Twitter’s future as an independent player comes under threat

By October 03, 2016

The total number of Twitter users stopped growing over a year ago. The microblogging platform is struggling to increase its revenue and rumours of an imminent takeover of the social network are becoming more insistent.

Twitter nevertheless has some serious advantages. It demonstrated its usefulness when it enabled users to get around state censorship during the Arab Spring, and invented the # hashtag that has become a must for promoting events. So have they made a mistake in their choice of business model, or is the main problem the risky strategy of hot-footing out of the information sector towards a supposedly more profitable entertainment sector, or quite simply the fact that it is proving impossible to monetise its audience adequately? Let us take a step back and look at the most recent Twitter announcements to help us form a view as to whether the company is likely to remain independent.

Boastful announcements in search of new sources of growth

On 14 September, Twitter announced it was launching new apps on Amazon Fire TV, Apple TV and Xbox One. The goal is to enable Twitter users to watch video available on the social network directly on their TVs, especially live retransmissions of some NFL American football games free-of-charge. Here we are quite some way away from the 140-character message facility that Twitter began with. While this new (projected) route that Twitter is taking has pushed it up a few points on the Nasdaq index, that should not make us forget the recent speculation around the social network. Rumours that Twitter is about to be sold persist and the meeting of the Board of Directors a couple of weeks ago was closely scrutinised by both financial analysts and technology experts waiting for a verdict on a potential sale and the extension of the position of founder Jack Dorsey as reappointed CEO for a few more months.

It is also worth remembering the short shrift pronounced recently by a speaker on CNBC: “We should give Twitter to the Europeans, who have been incapable of creating Google and Facebook, and who inflict disproportionate, unwarranted fines on Apple.” Even though the comment was aimed at the European Commission which is demanding that Apple pay up tax allegedly evaded – an amount about equal to the total Twitter valuation – this still managed to annoy Twitter.
However, Twitter has undeniably been a great success, with 300 million users worldwide, double-digit growth until 2015, and new stylish premises at the heart of San Francisco that have created quite a buzz. Twitter is also the inventor of the now-indispensable hashtag which you find in television broadcasts, at political meetings, sports events and protest movements. Nor should we forget that Twitter has played a significant role in getting around the information blockage imposed by dictatorial governments – in Iran during the demonstrations there, during the war in Syria, and during the Arab Spring. In spite of this, Twitter has never managed to join the mighty Google, Apple, Facebook, Amazon club. And there is a very good reason for this.

GAFA: an elite, high-growth club

While the Google-Apple-Facebook-Amazon club is a very exclusive one, the ‘unicorns’ – startups valued at over $1 billion – form a rather less exclusive cohort and Twitter, with its $13 billion valuation, is clearly well up there with them. However, in the digital world and especially in Silicon Valley, the rule has always been growth, even hyper-growth for some startups that became scaleups and then ‘unicorns’. One might say that Silicon Valley’s view of growth is like riding a bicycle: while you are pedalling, everything is fine, and you move forward. Once you stop pedalling, you will fall off. And this is the basic problem with Twitter. The social network is no longer growing; the user increase curve has flattened out. Suddenly Twitter is no longer knocking on the door of the Google Apple Facebook Amazon club. When Twitter is sub-letting parts of its prestigious San Francisco premises at the same time as the other tech giants are creating new buildings and expanding their campuses, it cannot really lay claim to membership of the same club. Moreover, since Instagram passed the goal of 400 million users, thus relegating Twitter to fourth place just ahead of Google+, this dearth of growth in user numbers leads us to ask the question: has Twitter already achieved its maximum potential audience?

Leaving aside inflated egos, public posturing and the race for users, there is actually an economic reality here. With digital platforms as with the traditional bricks-and-mortar world of yesteryear, what counts is monetising your audience numbers. What is the use of having 300 million users if you cannot make any money out of them? That, in a nutshell, is Twitter’s problem. The micro-bloggers’ social network has not managed to make money out of its colossal audience. Neither advertising revenues, nor the income it generated for a time from the sale of data has enabled Twitter to achieve profitability. Where Google and Facebook have succeeded, and parleyed their turnover into an astronomical market capitalisation, Twitter has failed. Among the ‘GAFA’ quartet we find a product champion, Apple, a services champion, namely Amazon, plus two – Google and Facebook – that are champions in monetising their audience.

