Category Archives: Twitter

Broadcast, Meerkat, Periscope, Quick Thoughts, Twitter, Video

Quick Thoughts: Periscope and Meerkat

I’ve been meaning to write something about Meerkat for a while, but haven’t got around to it. Now that competing product Periscope has launched, I feel like it’s finally time. A brief primer for those to whom these names mean nothing: Meerkat launched several weeks ago, and is a barebones personal video broadcasting app for iOS, and Periscope is a very similar but more polished app which Twitter acquired a while back and launched yesterday.

Watch me talk about this stuff

I did a quick interview with Reuters TV yesterday on the topic of these two apps, and you can see that here.

Also yesterday, by way of testing Periscope, I did a quick Periscope session where I talked about the two, which I subsequently uploaded to YouTube:

Meerkat’s faster start helped rather than hurt Periscope

Given that people knew about Periscope even before it launched, there has always been discussion about how the two would compete and whether Meerkat would have such a lead by the time it launched that Periscope would be dead in the water. I was always skeptical about that – being first doesn’t always (not even mostly) lead to winning in these battles. and first-day results from Periscope seemed to bear that out. Dan Frommer of Quartz posted this chart this morning:

This shows the number of Meerkat and Periscope-related tweets over the last few weeks. As you can see, it took Meerkat most of that time to reach the 30k per day mark, but Periscope almost hit that number in its first day. What I’ve wondered about, and what now seems to be happening, is that Meerkat actually did Twitter and Periscope a huge favor by teaching people about the concept and letting them experiment with it, such that by the time Periscope came along people immediately understood the value proposition.

I prefer Periscope so far

On top of that, as I alluded to in my first paragraph and in the video above, I find Periscope to be much more polished and easier to use than Meerkat. Meerkat seems very much like a cheap Android app, somewhat ugly in its interface and hard to navigate around. Periscope seems much more better thought out, nicely designed and professional, much more at home on iOS (the only platform both apps are on, for now). And of course then there’s the fact that Meerkat got cut off from Twitter’s social graph shortly after launch, which will make it harder for Meerkat to sign up new users, because the process of finding followers will be much harder. For power Twitter users, custom curation of following and follower lists has always been important, but for mainstream users easy setup is key, and Meerkat has likely lost some of that.

Periscope isn’t perfect – the fact that I had to post the video of my session from my camera roll to YouTube rather than being able to share it directly from the app is something I hope they’ll fix in time. Both apps force you to use a portrait orientation, which is fine for selfie-style videos but poorly suited to either group shots or shooting a scene (and, as this BBC citizen journalist expert mentioned, poor for incorporating into professional news broadcasts too). But I like the fact that it keeps sessions in the app for viewing after they’ve ended, unlike Meerkat, although finding those needs to get easier.

It’s still early days here, but I think Periscope has a fantastic chance to dominate, given its polish, its ownership, and the fact that Meerkat laid the groundwork for it. Meerkat isn’t necessarily doomed, but there’s little in my mind to recommend it over Periscope, and I think the latter will pretty quickly become dominant.

Why did these products break through now?

The other question worth thinking about is why these two apps suddenly appeared at this time, and what’s made them so successful when other previous efforts have failed. I think it comes down to two main things, and a third factor which has helped too:

  • Mobile-first products – these products don’t really exist in any meaningful sense on the web or desktop – they’re mobile-first, and only enable streaming from iPhones. Meerkat allows sessions to be viewed from the web, while Periscope doesn’t, but they’re clearly designed for both broadcasting and viewing on the device you have with you all the time. This also allows them to tap into notifications, which are huge for real-time services.
  • Twitter as megaphone – speaking of real-time, Twitter has become the real-time platform, with many people keeping it open and watching the tweets roll in more or less as they happen. It’s already been the real-time platform for covering current events, but that has largely meant text and the occasional picture. Video adds a whole new dimension to this real-time element, and Twitter becomes the megaphone through which these broadcasts from apps get shared with the world. Tapping into existing Twitter audiences and leveraging the retweet as a way to seamlessly rebroadcast popular streams is a huge part of why these services are successful. It’s also the biggest reason Twitter’s acquisition of Periscope makes sense – it adds another vital dimension to Twitter’s “media” strategy.
  • Tech reporters getting on board – this was arguably less a catalyst than an accelerant, but quite a few tech reporters quickly jumped on board with Meerkat, tried it out, broadcast themselves and got the product through its awkward “here’s me eating my lunch” phase that all sharing platforms seem to have to go through. Though that phase was repeated as Periscope launched as regular people tried it out, that early reporter experimentation meant we quickly learned what worked and what didn’t, and this early experimentation by those with significant followings helped the product to get far more attention than it would have got through more of a grassroots adoption by regular people.

