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Twitter – AdTech or Fad-Tech?

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Twitter – AdTech or Fad-Tech?

With the recent news of Twitter’s disappointing Q1 2015 results and CEO Dick Costolo announcing his resignation, is Twitter an effective platform within adtech (the use of technology in relation to advertising) or is it just fad-tech that is nearing the end of its run?

Resignation

Costolo will be resigning from the position on 1 July 2015 and will be replaced on an interim basis by Twitter co-founder Jack Dorsey. Costolo has been on the board since 2010 and led the company through its Initial Public Offering (IPO) in November 2013 when it had a market cap of $24.5bn. Since then, Twitter’s valuation has decreased by 41% from a high of $40bn in December 2013 to its current market cap of $23.48bn. It is this stagnation that has led to Costolo’s resignation.

The Financial Numbers

From 2013 to 2014, Twitter has increased its annual revenue by 111% which has corresponded to a 10.46% increase in its net profit. However, this positive change still resulted in a net loss of $577m. Note that the results for the year ending December 31 2013 should not be overstated as 2013 was the year in which Twitter went public.

All values in $000,000’s
Dec 31 2014 Dec 31 2013 (Year of IPO) Dec 31 2012
Total Revenue 1,403.00 664.89 316.93
Annual Revenue Growth (%) 111.01 109.79
Net profit -577.82 -645.32 -79.40
Annual Net Profit Comparison (%) 10.46 increase 712.75 decrease

In relation to the previous 5 quarters, Twitter has experienced:

  • A decrease in revenue of 9.00% from Q4 2014 to Q1 2015;
  • An increase in revenue of 74.03% from Q1 2014 to Q1 2015;
  • A net profit decrease of 29.59% from Q4 2014 to Q1 2015; and
  • A net profit decrease of 22.73% from Q1 2014 to Q1 2015. 
All values in $000,000’s
  Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014
Total Revenue 435.94 479.08 361.27 312.17 250.49
Net Profit -162.44 -125.35 -175.46 -144.64 -132.36

 Total Monthly Active Users

In addition to increasing competition from Snapchat, Twitter has been eclipsed by the number of monthly active users on Instagram (300m as of December 2014) and WhatsApp (800m as of April 2015) which are both owned by Facebook (1.4bn as of Q1 2015).

The following demonstrates Twitter’s decelerating growth in its number of total monthly active users:

Growth Rates
Period Total Monthly Active Users (000,000’s) Q4 Year on Year Comparison (%) Average Annual Growth (%)
2010 – 2011 54 – 117 116.67 17.65
2011 – 2012 117 – 185 58.12 10.56
2012 – 2013 185 – 241 30.27 6.88
2013 – 2014 241 – 288 19.50 4.58

Note that Twitter has 302m monthly active users as of Q1 2015, which is a 4.86% increase from Q4 2014.

Why is Twitter Decelerating?

Yes Twitter has reduced its net loss from 2013 to 2014 and yes it is still growing, but the quarterly results and the decline in growth are concerning since they affect Twitter’s validity as an advertising platform. Comparing the year-on-year figures, although Q1 2015 revenue was up by 74.03%, the revenue of $435.94m fell short of the average analyst estimate of $456.8m – also, net profit fell by 22.73% in the same period.

Twitter does not resonate with advertisers and its current 302m members is not as appealing as Facebook’s and its subsidiaries’ membership numbers. Additionally, use of ‘newer direct response products’, i.e. hard-sell methods which create immediate sales or traffic rather than ads designed with a softer approach in mind, is attributed as being the cause of Twitter’s failure to hit targets.

In an attempt to allay concerns with the platform, Costolo has stated that ‘we have a strong pipeline that we believe will drive increased value for direct response advertisers in the future’. However, the penetration of any upcoming innovation will be constrained by the problems that lie at the heart of the platform.

Twitter’s Limitations

Twitter does not possess as much data on its users as Facebook so it is harder for Twitter to sell itself as an effective advertising platform. Twitter marketers cannot target users as specifically as they can on Facebook which offers the use of highly nuanced ‘Dark Posts’. As anecdotal evidence, the disparity in the use of data between the two platforms became evident to me when I saw an irrelevant advert for summer bikinis from Missguided on my Twitter timeline, whereas on Facebook I was hit with an advert for mobile phone mounts after I had been searching for tripod mounts a few days earlier. It is this lack of targeting which has contributed to revenues falling short of targets.

