Over the past few years, there has been well-founded speculation on whether Twitter will go public, whether it will be acquired, or indeed, whether it can survive financially at all despite being a popular service.
We jotted down some thoughts about Twitter’s suitability for monetization via ads, way back in April 2010.
Today, Sarah Lacy has an excellent piece about the tug-of-war in the world of analyst and VC opinion about Twitter. Broadly speaking, we have — “in this corner!” — the view that Twitter is actually better suited to thrive long term than Facebook, even, because it will do well in the continuing transition to mobile, and due to the relevance and power of the small ads that may appear in user streams. In the other corner: the powerful argument that Twitter’s rumored financials are abysmal. We have yet to see significant revenues out of this juggernaut and some folks can’t remember a company this big that had this many lives without ever working out its monetization model. (Even there, it’s merely an argument for a “down round” or an acquisition rather than going public.)
I gave this some thought and I have to say I can’t imagine Twitter, after another year or two, winding up on the defensive. Somehow, their revenues are going to hockey-stick up and they may do so to the point of even a generous IPO valuation as opposed to an acquisition or another (down) round of funding.
Simple reasoning, really: “tweet” is a verb. Like, the kind of verb that’s in the dictionary, despite the activity being the domain of a private company. It’s an activity that’s universally understood, accepted, and practiced. Other “verbs” like “google” have done OK. And precious few tech companies or media companies have ever become this universal. Even LinkedIn (“you can Link In to me”… halfway towards “verb” status) is doing pretty well, and “to link into” is a relatively obscure, career-oriented activity.
Certainly, without a big upswing in revenues, you’re not going to see a lucrative Twitter IPO. Without being able to release financial statements showing significant profits for at least one full year, via non-fishy, not-like-Groupon accounting, you won’t see much enthusiasm out of investors and investment bankers. But with all the tweeting out there, the company still has a shot at achieving lofty financial goals. The combination of targeting and reach for advertising is there, so getting more advertisers to start paying for this is a (simple, or not-so-simple if you fail at it) matter of execution.
Financially speaking, Twitter to date might have been suffering from the twin drawbacks of slow advertiser uptake and an inefficient pricing model.
It’s said that Twitter uses an auction model for much of its advertising. The question is, what proportion of their potential advertiser base are aware of this? How many are truly excited about it? Well, the excitement may be about to begin. Reportedly, Twitter is dropping its floor price for an “engagement” to one penny, down from 50 cents. That’s huge.
Minimum monthly spend floors are a momentum-killer, too. Even large companies like to start out with tiny test budgets nowadays, given the self-serve revolution created by Google. Or they assign their agency to do a little reconnaissance, even (say) $2,000 for a two-week trial in a specific niche. $2,000 tests can turn into $1,000,000+ budgets amazingly fast… though the process may take years. Given this potential, Twitter’s current reported revenues of $350 million equates (in terms of $1 million spenders as “good” ad clients) having 350 mid-sized ad accounts. Quite simply, for this stage of the game, that’s crap.
At our small agency, we have some small business clients spending $4 million a year on Google AdWords (you heard right, you don’t have to be a household name to spend that much profitably on advertising). The total Google ad budget of a typical small agency with 40 clients (a few of them large) would be, like, 15% of Twitter’s entire revenue base. Yikes.
Remember, Google stalled initially when it debuted with an inflexible CPM-based model for search ads (AdWords 1.0) in 2001. Moving to an auction that allows advertisers to get in at a low cost, then get addicted — one that allows millions of keyword micromarkets to set their own price — was pivotal in creating a full market for the targeting Google Search offers advertisers. Twitter must iterate towards a clear, powerful advertising model and not just leave multiple options on the table in the hopes that advertisers will figure them out.