Whither Twitter? A question of strategy

Highlights:

• As announced late last week, Dick Costolo, Twitter’s CEO for the past five years, announced that he will step down on July 1. Jack Dorsey, co-founder, former CEO and current executive chairman, will take over as interim CEO until the company finds a new leader. According to Dorsey, the company’s strategy will not change.

• Twitter’s market valuation and prospects have suffered from a constant comparison by investors with Facebook’s massive 1.4 bn. user base and large mobile ad-revenue share (18% vs Twitter’s 3.6%), even though these two social networking businesses have distinctly different value propositions. While Twitter is a tightly-spaced microblogging network, Facebook is a free-wheeling socializing network.

• Along with other commentators and in contrast with Dorsey’s and Costolo’s stated views, I argue that with a clearer, more focused product and market strategy, Twitter can significantly accelerate user and revenue growth.

• More to the point, the company could capitalize on the enormous number of users who sign on once and then don’t return – estimated to be around a billion people. This would enable Twitter to become the default venue for many types of live events, something that it has already demonstrated in isolated instances.

• Furthermore, by revising its business model to make it more balanced in terms of revenue sources, I believe Twitter could grow even faster and become profitable.

If ever you need evidence that expectations can be (almost) everything in public financial markets, Twitter is it. To be fair to its investors, Costolo and other members of the company’s leadership have repeatedly declared that Twitter’s user base would grow rapidly, but each time the results have fallen short. Even more disturbingly, market research firm eMarketer has estimated that that, following user growth of 30% two years ago, Twitter’s base will grow only 14% this year, and by 2019 will grow a meager 6% annually.

Hidden behind this disappointing outlook is the company’s extremely positive revenue growth, which increased year-on-year by 74% in the first quarter, to $436m. This, from a company that had negligible revenues just three years ago and none at all five years ago. To be fair, losses totaled $162m. with no sign of impending profits, putting a dampener on investors’ spirits. But nonetheless, 74% revenue growth is not to be sneezed at. Whether this growth rate is sustainable is another question. Listen to what Debra Williamson, an eMarketer analyst, had to say on this score: “The more that Twitter has struggled with usage, the more weary advertisers are becoming because there are so many options for people when it comes to social media.”

All things considered, it was predictable that Costolo would have to step down. He was rumored earlier this year to have grown tired of the constant second-guessing by Wall Street. And more than anything, the predictions he made about the business generally failed to materialize to the level that he described they would.

But just as worrying as the sluggish user growth numbers and the fact that Twitter’s 302 million monthly active users (MAUs) are increasingly dwarfed by Facebook’s $1.4bn., is the company’s lack of market focus, and the confusing nature of the service itself. Chris Sacca, an early investor and passionate advocate of Twitter, described the service’s shortcomings in detail in his in-depth blog published on June 3. In one quote he drew attention to the disparity between current active users and the much larger contingent of one-time users who have abandoned the site (what I call “MIAUs” – Monthly In-Active Users): “Twitter has failed to meet its own stated user growth expectations and has not been able to take advantage of the massive number of users who have signed up for accounts and then not come back. … Today Twitter doesn’t work like our minds do. Our brains prefer signal over noise.”

The truth is that today Twitter looks and feels like a raucous bazaar with tweets flying back and forth in a cacophony of disordered commercial, professional, opinionated and gossipy noise. So while the service is capable of attracting eyeballs, it is unable to keep enough of them engaged for long. It is awkward to use and just plain disorganized. If three or four times as many people disengage after a few interactions, or if – like me – they engage only sporadically and briefly, monetization from ads becomes vulnerable to advertisers who eventually realize that their investment, especially those in direct response ads, is largely wasteful and that they have other choices of where to place their commercials.

In lieu of the current longstanding design based on strict reverse chronology of the tweet-feed from everywhere and anywhere, which conveys the impression that the most recent tweets must always be the most relevant to read, Sacca proposes a series of fundamental changes. These include providing separate tabs for topics such as news, politics, sports, entertainment, gossip, comedy, and even a “Best of Twitter” selection of the most popular content on the service overall. He also suggests that Twitter start to exploit location to show where tweets are being sent from. Thus, “a tweet about a protest would take on increased importance if you could see that it was sent from Baltimore or Ferguson.” Other examples cited include tweets from inside a football, soccer, or basketball stadium where a key contest is taking place; or tweets from people who are in the middle of a weather event such as an earthquake, tornado, or storm.

Sacca argues that popularity is another theme that Twitter could take advantage of. Examples might include the most popular articles linked-to on Twitter, the most popular sites linked among people we follow. Or which books are people tweeting about, or which videos are attracting the most attention, and so on.

These evolutions are part of what Sacca advocates when he says that Twitter “should boldly push the envelope” and “try evolving the core product in three directions: Live, Channels, and the Save button.” Separate tabs for distinct topics are what he calls Channels. Live is designed to exploit Twitter’s potential to be the “global gathering space for live events”, as NYT technology reporter Farhad Manjoo puts it. Manjoo’s complaints echo Sacca’s many concerns because, like Sacca, he is an avowed Twitter addict: “Because the service offers so many uses, Twitter as a company has had trouble focusing on one purpose for which it should aim to excel. The lack of concentration has damaged its prospects with users, investors and advertisers. Choosing a single intent for Twitter – and working to make that a reality – ought to be the next chief’s main task.” Manjoo further argues that among social networks Twitter is uniquely suited for this purpose.