Breaking into the mainstream is the next challenge

The challenge will be transitioning from this early success among those who have significant followings on Twitter to regular people. Are ordinary people whose Twitter audiences consist mostly of people they know in real life going to use either of these two services? Or will their broadcasts only be meaningful when they happen to find themselves in the right place at the right time, as with yesterday’s building collapse and fire in Manhattan? I suspect that over time we’ll see some new Meerkat and Periscope celebrities emerge, just as we’ve seen Instagram and Vine give rise to new personalities with significant followings seemingly out of nowhere. But I think that, most of the users will be viewing, not streaming, and that actually fits great with Twitter’s new direction.

Earnings, Q4 2014, Twitter

Thoughts on Twitter’s Q4 2014 earnings

I’ve just sent my Twitter deck to subscribers (screenshot at the bottom of this post). This analysis picks a few of the key charts from that deck. As always, you may want to read my previous posts on Twitter, as a lot of the themes here are ones I’ve touched on before.

As I’ve talked about before in relation to both Twitter and Facebook, there are three main growth drivers for these companies: user growth, increased engagement, and better monetization of that engagement. Twitter’s problem continues to be that only one of these three is going in the right direction:

Twitter growth driversUser growth has been slowing significantly over the past two years, and especially over the last few quarters. This quarter the company added just 4 million MAUs (or 8 if you’re charitable and give them back the 4 million additional MAUs they claim they lost to an iOS 8 bug). Even at 8 million, that’s by far the slowest growth in several years. Engagement, meanwhile, as measured by timeline views per MAU, has also been stagnant or falling for several quarters. The only metric moving in the right direction is monetization, and boy is it moving in the right direction! Here’s that chart broken out by itself, with the numbers:

Twitter monetizationAs you can see, the number has risen from 60 cents to almost $2.40 in the last three years, and it’s rising rapidly. In the US, this number is now almost $6 on a quarterly basis. The challenge with this number, though is that it’s unique to Twitter and therefore not comparable to anyone else’s metrics. However, since we know total ad revenue and we also know the number of MAUs, we can do a rough calculation for ad revenue per MAU for Twitter, and then compare it with the equivalent figure for Facebook:Facebook and Twitter ARPUWhat you can see is that the two lines are following a very similar trajectory, with Facebook quite a bit ahead of Twitter. I think what investors were so heartened about today was that Twitter demonstrated this ability to grow revenues significantly without growing users much at all, which suggests there’s still significant headroom on this ARPU measure. That means that, even if the other two growth drivers are underperforming, Twitter can still get good growth through the one lever that’s performing well. If it can get MAU growth going again as it promised to on today’s call, that will simply have a multiplier effect on that ARPU number, which will be so much the better.

The problem is, of course, that there is a ceiling here at some point – we just don’t know how high it is yet. Google generates between $30 and $50 per user annually in ad revenue from its own properties, so that could be a ceiling. But that’s based largely on one very effective form of advertising: search. There’s no guarantee that Twitter will ever be able to achieve that level of spend. Which brings us back to the question of the logged-out user. What was heartening both on today’s earnings call and in the last couple of weeks of news is that Twitter is finally really making some progress in telling the story of how it will grow this number. Though it refused to spell out the details of the Google agreement, it’s clear that Twitter hopes to drive significantly more traffic to Twitter.com in this way, for example. And then there’s the logged-out homepage it demoed this past week.

Despite all this, my two big questions for Twitter remain the same:

  • How will it monetize all this activity from logged-out users? It’s said very little about this, even on today’s call, and all this usage has to be monetized for it ultimately to do Twitter any good.
  • What are the new metrics by which we should measure Twitter’s progress on its new goals? It hasn’t established a consistent metric for measuring logged-out user activity (the 500m visitor number mentioned on today’s call was unchanged from three months ago). It’s abandoning its timeline views metric for engagement but won’t give us a different one. And ad revenue per 1000 timeline views only measures monetization of logged-in users, so how should we measure progress on monetizing the logged-out user? Twitter continues to try to steer everyone away from the metrics it does provide, but won’t supply metrics that support the new story it’s trying to tell.