Twitter is noisy and cluttered. As of Q1 2015, there are 302m monthly active users and timelines are now filled with so much noise that the platform does not hold the user’s attention (this is why the largest media networks are publishing content on Snapchat, because the disappearing nature of the content forces users to pay attention). The lack of engagement is why people tweet using images and why there are so many click-bait articles and ‘listicles’. Despite these attempts to attract attention, with so much noise, marketers cannot truly connect with their audience and, combined with its limited application of data, the value proposition of marketers’ already-limited ‘targeted’ ads are diluted whenever the timeline is refreshed and x amount of tweets pushes the ad down.

Bullying and trolling run rampant on the platform, and both are key reasons for stagnating growth. In February 2015, Costolo stated that ‘[w]e suck at dealing with abuse and trolls on the platform and we’ve sucked at it for years… We lose core user after core user by not addressing simple trolling issues that they face every day.’ With the risk of being trolled limiting growth numbers, marketers’ opportunities to fully exploit the platform are capped at a non-maximised growth rate which reduces the value that marketers gain in exchange for utilising Twitter.

People do not like advertising but they do like content marketing. You might have seen the Kenco #CoffeeVsGangs ads in your timeline and, as cynical as it sounds, this is content marketing at its finest. This is because Kenco is indirectly advertising its brand via the publication of its corporate social responsibility. Once it gains traction and the virality of the hashtag grows, Kenco’s goodwill will increase exponentially. However, more often than not, marketers are constrained by their budgets and need to see results immediately. This is what Costolo attributes as being the reason for the recent disappointing increase in revenue.

The Future

Twitter needs to bulk up its capabilities as an effective advertising platform. However, despite purchasing 6 companies a year since 2011, which include marketing, analytics and advertising software firms, Twitter still only accounts for less than 1% of the total $145bn spent on digital advertising worldwide in 2014 – it lags behind Facebook which currently holds 7.93% of the market. Unless it drastically improves its trove of personal data available to marketers, regains users’ attention and addresses bullying on the platform, marketers will not fully invest their efforts into Twitter.

There have been attempts to regain traction, e.g. the acquisition of TellApart, an ex-Facebook ad partner that produces targeted ads, for $533m worth of shares in Twitter in April 2015. The company hopes that this will build upon the previous acquisitions to improve Twitter’s viability as an adtech platform. The company also purchased Periscope for $100m this past March to further improve engagement. Until the quarterly results and growth rates are published, it is hard to fully evaluate the effect of such acquisitions. However, as demonstrated by the company lowering its full-year expectations after the release of its Q1 results, it is near certain that Twitter will continue to plateau.

Marketers need to better engage with the platform and Twitter is attempting to facilitate this with the upcoming introduction of Project Lightning, a curated news service. Whenever a large-scale event happens, people flock to Twitter for information and this is exactly what Twitter needs to monopolise: it needs to consolidate its position as being the first service that people turn to for information, and the introduction of this new curated feed should do just that. As an extension of previous investor Chris Sacca saying that Twitter needs to be the owner of the space for trending events, such ownership will lead to marketers increasing their Twitter-expenditure as they will be able to capitalise on live advertising whilst cutting through the usual noise and clutter.

Conclusion

Without increasing engagement, the growth rates of monthly active users will continue to deteriorate which will result in further disappointing revenues. A continued decrease in growth might represent the fact that Twitter is reaching its maximum scalability and such deceleration would impose a limit on the revenue that can be generated from its position as an adtech platform with a finite number of users.

Therefore, with the company’s current dwindling figures and growing shareholder discontent, Twitter needs to innovate as soon as possible otherwise it risks coming to the end of its run and being remembered as an example of fad-tech.

For more information, please do not hesitate to contact me.

Tidal – Washed up already?

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Just over two weeks after its star-studded press conference, Tidal has fired 25 employees including CEO Andy Chen. This is a clear red flag; its re-launch was supposed to establish a new direction and the fact that the CEO has already been replaced by someone with a ‘clear vision’ shows that Tidal is in disarray. What exacerbates the situation is that Chen will be replaced by Peter Tonstad, former CEO of Tidal’s parent company Aspiro – if Tonstad has such a ‘better understanding of the industry’, why was he not made CEO prior to the re-launch?

