Seems like both Twitter and Wall Street are embracing the Twitter IPO sometime in Q4 of 2013 or very early in 2014. No doubt Twitter growth has shown loads of promise and, in the leadership of Jack Dorsey and Dick Costolo with some notable new hires, they have a very balanced team in place to execute the plan. In addition, recent Super Bowl data more or less confirms that Twitter has become a second screen while watching telly!
From Grammy Awards to Olympics, everything seems to be gaining momentum at Twitter, and no one can ignore Twitter’s growth: the number of users has doubled since 2011, and the range from celebrity to businesses to the masses has made this an integral tool for information publishing and gathering!!
To monetise their success, Twitter has been rolling out various advertising and data mining products such as promoted accounts’ tweets, and licensing Twitter stream to 3rd parties! And the results are very encouraging too: Twitter has generated over 300m revenue and a variety of companies from Kuwait investments to the Black Tones have invested a substantial amount to leverage this service!
But despite all this success, the $10billion question is, is it really a $10bn company? That’s the evaluation by secondary market; and is it really ready to go public, and has it got a proven and sustainable long-term revenue model? And how can they make sure that they will not meet the same fate as Facebook, Zynga and GroupOn, when launching into the stock market?
To find the answer, let’s look at what Twitter has in its armoury to justify its valuation, and the potential products and services they can offer to keep generating value for their shareholders.
Like Google and Facebook, Twitter too is a numbers game
Twitter is playing their huge user base card, which no doubt is really very impressive, and as soon as they roll out its services to other countries it grows exponentially! Current stats suggest it has over 200m active users with 30% growth every year. These can be categorised into 40% active participants (i.e. those who read and write tweets) and 60% listeners (who only read tweets from top brands, celebrities and friends). Twitter claims around 40% of people follow brands to find special deals and new product information, and 80% follow their favourite celebrities and journalists to keep up to date with news, gossip and other information. Overall, Twitter has a huge base with a vested interest in business-driven information, not just focusing on mingling with friends like Facebook!
Twitter can leverage its user base by selling advertising
Considering Twitter has a huge user base interested in various types of information, they have come up with the idea of an interest graph to help businesses to leverage people’s interests. Therefore, like other content driven businesses, they have launched advertising products like promoted accounts and tweets. They also verify businesses for a fee, to give them more credibility on their platform. In summary, these products are very basic online advertising products with similar kinds of conversion ratio, which would act as cash cow for Twitter in the long run.
Platform openness enables Twitter to license their data too
Twitter via Gnip and DataSwift and them self has gone into 3rd party data licensing where Twitter sells data generated on their platform to businesses for further integration and analysis; no doubt this has huge potential for business, as this can help them to trap customers and/or market sentiments and subsequently help them to develop their products and services. Lately businesses have also used Twitter as a communication channel to provide customer support!
And now, like LinkedIn, Twitter is exploring industry-specific B2B products
They are also actively integrating and exploring opportunity on TV analysis and recently got into a partnership with Nielsen and bought TV social media analysis company Bluefin Labs. This shows Twitter is ready to leverage their success from last Super Bowl, where 50% of advertisers integrated Twitter hashtags to carry on conversations with customers after their 30 sec TV ads. This is a huge opportunity for Twitter as TV is still gets the most eyeballs for businesses; however Facebook is also apparently testing a watch button, which means Twitter could face stiff competition from its obvious competitors.
Twitter with Amex has introduced commerce too
Twitter has also taken an initiative with Amex to enable users to buy products just with a tweet; it is an enormous minefield to explore as Twitter with credit card details and using hashtags can really make commerce very simple, but users might shy away from using tweets as a buying instruction, as you are telling (or spamming) the world, not just friends, that you have just done the transaction. Facebook is trying this concept with Facebook Connect and Facebook Gifts.
Twitter is replicating the micro-blogging concept with video and images!!
Like any tech company from Google to Facebook to Apple, Twitter too has a huge challenge to come up with a product line so that investors can see scalability and be comfortable with investing. The reason for this is probably that in this day and age disruptions occur at supersonic speed and if Twitter keeps banking on their obvious product line, it may not be on the map after a while. However, Twitter is aware of it and they have already introduced a Twitter-like video service, @vine, and have improved image attachments to take on Instagram and Pintrest.
But and it’s a big but – Twitter will always have issues about data ownership and Privacy
I think Twitter will at some point find themselves in the middle of a data ownership controversy where they will be in the crossfire with authorities and their users for not sharing the revenue with those generating content on their platform. Basically, Twitter is licensing and analysing, and subsequently selling, data that is not produced by them and therefore, somewhere along the line, someone will ask the question, why is the content producer not getting a share from data licensing?
I think Twitter might need to adopt the Youtube business model where they share revenue with publishers too.
Per user valuation might be too high like Facebook?
Facebook launched $100bn valuation IPO by valuating per user around $100, when they were yielding only $3/user and subsequently struggling in the stock market. LinkedIn valued their company around $4.3bn for an IPO, when they were making around $5/user and now trading at two times of the list value. So for Twitter with $1.5/user, a $10bn valuation might not be the best valuation?
*Note: Calculations are based on Facebook Revenue $3.5bn and 100bn users, LinkedIn revenue around $944m with 200m users and Twitter revenue around $350m with 200m active users
Twitter technology and ecosystem desires more!
Twitter was recently blamed for killing its most progressive ecosystem when they suddenly changed their API terms and conditions, citing the reason that there are too many hackers around, stopping Twitter making their services consistent across the platform. However even after that, technology is still not resolved e.g. tweets are not synchronised on all platform i.e. if I deleted a tweet on iPhone, it still appears on my web client, if I don’t delete from there too!
Conclusion – All going in the right direction but Twitter need to prove more monetisation tools than advertising to launch an IPO!
Overall it seems Twitter is, like Facebook, making sure that they have strong user base and, like Google, they are hoping to leverage big data produced on their platform via selling advertising. The openness of Twitter has also enabled them to license their data to businesses for further analysis and/or use their content to provide industry specific products. Plus, the lesson they have learned from Facebook’s recent hiccup on the stock market and Apple’s on-going agony of not having a product roadmap, forced them to start thinking of future products, leading to partnerships with Nielsen and Amex and the launch of micro-video-blogging app @vine, which means Twitter is ticking all the right boxes.
However, despite being on right path, apart from growing their user base and advertising products, the rest of the products need to be monetised before Twitter can launch into the stock market. After the Facebook, Zynga and GroupOn stock debacles, any move from tech companies will be received with a pinch of salt by investors. Also, Twitter as a sharing platform might need to embrace sharing economy i.e. sharing revenue with content producers to ensure they have sustainable non-controversial revenue model and do not end up in various court battles. Therefore, the right thing for Twitter is to first prove their model beyond advertising, and then to value their company correctly before launching on the stock market. But would investors have the patience to wait that long, given that businesses lifecycles are shortening at lightning speed these days?