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Twitter: takeover target vs organic growth

Thursday 26 March 2015 | 12:21 CET | Background

Twitter's last quarterly results showed the company's revenues nearly doubled, to USD 479 million. Advertising accounted for 90 percent of revenue, while the remainder came from data licensing (and 'other'). The number of active users increased by 20 percent to 288  million. In financial terms, the results were better than expected, but the operational performance was less good, with the growth in users slowing to 20 percent. The share price ended higher after the report. Speculation of a takeover of Twitter aside, the company needs to focus on continuous improvement in its core service, tweeting, while adding functionality and staying focused on the need to monetise the service. 

Takeover target

Twitter divides opinion. Some people have already written the platform off (288 million users worldwide is not especially impressive), while others swear by it. The company appears ripe for a takeover, in order to create synergies with other business activities. With a current market capitalisation of around USD 30 billion, any 'friendly' bidder will need to offer at least USD 40 billion for the company in order to get the board's support. That is twice what Facebook paid for WhatsApp, which at the time had 450 million users and little revenue. From a financial viewpoint, a takeover is a real possibility. 

Will Twitter be able to remain independent or will it end up prey for a company like Google? What is twitter focusing on and what does that mean for revenues? Will it be able to accelerate the growth in users? The company's latest initiatives appear promising. These are improving its results, and the usability of the service is continuously increasing. It's still questionable though whether this will lead to any substantial growth in users.

Strategy

A few themes form a clear thread in Twitter's strategy.

  • Improving the site and app. This is business as usual for Twitter. It's already added various features, such as adding video clips and photos to tweets, direct messaging for one-to-one tweets, direct messaging with groups and the latest: 'while you were away' (tweets you've missed since you last checked in).
  • Vine. Acquired by Twitter in 2012, Vine facilitates sharing short videos. What Instagram is for Facebook, Vine is for Twitter. It provides a certain amount of diversification for the company and boosts its exposure to the video market. 
  • Video. Related acquisitions include SnappyTV (2014) and Periscope (March 2015). The latter allows consumers to stream videos to their Twitter followers. This is expected to fill the role of Meerkat, a competing app that Twitter has already blocked from its services.
  • Advertising. Twitter offers a number of advertising formats: Promoted Tweets, Accounts and Trends. In addition, it has Twitter Amplify or Promoted Video (premium content in the form of videos and photos placed by businesses, such as a sporting event on TV). With the takeover of MoPub in 2013, Twitter acquired its own mobile ad exchange.
  • Big Data. Technology was gained through various acquisitions (eg LuckSort, Trendrr, Gnip). Twitter also has partnerships with players such as IBM, to develop analytics for business customers and developers.
  • SDK. Twitter Fabric is a SDK (software development kit) for developers to make apps linked to Twitter.

Platform

Twitter is also becoming a platform for third-party services. Comcast launched the feature 'See It' for customers to programme their DVR with a tweet. Netflix offers 'tweet me a reminder' for its subscribers following a particular series. A French bank as well as Barclays allow customers to make payments with tweets. Twitter itself is testing in the US the Buy Button to make purchases from a tweet, working with retailers such as Hachette. A partnership with Rhapsody allows subscribers of the music service to share tracks over Twitter. The acquisition of Periscope will also allow users to share videos with Twitter followers.

This is a clear trend in the OTT services market. A platform like Wechat is no longer just for messaging, but also provides access to services such as gaming and e-commerce. Facebook also operates as a platform for third-party services, including on Facebook Messenger. In the US, it's now possible to make money transfers with contacts on Messenger.

For Twitter, the above can be summarised in two themes: usability and monetisation. Based on the latest quarterly results, the problem is more with the former than the latter. The platform function appears highly promising, allowing Twitter to add a wide range of services from communication and gaming to financial services. The company will need to take a multifacted approach to realising its potential:

  • Continue to improve the core service. For example, improving the quality (and speed) of Vine.
  • Expanding functionality. Twitter can serve as a platform for e-commerce (Hachette), payments (Barclays), music (Rhapsody) and videos(Periscope). Expansion to other areas such as gaming and VoIP appears a logical next step. 
  • Monetisation. New advertising formats and selling user data are inevitable.


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