Why would a company that has just embarked on a new direction embark on another new direction with new personnel? The answer is simple: Tidal is not connecting with the market.

The Numbers

Three weeks after re-launch and Tidal has crashed out of the top 700 apps in the US iPhone download chart. It had some initial success climbing into the top 20 downloaded apps, but any traction that it gained has now been lost. That said, there has been some suggestion of corporate espionage with Jay Z tweeting that ‘there are many big companies that are spending millions on a smear campaign’ and unofficial sources have stated that Apple has manipulated Tidal’s download numbers by being slow to approve the app’s iOS updates. It might therefore be fairer to check the numbers on Google Play Store. At the time of writing, Tidal is not within Play Store’s top 540 downloaded apps and it does not appear unless you manually search for it. In comparison, Spotify is Google’s 7th most downloaded app.

In his #TidalFacts Twitter session, Jay Z said that ‘Tidal is doing just fine’, that it has over 770,000 subscribers and that it has only been in business for one month. However, he failed to mention that it already had 550,000 subscribers prior to the re-launch. Disregarding whether these new members are people using the free one month trial or if they are early adopters who have anchored themselves to the platform, it must be noted that each of these artists can generate more sales figures in the first week of their solo albums than what Tidal has achieved in a month. There has therefore not been a conversion of fandom into membership.

Meaning of the Numbers

Yes it is just the first month of business for the revamped Tidal, but it is clear that consumers have not warmed to the platform. In an economy of price-conscious and value-driven millenials, consumers find no appeal in Tidal giving artists more money in exchange for expensive subscriptions, little exclusive content and lossless audio that only those with specialist equipment can truly appreciate.

Tidal is tailspinning into irrelevancy. It needs to change, but it will not offer a free subscription model because that would defeat its purpose. An exclusive Jay Z and Beyonce album could prevent Tidal from becoming washed up, but how will it fare when the pirates get their hands on the booty?

What Next?

Although it markets itself as a niche product, the fact that Jay Z compared Tidal’s valuation to the valuations of Apple, YouTube and Spotify shows that it wants to compete with the key figures in this industry; 16 of the world’s most renowned artists holding equity in Tidal also betrays its image of being a specialist service. Therefore, to compete with Spotify or another similar service, it must become more consumer-friendly. It currently adds no value, or at least not enough to detract a significant number of customers away from services which do offer a free membership.

The vital move would be to change its pricing strategy and offering a free membership would be most beneficial. On the face of it, this seems like it would defeat the purpose of Tidal, which is to give artists more ownership over their work, but do not forget the star power that the company wields. The advertising revenue that could be generated in a move into adtech to subsidise the free memberships would be extremely significant and the idea is that Tidal could scale up advertising fees alongside its growing membership. This is a long term strategy that could work but the artists would need to all buy in to the system for maximum effectiveness.

Another very promising feature would be to expand on the exclusive content, not just the music but on concerts and sporting events, as indicated by Jay Z’s recent tweets. To give consumers an experience truly distinct from its competitors, broadcasting live events for a one off fee in cinemas would be a novel way of moving far beyond what Spotify, Pandora etc currently do. A consistent schedule of live events would generate the excitement that the initial re-launch press conference warranted.

With the streaming market becoming increasingly competitive, Tidal also needs to bear in mind that the European Commission is currently investigating the competition aspects of a joint venture between German, UK and Swedish collecting societies (the bodies that manage copyrights in music on behalf of their members and who also licence the works out to companies like Spotify). If such a joint venture is successful, its dominance could increase the prices that streaming services pay which will ultimately benefit the artists and take away from the purpose of Tidal. Increasing membership and generating revenue so as to reduce the purchasing power of Spotify would protect Tidal’s position and, granted Tidal is still in its infancy, if Jay Z is honest about the company being in it for the long haul, this is certainly something that it needs to consider.

Conclusion

Despite what Jay Z says, it seems that the market is in agreement that Tidal is about the artists and not about the consumers. That is fine. Tidal is a business and it is supposed to benefit its stakeholders, but it must make itself more appealing to the customer and what it absolutely cannot do is continue with this current pricing strategy.

For more information, please do not hesitate to contact me.