Here’s a screenshot of the Twitter deck that went to subscribers earlier this evening:

Twitter deck screenshot

Advertising, Twitter

Twitter’s new ad product won’t help

I’m making this part of by earnings series, even though Twitter hasn’t actually reported yet, because it hits one of the key points I expect to come up in Twitter’s earnings this week and gets at one of the fundamental concerns I have about Twitter’s growth going forward.

Today, Twitter announced that it would start offering advertisers the ability to serve their promoted tweets off the Twitter platform itself. This is an important step for Twitter because its key growth challenge has been that the number of monthly active users on the platform itself isn’t growing rapidly, and it sees its biggest opportunity in serving what it terms “logged out users,” or those who see tweets without being explicitly logged in to Twitter or one of its apps. This is something I’ve talked about quite a bit here over the last few months, notably here and here. The challenge as I’ve seen it has been that (a) Twitter hadn’t articulated how exactly it would monetize that usage and (b) Twitter can’t use any of the data it has about its users in these third-party contexts, so the advertising would be only minimally targeted.

Today’s announcement gets at the first of these problems, in that it’s the first meaningful articulation of how Twitter can play outside of the core Twitter experience. But it doesn’t solve the second problem. In fact, the way Twitter has chosen to implement the promoted tweet product is a great illustration of how steep a hill Twitter has to climb here. I’m reposting below a chart I’ve used several times here in relation to the effectiveness of advertising:

Advertising relevance vs timelinessWhat this chart attempts to demonstrate is that there are two characteristics to effective advertising: relevance and timeliness. What makes search advertising so effective is that it hits both of these – i.e. an ad next to search results is relevant now to that user. Most other forms of advertising can at best produce relevance without timeliness, and in some cases neither. The problem with Twitter’s new ad product is that it looks an awful lot like a classic display ad, with little or no connection to the context and with no use of Twitter’s demographic data about the user. It’s likely that these ads will use some targeting from the property on which they appear, assuming those properties have that information, but Twitter itself brings nothing to the table here but the format.

Twitter makes the argument with regard to Flipboard specifically that the app already shows normal (non-promoted) tweets, so these promoted tweets won’t seem too out of place, but it’s a far cry from seeing a promoted tweet in the midst of a stream of regular tweets in the Twitter app or on Twitter.com. This is at best very loosely native advertising. And very few other properties show enough tweets in native format that these ads won’t look just like another sort of banner ad.

It seems investors don’t mind, at least in the early reactions: the stock is up 6% today. But to my mind nothing about today’s announcement really gets at solving the fundamental problems solving Twitter. We’ll see how this is presented on the earnings call this week, but given this and recent comments from Twitter founders Ev Williams and Jack Dorsey (ironically, in a tweet storm I can’t easily link to because he didn’t post it right), I’m wondering whether this is a pre-emptive strike ahead of another set of poor user growth numbers. Both Williams and Dorsey seem to be saying that we need to be looking beyond Twitter’s actual numbers at the societal impact it has, which seems like a strange thing to say if the numbers are actually going to be any good.

Apple, Instagram, Quick Thoughts, Twitter

More quick thoughts on Twitter and Instagram (and Apple)

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I posted some initial quick thoughts on Instagram hitting 300 million users yesterday, but there were two articles today that prompted some more quick thoughts on Twitter and some parallels (and important differences) when compared with Apple.

The first article was this one by Walt Mossberg on Apple, and it included this paragraph:

In my conversations with Apple executives, they vehemently insist that market share isn’t — and won’t be — their goal, and even go so far as to say that most public market-share numbers are somehow off the mark, though they decline to explain how.

There are two parts to this: one, Apple doesn’t think market share is the right goal for them to chase, and two, it doesn’t think market observers measure it right anyway.

Now, the second article, which is an interview with Ev Williams, one of the founders of Twitter, commenting rather forcefully on the news that Instagram has more users than Twitter:

Why is users the only thing we talk about? The crazy thing: Facebook has done an amazing job of establishing that as the metric for Wall Street. No one ever talks about, ‘What is a [monthly active user]?’ I believe it’s the case that if you use Facebook Connect—if you use an app that you logged into with Facebook Connect—you’re considered a Facebook user whether or not you ever launched the Facebook app or went to Facebook.com. So what does that mean? It’s become so abstract to be meaningless. Something you did caused some data in their servers to be recorded for the month. So I think we’re on the wrong path.