Sacca’s and Manjoo’s views directly contradict Jack Dorsey’s most recent statements as he assumed the role of interim CEO last week: “This transition is nothing more than Dick deciding to move on from his role as CEO. I believe in the course the company is on and management’s ability to fulfill it and execute on it. … We do have a great strategy, we do have a great direction, and we do have a great team behind it.” Really? Well, no one should condemn him for making a statement like this, as long as he and we all understand that this is normal diplomatic code for acknowledging that “we actually don’t have a great strategy and we don’t have a great direction, but we’re determined to address this starting immediately.” Unless, that is, he believes that the strategy really is fine, in which case investors ought to be even more concerned. As for the “team” factor, the fact is that Twitter has experienced considerable turbulence between its founders, especially Evan Williams and Dorsey since its early days, and with considerable senior management turnover during the past few years.

Leaving aside issues between personnel, whether caused by personal friction or philosophical differences, I totally endorse Sacca’s and Manjoo’s recommendations for much greater strategic focus – in essence, for choosing a single “play for power” value proposition, and for evolving the service (“product”) accordingly. The one major product change that I have yet to comment on here is the Save button in Sacca’s list a few paragraphs above here. Sacca sees Save as a means to build a commerce business, when Twitter would add a Buy button and thus enable users to buy and sell goods and services on the site. Save, in this context, means giving users the opportunity to save a tweet or an offer till later so that they can think about it and make a decision in “a matter of minutes/hours/days, not just seconds.”

By adding commerce, something that has been discussed for years within Twitter but not yet implemented, the company could go beyond its current reliance on advertising revenues, and instead charge transaction fees – in addition to giving the ads a concrete ROI, which would encourage advertisers to use the site more frequently and persistently. Anything that provides a more diversified business model, perhaps emulating LinkedIn’s ad-based and freemium services model rather than Yahoo!’s pure ad-based revenue model, would give Twitter a more sustainable and resilient base from which to develop a profitable business.

Returning to the theme of adopting a strategic focus – remember, strategy means above all making choices about what not to do as well as what to do -, assuming that Twitter’s leadership decides to become the world’s go-to gathering place for live events, Sacca prescribes five critical success factors to achieve this feat:

1. A separate tab in Twitter (or app) for Twitter Live.

2. Thoughtfully curated follows to build the initial stream.

3. Human editors.

4. Scheduling and promotion to build traffic.

5. No permanent commitment nor login would be required.

Sacca explains that Live Twitter should have its own tab “so we can concentrate on the live experience free of distraction. Once we click on that tab, we should see a stream of Tweets prioritized not just for immediacy but for relevance as well.”

He advocates using actors in TV shows, athletes in sports events, performers in concerts, reporters, commentators, notable fans, comedians and others to live-Tweet along with the event.unts that are directly relevant. Human editors would review streams of Tweets in real-time and edit them for relevancy, importance, humor, and value. Tweets that don’t pass muster would be cut from the stream. In parallel, “editors will watch all of Twitter for event-themed Tweets that are earning a lot of hearts and retweets. Anything particularly resonant will be inserted quickly and artfully into the event stream.”

Sacca continues: “To ensure the broadest participation in live events, Twitter will promote them in the main stream and encourage us to subscribe to our favorites, essentially building a calendar of anticipation. The rollout will start with the biggest award shows, the most pivotal sporting events, key political events, and a couple of influencer-heavy shows like Game of Thrones and Shark Tank. This programming will ensure that the most interested audiences won’t ever miss a live feed and it will bring us all back to the service again and again as the range of covered events expands. Done right, live Twitter will have sports scores and TV listings front and center and will be the place everyone visits first to see how the game is going or when the show starts.”

The final key element about Live Twitter would be no need to log in, in order to make it easy for users to enter and engage. One additional asset that Twitter recently acquired and has yet to have had an opportunity to fully leverage is the live-streaming app Periscope, which Sacca considers to be a new crown jewel given the captivating nature of live video.

I’ve borrowed liberally from Chris Sacca’s detailed blog because I believe he has done some hard and invaluable thinking that will benefit Twitter, its investors, and the large number of normal pragmatic users who will value a compelling and easy to use service like the one he describes. To be fair to the company, it seems that the management team has considered many of these ideas in the past. But for one reason or another – among which are the challenge of dealing with the vast quantity of ideas and opportunities that come hurtling thick and fast at any hot new property and its management team – it can, to put it mildly, be quite challenging for a young company to press all the right buttons and execute to perfection.

Let’s not forget how Twitter was conceived way back in 2006. Two statements, one by Dorsey, and one by co-founder Evan Williams (now founder-CEO of blog publishing site Medium), illustrate its unpretentious and humble beginnings: “…we came across the word ‘twitter’, and it was just perfect. The definition was ‘a short burst of inconsequential information,’ and ‘chirps from birds’. And that’s exactly what the product was.” Now for the insight provided by Williams into the ambiguity that defined Twitter’s early period, in a 2013 interview: “With Twitter, it wasn’t clear what it was. They called it a social network, they called it microblogging, but it was hard to define, because it didn’t replace anything. There was this path of discovery with something like that, where over time you figure out what it is. Twitter actually changed from what we thought it was in the beginning, which we described as status updates and a social utility. It is that, in part, but the insight we eventually came to was Twitter was really more of an information network than it is a social network.”

Despite all the investor angst about where the company is today, let’s summarize some of its key assets: 1) a viral application with 500 million users (300 million or so of whom are active on a monthly basis), 2) $1.5bn in annual revenues growing at 74% y/y, and 3) a current market valuation of approximately $23bn. Nothing to sneeze at. Going forward, if the company’s leaders can just get the critical gears of user acquisition, engagement, monetization, and enlistment (thus leveraging the Twitter service’s powerful network effects) to mesh in the ways suggested here and elsewhere, the company should do extremely well. It’s very difficult to see another very similar type of social networking company substituting Twitter unless they really screw up.

It’s just a matter of setting and managing expectations. Easy as pie.