The desperate battle to monetise audiences

So what exactly has prevented Twitter from doing as well as Google or Facebook? There are a number of answers to this question, including shortcomings in marketing, business model planning, digital processes and last but not least lack of appeal to advertisers. The basic issue here is that Twitter has been perceived as a one-product company. Just purveying information – and express information in just 140 characters at that – though this is less and less true of Twitter, is not a recipe for success. And while Google is an online search platform plus a content showcase, providing access to a vast library of photos and videos, and Facebook has become a channel for entertaining content, information and personal pictures, Twitter – in spite of the addition of video and photos, and the easing of the 140-character rule – has not managed to shake off the image of being a micro-messaging platform. In any case, it is no longer sufficient to be an access portal for entertainment in order to succeed, at least not in the longer term, as evidenced by the sad example of Yahoo!, which was the inventor of the portal and yet ended up scavenging for scraps. This shows us one thing: to find the Holy Grail in the world of online content, i.e. the ability to monetise audiences effectively, you need to have a massive, global audience with enormous influencing power, otherwise you will not be able to cover your investments in technology and your marketing expenses. This is precisely what Yahoo! failed to do once the growing audience share taken by Facebook and Google began to eat into its advertising revenues.

There is also a parallel to be drawn with the traditional press. The whole conundrum of how to monetise the audience and the brand in the face of free content has killed off a good number of newspapers and magazines. To survive in this world, you need knowhow, recognised content and exceptional pulling power. The paper that has had the most success in monetising its audience with a mix of paper and digital offerings is the Financial Times. This paper has been extremely efficient in building a hybrid digital-physical ecosystem, largely because it has a global readership stretching from New York City to Johannesburg, New Delhi, Sydney and further. Nevertheless, the Financial Times does have a very specific approach, mainly based on a B2B business model – i.e. most subscribers are companies that have the means to pay the cover price. It is much more difficult to operate on a B2C basis, aiming for ‘the man in the street’, whose resources are more limited and might have to choose between buying news content, whether paper-based or digital, and having a coffee at Starbucks. This is relevant to our story here because Twitter is a B2C media player, which has not managed either to win over advertisers or persuade individual readers to pay for the content it provides.

Segmentation the only effective long-term strategy

We could spend hours debating the absorbing topic of how best to monetise audiences.  L’Atelier has been working on this for years. To simplify things, one might say that there are two basic audience strategy models. Either you have a very large, non-specific audience, in which case you have to be very powerful indeed to attract advertisers so that they say: “They’re so big that we’ll reach our target audience come what may.” Or you take a different approach, which is to target your audience, to focus on a highly specific audience, even if it is a very limited one: for example, a forty-something male city-dweller with considerable purchasing power who likes beautiful watches and sports cars. And this way you will attract specialist advertisers who are happy to pay dear because they are they are reaching the right customers.

Once again here a comparison with the media – a world which lots of people have been studying recently – is relevant. On the one hand you have a player like French news website Mediapart, an Internet pure player, with a limited, but well-targeted audience, and low costs, which all of a sudden starts to be profitable. On the other hand, a television station such as France’s TF1, with the best audience figures in Europe but weak profitability because it addresses a very wide audience, and this is very costly in terms of grid, i.e. in terms of buying sufficiently powerful content to fill a grid that is attractive to its viewers at any time of the day. This is precisely why the new TF1 boss today seems prepared to accept lower audience numbers, preferring to target more accurately by viewer category and so attract advertisers in a more focused manner.

Meanwhile it is well understood that the strength of the digital world lies in its ability to enable segmentation, which increases the effectiveness of advertising campaigns. This is the advantage of Facebook which, in addition to having the largest audience worldwide – over 1.5 billion users, five times as many as Twitter – has also developed its content and audience in terms of tribes, communities, people who share common group interests and who thus constitute a series of precise, labelled targets for so-called ‘precision advertising’.

So what does the future hold for Twitter?

Twitter management has grasped these facts and they have been making moves over the past year to shift out of the purely information world and loosen up the tweeting format in an attempt to join the more lucrative entertainment business. This involves free streaming on Twitter of some NFL games – given that subscriptions to sports channels are very expensive both in the USA and Europe – in a bid to attract new users, and integrating app platforms with a view to shucking off the straitjacket imposed by the 140-character format. These decisions show that the penny has dropped in the Twitter boardroom but might this not be too little, too late? 

Many would answer this last question in the affirmative. In fact, there are two possible solutions. Either Twitter will be taken over by one of the Web giants that knows how to make money and will endeavour to apply its proven methods to Twitter and its audience. Whether the acquirer will succeed in this attempt is another story. Or, the same thing will happen to Twitter as happened to LinkedIn, i.e. it will be taken over by a major IT or digital player working in another field altogether, who will then try to capitalise on the image of the micro-blogging platform. In either of these cases, Twitter’s future will not be as an independent provider. And this will happen because Twitter has not managed to find its own specific business model.

There is however an alternative idea, a little more fanciful but actually rather appealing if we see Twitter purely as a global information network, almost like an international public service such as the UN or the Red Cross – a sort of Wikipedia for ‘hard’ news – which would rely on private or public grants rather than on the commercial revenue that it has struggled to bring in. It is unlikely, though, that the Twitter founders and the investment funds that have backed the company would regard this option as a satisfactory exit strategy.

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