If you think about the impact Twitter has on the world versus Instagram, it’s pretty significant. It’s at least apples to oranges. Twitter is what we wanted it to be. It’s this realtime information network where everything in the world that happens on Twitter—important stuff breaks on Twitter and world leaders have conversations on Twitter. If that’s happening, I frankly don’t give a shit if Instagram has more people looking at pretty pictures.

Do you see the parallels here? First, a rejection of the metric of choice for comparisons between the company and its competitors, and second, a questioning of the accuracy of those metrics.

I think it’s fair for a company to suggest alternative metrics it wants to be measured by, especially if those relate better to (a) its own strategy and (b) its ability to generate growth and profits for its shareholders. That’s certainly the case for Apple, which generates several times more profits than any other player in the smartphone market despite its minority share, and also captures a great deal of the revenue. But it’s not the case for Twitter, which despite all its attempts over the last few months to point Wall Street at metrics other than MAUs, has failed to either provide alternative metrics in a reliable fashion or demonstrate that those are better indicators of its future profits.

For the record, I’ve no idea whether Williams’ assertion that Facebook counts Facebook Connect usage is accurate, but when Facebook’s users are multiple times Twitter’s users, I’m not sure that matters a great deal. Apple likely objects to market share numbers on the basis that they tend to measure shipments, and shipments are neither the same as sales to end users, nor is shipment market share the same as installed base market share,  and nor do they reflect the way in which those devices are actually used. But in Apple’s case, market share actually doesn’t matter to its business model or its ability to generate outsize revenues and margins from what share it does capture. Twitter’s problem is precisely that its MAUs are exactly the source of its current revenue streams, and it hasn’t yet demonstrated how it will monetize the broader bases of users it wants Wall Street to start thinking about. It’s all very well to jump on your high horse about the metrics you want others to use, but you have to back up your assertion in order to avoid looking bitter.

Facebook, Instagram, Quick Thoughts, Twitter

Quick thoughts: Instagram at 300 million

Facebook today announced that Instagram now has 300 million monthly active users. This has invited inevitable (unfavorable) comparisons to Twitter, which had 284 million MAUs at the end of last quarter. I wanted to talk about a couple of things in relation to those comparisons.

Facebook and Instagram

Firstly, I wrote a post a year ago which I titled “Instagram’s advertising problem” which was really about the challenge of serving relevant and timely ads, and the degree to which various services struggle to hit that sweet spot. Instagram’s core challenge as a standalone business was that it knew next to nothing about its users, especially before brands started being a big presence on the service. What’s becoming increasingly clear since then is that one of the biggest forms of synergy between Facebook and Instagram is the ability to use the data Facebook has on users to target Instagram ads. See this quote from the Wall Street Journal’s interview with Instagram CEO Kevin Systrom today:

We use Facebook to serve the ads to Instagram. Basically, we’re making it very clear that data is shared between the services under Facebook’s roof. Facebook helps us provide relevant ads to the users. You don’t want a 50-year-old male who’s interested in autos seeing an ad for a beauty-care product targeted at teens. If you ask users what they hate most, it’s not having relevant ads being served to them.

It’s also very clear that information doesn’t flow back the other way:

WSJ: Does my activity on Instagram affect the ads I see on Facebook?

Systrom: I don’t think we have plans for that right now.

That’s likely because there’s almost no useful information that could be sent back the other way, because Instagram activity provides almost no insight into user demographics or interests (except to the extent that users have explicitly followed brands). All this also raises an interesting question: to what extent do the two user bases overlap? Are the vast majority of Instagram users also Facebook users, who’ve built up enough of a profile there to provide targeted advertising on Instagram? For now, I think the answer is likely yes: many of the teenagers now swarming to Instagram likely had Facebook accounts already (even if they’re not using them as often), but what if future teenagers (or other Instagram adopters) skip the Facebook stage entirely, or never bother populating their Facebook profiles with enough material to effectively target ads?

Twitter and Instagram

So, on to that unfavorable comparison to Twitter. I actually want to talk about two things here: one is why Instagram is growing so much faster, and the other is addressing the idea that Twitter should have bought Instagram instead.

