list of followers, partnering with Google to include tweets in search results. But today, Costolo said Twitter still needs to help users answer two questions, “Why should I use Twitter?” and “How do I use Twitter?”
Incredibly, these questions plague Twitter nine years after the first tweet was ever sent, 17 months after Twitter’s IPO and nearly six months after the analyst day when Costolo pledged to turn things around. As a result, user growth remains disappointing. And now, it seems, so does revenue growth.
Twitter’s revenue grew 74 percent to $ 436 million in the first quarter. That’s an enviable growth rate for most companies but it fell short of the $ 457 million analysts were expecting. The reason had to do with a new “CPX” ad model designed to improve user engagement on direct-response ads.
Advertisers have long used Twitter to promote events or build brands, but last year Twitter began building direct-response ads for more targeted campaigns. The CPX model is working too well, driving up auction prices so much it’s driving down overall demand. Over time, this will increase return on investment for advertisers and make Twitter more competitive. In the short term, the company warned, it could drag on earnings for several quarters.
This isn’t good news for investors, but it was coupled with another warning that April’s new users are off to a “slow start.” Before this admission, Twitter’s stock had managed a slight recovery in after-hours trading. That recovery vanished amid concern that user growth could slow this quarter. Twitter can have slower ad growth if enough new users are coming, or slow user growth if it’s monetizing its users effectively. Now it’s faced with the prospect of neither for a while.
And that raises another question: It used to be Twitter competing primarily against Facebook for users and ad dollars. Now it’s facing Instagram, and Snapchat, and apps like Messenger or WeChat that are morphing into platforms where publishers and users share content. Attention and ad dollars are starting to be spread out among many apps offering new, compulsive information. How can Twitter stand out?
The coming weeks may bring renewed calls for Costolo to step down, but he still remains the best choice to lead the company forward. Changing the site could drive away the loyal users, and changing the strategic course could slow down the turnaround even more. Costolo isn’t sitting still, reaching out to other platforms, including tweets in Google search and Apple’s Spotlight, as well as working with Google’s DoubleClick ad service.
That suggests another outcome. It’s getting easier to imagine Twitter eventually merging with or being acquired by a larger company with an established platform. Rumors seem to pop up every few months that Google will buy Twitter, although Twitter’s still formidable $ 33 billion market cap and Costolo’s support by Twitter’s board make that seem unlikely. Twitter still has plenty of time to reignite growth in users and revenue, but in the longer term the evolution of its market may force its invaluable service into the arms of a bigger company.