REPORT INCLUDING DISCLOSURES CAN BE FOUND HERE: Madison & Wall 2-7-14.pdf
Many aspects of Twitter are widely misunderstood. Perhaps this statement goes without stating, but we think there has been something of a misunderstanding among much of the investment community regarding how universal Twitter's appeal is or will be among consumers. Although we always caution against relying on focus groups of one, to have used Twitter is to know that it is not for everybody in its present form. And we think it is safe to say that few among the investment community (let alone Twitter's institutional investors) are significant users of the product. This is not to deny the power of Twitter as a communications vehicle or its appeal to a very large absolute number of people, but it has always seemed evident to us that Twitter fills a consumer niche, if a significant one.
Still, expectations around Twitter's user trends and the implications of those trends were evidently divorced from reality going into Twitter's earnings report this week . This gap occurred despite the coverage around Twitter's slowing user growth when the IPO was formally announced, and proved to be the focal point of the fourth quarter results despite what were solid revenue figures. However, even if Twitter did have universal appeal, the metric that would have mattered was not user growth or revenue per timeline view, but revenue per sales-person (which, incidentally, we're guessing was around $400,000 per sales-person during the fourth quarter) or revenue per advertiser or per campaign, and related growth. This is because at Twitter's existing scale it is more than big enough to make the company and its ad products matter to many marketers. Consequently, we think investors should be primarily focused on how Twitter monetizes that base, welcoming additional user growth or time that users spend with the medium (if such metrics were reliably available) as helpful, but not critical or even necessary so long as Twitter remains within a reasonable range of scale around its present size.
Which leads us to what should be the most important area of concern for those focused on Twitter: It is to answer "what is the role of a Twitter campaign for a marketer, and for which marketers is Twitter a best or 'least-bad' alternative to satisfy a given marketing goal?" Part of the challenge in addressing this concern is that Twitter's utility is still evolving for marketers. With a user base as large as it is, almost every marketer of scale is rightly deploying resources in order to identify what role Twitter holds for themselves, although a large brand spending even $100,000 in a year is hardly breaking the bank to do so (consider that fewer than 200 advertisers account for 90% of network TV advertising spending in the United States; this cohort might spend $300mm on advertising in a year and perhaps $50mm each on digital media).
Over time, a medium will evolve as a go-to-medium for certain kinds of strategies, and these preferences will vary for different kinds of marketers. For example, a brand may choose to use Twitter essentially as a branding vehicle, creating a "voice" or a "character" the helps define a brand's attributes in the minds of consumers (think of the playfulness associated with Kit Kat and Oreo when the two brands from competing companies used the medium to compete in a game of Tic Tac Toe via tweets). Another brand might choose to use Twitter as a call-to-action vehicle (think of eSurance's use of Twitter in association with its post-Super Bowl giveaway this year). Other brands might use it to drive location-based marketing strategies. Small businesses and e-commerce-based marketers may have another wide range of strategies that they will focus on.
All of this can be a bit squishy for investors who are unused to the dark arts of modern marketing, let alone media buying and media sales, but the squishiness is nonetheless real. Metrics like users or time spent relative to other digital media seem like they should be clean metrics against which to compare Twitter with Facebook or even Yahoo. Unfortunately it won't be quite that simple. Twitter is, to our eyes (even if we haven't tweeted much in seven years, we still look at it - incidentally, mostly as a search engine) a different medium that just happens to be commonly compared with and budgeted alongside Facebook and other digital or social media. As more marketers who use the platform (and there are reportedly more than 4.5 million of them) find better ways to use Twitter and as Twitter finds better ways to capture more money from greater numbers of them, best practices and common goals will evolve. And they will be different than the goals that are associated with other digital media, with differing skews of advertisers.
On this read, assessing Twitter against other digital media properties in order to identify what proportional share of spending it can capture might be a futile exercise. Consider that in the United States, radio captures around 40% as much consumer time as does television. But radio is unlikely to capture 40% of spending (it's presently more like 25%) in large part because it suits different goals for different kinds of marketers. Radio certainly has the capacity to build brands, but advertisers who want to build big brands or drive mass awareness quickly have generally expressed a preference to do it through television, especially national TV. Meanwhile, companies who tend to organize their budgets on the basis of local geographies or companies which are related to driving, where most radio listening occurs might skew their spending towards radio. A marketer with these characteristics could also use television, but chances are their share of spending won't match the share of time their customers spend with that medium.
It is difficult to be certain about what tactics and strategies will prevail on Twitter, but it is probably reasonable to think of Twitter as to Facebook as radio is to television. Consider that Twitter has immediacy and a geographically mobile skew (presumably more of Twitter's mobile use happens out of the home rather than on tablets in the home), with potentially burst-y usage and a greater capacity for in-your-face messaging. By contrast, Facebook offers a richer environment for marketers to develop a relationship with consumers and the capacity to them to more immersive brand-building environments, whether within Facebook or off of it. The parallels between Twitter and radio and Facebook and TV in this sense are actually quite striking.
This doesn't mean that at maturity Twitter will capture 25% of Facebook's ad revenues on 40% of its usage (although that's not far from where our model is set). Twitter will instead be limited by their ability to develop new ad products for different segments of marketers in the US and around the world. While Twitter was over-valued both before and after its earnings report in our view, we think the operational results highlight that Twitter is actually proving to be quite successful in establishing traction developing and monetizing those ad products for a wide range of marketers around the world.
Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which are impacted by the advertising economy, including Facebook, Google, Yahoo, Interpublic, Omnicom, WPP, Publicis, Nielsen, CBS, Viacom and Discovery Communications. Brian can be reached at email@example.com.
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