First, why is Instagram growing so much faster? I think the answer is that it basically mirror the network effects of Facebook itself, in that it’s built around a community of friends and family. It benefits hugely from the fact that once a critical mass of your friends joins, it becomes inevitable that you will join too, to avoid missing out. This is especially the case among what is (likely) one of Instagram’s strongest-growing demographics: teenagers. Twitter entirely misses out on this phenomenon, by being a platform that’s largely about connecting with people, brands, news sources and so on that you have no existing personal connection to. It also suffers from the fact that so much of its content is easily available to its famous “logged-out users”. Because it’s inherently a public platform, there’s no great benefit to being logged in (or even registered) for much of the content shared there.

As I’ve written about previously in various posts on Twitter (e.g. here, here and here – full archive here), Twitter’s focus seems to be on talking up the size of its existing audience, partly by expanding the definition of what that includes, but what it really needs to do is find ways to keep growing the core base. And it’ll do that only if it (a) lowers the barriers to entry (as I described in this piece), and (b) taps into those viral and network effects that true social networks enjoy.

Secondly, the issue of whether Twitter should have bought Instagram instead. Arguably, Instagram might have helped Twitter solve the very problem I’ve just been talking about: as a true social network, Instagram enjoys network effects Twitter doesn’t, and it could have both plugged a gap and served as a focal point for Twitter’s messaging and other efforts. Instead, it’s now trying to build those things around the core Twitter experience instead, and that’s going to be tough. So there are some good arguments for such a combination. But the biggest counter-argument goes back to the point I started with, which is that without Facebook, Instagram really had no way to monetize effectively, because it had no way to display timely, relevant ads.

With Facebook’s help, it now scores very highly on the relevancy side, because it can leverage Facebook’s data on its users where the two user bases overlap. Twitter, on the other hand, suffers from a very similar problem to Instagram itself: it knows something about its registered and logged-in users, though arguably not that much, but knows almost nothing on its own about the logged-out users. Instagram wouldn’t have helped with that, and without its own data on those users, and likely relatively small overlap between the two bases, it would have found it very difficult to effectively monetize Instagram. For all these reasons, though there is some logic behind a combination of Twitter and Instagram, it would have been enormously tough to justify financially for Twitter. I think it’s a much better fit for Facebook, but unfortunately that leaves Twitter struggling with the same old problems.

Advertising, Earnings, Q3 2014, Twitter

Thoughts on Twitter earnings for Q3 2014

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Note to new readers: this is part of a series on major tech companies’ Q3 2014 earnings. I do similar analysis each quarter for certain companies. Previous pieces on Twitter may be found here. 

Last quarter I talked a little about the challenge of Twitter’s user growth, and what I uncovered as its renewed emphasis on logged-out users (a theme Dick Costolo had first talked about three years ago and to which he has now returned). I and others have talked about Twitter’s different user groups and on yesterday’s earnings call Costolo explicitly spoke about three concentric circles (he actually said eccentric, but I’m fairly certain he meant concentric) representing Twitter’s users. That’s something I’ll return to below. There will be three major points to this analysis:

  • Twitter has given us metrics to measure its growth and potential, but it keeps backing away from or hedging on these without providing better ones
  • Twitter’s core user growth has slowed in recent quarters, and though it wants us to think about a broader group of users, this broader group is both ill-defined and much harder to monetize
  • Twitter is very successfully managing the same transition to mobile advertising as Facebook, but it’s not yet clear how sustainable this business will be for either company.

Twitter’s metrics aren’t telling a good story

The three main metrics Twitter has established for tracking its progress are:

  • User growth: as measured by growth in monthly active users (MAUs)
  • Engagement: as measured by timeline views per MAU
  • Monetization: as measured by ad revenue per thousand timeline views.

