For much of the past year, Twitter shares have been a disappointment, trading well below its IPO price of $26 as investors have fretted about the company's loss of focus. With adjusted EBITDA of $557 million for 2015 on $2.2 billion in revenue, I believe such negative investor sentiment is unwarranted.
The company may be in the red in accounting terms, but this is in no small part due to the huge non-cash (but share diluting) expenses in the form of stock-based compensation which Twitter generously gives out to attract top talent in its effort to re-engineer itself and find a way to make money. On June 7, for example, Twitter announced that it was looking for another head of product - the fifth person for this position in three years. Its stock price suffers because Twitter is judged against criteria that it is not designed to fulfill.
Monthly active users and (the promise) of advertising revenue are two metrics which cause Twitter shares to rise and fall, but the company struggles to achieve growth in either of them. Twitter is neither an intuitive nor an easy-to-use tool, but it has achieved popularity among educated, affluent users with an agenda -- people with some form of a media exposure and a desire to be heard. In the words of Sir Martin Sorrell, WPP Chief Executive, Twitter is “not an advertising medium but a PR one.” With 320 million monthly active users reported at the end of 2015, maybe Twitter has reached its inflection point in terms of user growth. What if all those educated, affluent users are already on Twitter?
What if Twitter could become a public good -- a medium of communication that is funded by its user base? It could work just fine financially, in fact.
Twitter's market cap is around $12 billion at the time of writing. Let’s assume that only 50% of Twitter's users commit to pay an annual membership of $20. Let’s also assume that we can add back $121.8 million in relation to the company's traffic acquisition costs, which represent Twitter's own advertising to attract advertising. In Twitter's own words, these efforts are largely unprofitable, since "We might not generate advertising revenue in excess of traffic acquisition costs incurred." After these adjustments, Twitter would earn some $592 million of net profit. Assuming that the company's discount factor (weighted average cost of capital) is around 4.996% (see note at bottom), the company's value should be around $11.6 billion to its (now) dividend-earning shareholders. The stock may well remain prone to investor sentiment and market play, but the underlying factors would change. Twitter would release itself from the promise to its investors that it become an advertising machine (like Facebook), which currently weighs so heavily on its stock. It would become a profitable enterprise and a highly sought-after PR tool with a quite interesting added value.
The company's paying users would be allowed to tweet, while the rest of us would have access to Twitter as a source of news that has been created by someone we want to listen to.
This is not a new idea. Marketer Seth Godin, for example, has proposed that Twitter should charge its users for features which only power users are likely to want, such as advanced analytics, verification and other. In 2012, Dalson Caldwell tried to set up an ad-free social network, App.net, which was to be funded by its users.
One of Twitter's main investors, Union Square Ventures managing partner Fred Wilson argues that the best route to success is scale, which a service like Twitter can only achieve by being free.
None of them, however, have fully considered the idea that by making Twitter a paid PR tool the platform could become a human-powered search engine and a good alternative to Google. Facebook is beginning to challenge Google's hegemony in web search thanks to the shift to mobile. Twitter could become just as dangerous a contender to Google by being a mobile-friendly source of news based on ideas and opinions of people that we ourselves choose to be authorities on particular topics. Google will, of course, remain No.1 for factual searching; the "how-to" and "what-is" questions. Facebook and Twitter are, however, increasingly becoming the starting point for the contextual searching.
Why would the tweeting users pay, you ask? Twitter is faster than any other media to generate a thought, opinion and a first statement on something that just happened. Twitter is a place to be when there is a live event or some major happening: be it a sport match or a country's revolution. Precisely in these moments, people who have a public profile and an agenda want to be heard. Indeed this (rather than being some sort of Facebook-like advertising machine) seems to be Twitter's unique selling proposition.
The company should think in terms of events, not in terms of products and advertising dollars.
In a certain sense, Twitter management seems to understands this. Since Twitter struck a deal in April to make its first foray into live-streaming, with NFL Thursday night games, the company has been working frantically to build up partnerships with major broadcasters to stream other live sport events, as well as business and political shows. Most recently, Twitter and Bloomberg TV have signed a deal to live-stream several Bloomberg TV programs on Twitter, including Bloomberg West, What’d You Miss? and With All Due Respect.
For now, however, Twitter management is not prepared to make any dramatic detours from its established (even if only moderately successful) strategy of fighting with Facebook for ad dollars. Neither selling in-stream ads nor seeking some form of revenue- (or profit-) sharing arrangement with the big broadcasters is very original. It is also unlikely to be very successful.
People will certainly come to Twitter to watch the premium live content, for which they would otherwise have to pay. But in the case of the NFL deal, for example, Twitter has to re-run the CBS and NBS national advertisements and is therefore only allowed to sell ads against the inventory reserved for local broadcasters. By doing so, Twitter is entering a declining market. According to Statista, local TV ad spending is projected to decrease from $61.17 billion in 2015 to $57.22 billion in 2020. I dare to add that Twitter may not be able to buy premium content for streaming at a discount in future (whereas Twitter reportedly paid around $10 million for the rights to stream 10 of the NFL's Thursday Night Football games, CBS and NBC ponied up a combined $450 million for broadcast rights).
Twitter has been, is and should remain a "second screen" -- a medium for interesting and insightful remarks made by the people that we respect. Its user base is much wider, as it extends to people who read, watch and enjoy Twitter through other outlets, in the form of tweets exported to Facebook, Google and, in fact, the rest of the Internet universe.
Twitter as a public good may seem like a wild theory, but it is also a compelling solution to the company's pointless struggle to re-engineer its curated newsfeed of comments by making it commercial. This experimentation with its tweets is dangerous, in fact, because it fiddles with the reason we all like Twitter.
Note: Using standard Capital Asset Pricing Model, Twitter's Weighted Average Cost of Capital has been calculated on the assumption that the company's Beta is on par with that of Facebook and that the company's debt costs are comparable to 10 year corporate bond yield of an S&P AA-rated company.