These three may be seen as levers, or multipliers, for growth. To the extent that all three are improving, they should drive faster and faster growth for the company, as each change in the first is magnified or multiplied by growth in the second, which in turn is magnified or multiplied by the third. The challenge is that of these three metrics, only one is heading in the right direction, and that’s ad revenue per thousand timeline views:

Ad revenue per 1000 timeline views

As you can see, international monetization continues to lag significantly behind US monetization, which is a function both of Twitter’s underdeveloped overseas sales channels for ads and the lower ad spend in every other market around the world. But both sets of numbers are moving in the right direction, and in the case of US revenues very rapidly so. I’ll come back to the drivers for this growth later, but this is the single best sign about Twitter’s business: it’s able to monetize what usage there is better and better, and this in turn has driven strong overall growth in ad revenues (in thousands of dollars):

Twitter ad revenue

The challenge is that this growth is strongly tied to direct sales, which is an expensive proposition in its own right. Even as some of Twitter’s other cost lines have shrunk as a percentage of revenue, sales and marketing costs are rising over time: Continue reading →

Growth, Twitter

Twitter’s channel model is broken

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Zach Seward has an interesting piece on Quartz today about how Twitter is like TV. Quoting from that piece:

What makes the service so compelling—and also, yes, maddening—is how linear it is. Twitter marches in a straight line with time, like a novel or cassette tape or, most similar of all, television. You can wade in and out of the stream as you might tune in and out of a TV channel. It’s always on and crackling with energy whether you are watching or not.

At a basic level, I agree that Twitter is like TV, but it’s not really like today’s TV at all. It’s like TV from forty years ago, but with a hundred million times as many channels. Think about all the advancements in TV since that time:

  • The rise of cable television, providing vastly more channels, many of them aligned to specific interests (sports, movies, home improvement, history etc.), and bundled into packages
  • VCRs, and then DVRs, allowing you to capture slices of linear television for replay later on and enabling the pausing, fast-forwarding and rewinding of content
  • Video on Demand, allowing you to select specific content aired earlier to watch after the fact.

Not only this, but Twitter is effectively an a la carte TV service with hundreds of millions of channels on offer. The burden is on the user to choose individual accounts to follow, which can be an overwhelming experience.

Individual accounts as channels is a broken model

For a segment of Twitter users (myself among them), which I might describe as power users, the individual account model works perfectly. They have enough incentive, for personal or work reasons, to go through the effort of carefully selecting and curating a specific list of accounts to follow, and this relationship is sacrosanct. These are the very users who are now blowing up on Twitter about the change the service introduced this week. However, these users are a minority of Twitter’s current user base, and if the company is to grow from 271 million MAUs to Facebook or Google scale at over a billion, the new users it needs to gain look a lot more like the rest of Twitter’s current user base than its power users.

For those other users, though, the individual accounts as channel model is fundamentally broken. Most of them simply won’t go through the effort of selecting individual accounts to follow to the extent that they’ll end up having a satisfying experience. Twitter has now overlaid an interest-based filter on the onboarding experience, but it’s merely a step along the way to selecting individual accounts to follow, and the filters are too broad. What Twitter really needs to do is create channels at a higher level, and abstract them from individual user accounts.

For example, I might say that I’m interested in baseball at a high level. Twitter would then scan all baseball-related tweets at any given moment for all those that are most newsworthy, and curate these into a baseball-related channel which I can follow. Alternatively, I might go a level deeper and say I’m interested in the Yankees specifically, and Twitter would then curate tweets specifically related to that team. The other advantage with this model is that it doesn’t necessarily have to be based on following at all: I could simply dip into and out of topics as I’m interested in them. If I’m at work, I could focus on the topics that are relevant to that, and when I get home I could switch to my Yankees, current affairs or Modern Family channel. This would also avoid the frequent incongruity of seeing a tweet about a plane crash next to one about a celebrity breakup or iPhone rumors.

To go back to Seward’s TV analogy, live TV only works because you just have to turn on the TV and something is there. If you don’t like it, you change the channel. But on Twitter today, there’s literally nothing on until you explicitly tell the service what you’re interested in, and if you don’t like it, it’s a lot of work to change channels, because you effectively have to create each channel yourself in a very manual and labor-intensive fashion. It works fine once you’ve created a channel you’re happy with, but I suspect many users never reach this point and thus don’t use the service often or abandon it altogether.

Favorited tweets in the timeline is a bandaid

Twitter’s move to include non-followed but favorited tweets in timelines is a bandaid that doesn’t do anything to solve the fundamental problem of Twitter for the vast majority of users. But Twitter has the potential to change the model in a way that won’t break it for power users, while creating a new and different experience both for new users and existing users. This week’s change makes me worry even more about the problem I posited a couple of weeks ago ahead of Twitter’s earnings: that in the search for growth, Twitter will end up breaking the core experience for the very users to drive much of its value. It doesn’t have to be this way.

Advertising, Earnings, Q2 2014, Twitter

Thoughts on Twitter earnings for Q2 2014

Note: This is part of a series on major tech companies’ Q2 2014 earnings (e.g. Google here, Microsoft here, Apple here and here, Netflix here, Facebook here and Amazon here). My post about Twitter’s earnings last quarter is here.

Non-logged-in users and “Twitter Everywhere”

I posted yesterday evening about the growth challenge that Twitter faces (and which it shares with Foursquare). Given the focus during today’s earnings call on non-logged-in users, I’d say this is very much at the top of Twitter executives’ minds at the moment too. Let’s dig into that a bit. I was reminded of something I read quite a while ago on Fred Wilson’s blog:

Let’s remember one of the cardinal rules of social media. Out of 100 people, 1% will create the content, 10% will curate the content, and the other 90% will simply consume it.

It occurred to me during today’s earnings call that Twitter is experiencing this in quite a different way from some other services. Facebook and other social networks require you to log in to gain any meaningful benefit from interacting with the service, because Facebook posts are largely private and because the benefit is largely derived from seeing posts from people you know. As such, this 1%/10%/90% split Fred Wilson talks about largely applies to logged in users. But with Twitter, the big difference is that the vast majority of posts are public, and therefore people don’t have to be logged in at all to get value out of the service. So, in fact, the logged-in monthly active users Twitter has reported so far (271 million at the end of June) might represent some mix of the 1% and 10%, while Twitter might very adequately serve the other 90% as non-logged-in users. This is what drove much of Dick Costolo’s prepared remarks during the call: that the real size of Twitter is a multiple of the size it appears to be based on the number of monthly active users (MAUs) it reports.

It turns out that I had forgotten the context in which Fred Wilson quoted those numbers, which was an account of a state of the union address Dick Costolo gave at Twitter HQ in September 2011. During that session, Costolo very much hit on the same theme he returned to on today’s call, and I direct you to Wilson’s post for a recounting of some of the key points. What’s very interesting is that back then Costolo was quoting a 4:1 ratio of total users to logged-in users, or about the same 3x multiple of non-logged-in to logged-in users he quoted on today’s call. What’s surprising is that Costolo doesn’t seem to have talked very much about this in the three years between then and now (if you search for Costolo Logged In Users on Google, you’ll find posts from 2011 and today, but almost nothing in between). But I wouldn’t be at all surprised to see some sort of unique users metric emerge next quarter now that Costolo has provided the strategic rationale for measuring it. The challenge will be monetizing these users going forward, something Twitter doesn’t even attempt to do today.

Downplaying the World Cup while learning lessons

Costolo and the other executives on the call were also very keen to both play up and downplay the impact of the World Cup. On the one hand, they want to play it up as an example of what Twitter can do on an ongoing basis by way of creating topic- and event-driven experiences that are different from the classic Twitter feed. On the other, they were keen to downplay the impact of the World Cup specifically as a factor in driving the strong MAU growth it saw this quarter. On the other hand, they suggested the World Cup did have an effect on engagement, which is definitely illustrated by this stark contrast in sequential MAU growth from Q1 to Q2 (turns out the US still doesn’t care much about soccer):

Sequential growth in MAUs US vs InternationalLook at the difference in Twitter’s key engagement metric from Q1 2014 (no World Cup) to Q2 2014 (World Cup). International engagement rose, while US engagement actually fell. You can see this in the shape of the overall graph for timeline views per MAU, which appeared to improve in Q2 but were largely driven by International growth:

Timeline views per MAUThe big question is to what extent the World Cup experience is replicable for other events and topics, which is clearly Twitter’s plan.  The World Cup is either the most or second-most watched event in the world (sporting or otherwise), and along with the Olympics only happens every four years. Putting a lot of investment into creating  a curated experience around the World Cup clearly makes sense, and its major news bites make for good tweets because they’re short and to the point (Brazil 7, Germany 1 takes considerably fewer than 140 characters).

But how does this experience translate to hundreds of other events and topics Twitter would want to do this for, and to what extent can those experiences be machine- rather than human-curated? Twitter has just 3300 employees – how many of them can it afford to attach to human curation projects for the many other events and topics Twitter might want to recreate the World Cup experience for? And would there be any meaningful return on that investment for most of those events? If the World Cup drove a small increase in engagement for international users, how many events that happen more frequently would it have to bundle together to drive a similar impact?

Data and Licensing is growing faster

Twitter, like Facebook and Google, derives about 90% of its revenue from advertising. However, unlike Facebook, which is deriving an ever-greater proportion of its revenues from advertising, Twitter has actually quietly been going in the opposite direction for the previous two quarters and just took a slightly bigger step in that direction this quarter:

Twitter revenue mixThe reason is that Data and Licensing revenue actually grew as a proportion of total revenue over the last several quarters, and  accounted for 11.1% of revenue in Q2. There wasn’t much detail on the earnings call, but the 42% sequential and 90% year on year increase was put down to a combination of the Gnip acquisition (which closed in April) and revenue from the mobile ad exchange (the former MoPub). Presumably, much of the revenue generated by the MoPub business is actually recorded in the advertising line, but a portion apparently comes from Data and contributed to this growth. In my post on Facebook’s earnings I worried about their increasing reliance on mobile advertising and the paucity of other possible revenue sources in the near term, so I think this secondary revenue stream for Twitter (albeit still small) is important.

Earnings, Foursquare, Growth, Limits to growth, Q2 2014, Twitter

Twitter and Foursquare’s shared growth problem

Ahead of Twitter’s earnings tomorrow, I wanted to do a quick take on the problem that both Foursquare and Twitter share when it comes to growth. Foursquare is a privately held company and as such we have very little data to go on as far as how many active users it has or what its revenues might be, but it does report registered users from time to time, so we have something to go on.

The fundamental challenge both businesses face at this point is that their most active users to date likely don’t behave anything like the users they want to capture in the coming years. That is leading both companies to both consider and execute on major changes in the way their services work, which in turn will create challenges for retaining their most active users.

In the case of Foursquare, this has meant splitting its app into two: the classic Foursquare app, which is now a sort of Yelp equivalent, focused on recommendations, and the new Swarm app, which is focused on checkins. This is intended to strip away the checkin focus from the main Foursquare app to make it more appealing to the massive base of potential users who don’t want to signal their location constantly, while still making checkins available in the Swarm app for power users. The response from existing power users hasn’t been great: look at the ratings for Swarm on the App Store, for example: 1.5 stars for all versions of the app, with over 3000 ratings. The complaints fall mostly into these categories:

  • The hassle of splitting the app into two (see also Facebook Messenger)
  • It’s now harder to check in than it used to be, especially if tagging a friend
  • Killing the competition aspect, mayorships and so on.

In short, for these power users, hitherto Foursquare’s biggest advocates, Foursquare has broken the core experience of checking in and competing for mayorships. And some of these users are doing more than just posting reviews on the App Store.

Of course, with those as the two key pillars of the service, Foursquare has just barely reached 50 registered users (the number of monthly active users is likely much smaller, perhaps 10-20% of that). If Foursquare wants to grow beyond its current tiny base of users, it has to expand into new areas, and that means changing the core app experience from one that’s checkin and game-focused to one that’s recommendation-centric. As such, it was the right broad strategy to start to shift the focus of the app away from power-user features and towards these new ones, but the implementation has been poor, and in the process Foursquare has alienated its biggest fans.

Twitter faces to some extent the same problem – power users use lists, hashtag, @mentions, DMs and  Tweetdeck, and follow hundreds of accounts, but most ordinary users don’t. If Twitter is to grow, it has to cater to these new, ordinary users rather than the power users. That means changing the experience so that it’s not so overwhelming, and doesn’t have such a steep learning curve. Ideally, a new user would sign up, check a few boxes, and instantly have a feed that’s relevant and interesting, without having to do all the work of hand-crafting a list of accounts to follow. There’s talk this week of filtering feeds à la Facebook, and there have been multiple rumors in recent months about moving tags and @mentions out of the 140 characters, in part perhaps to remove some of the jargon from the stream and make it more user-friendly.

But in all this, Twitter faces the same risks that have plagued Foursquare since its repositioning. It needs to learn from Foursquare’s mistakes and preserve the core experience that its power users love while creating a new version of itself for mainstream users. That’s a tough balance to strike, because it’s almost like maintaining two products at once, with two separate user experiences. But Twitter, to an extent that’s not even true for Foursquare, needs its power users to continue to create the content for which its mainstream users will come to it.

Foursquare isn’t by any means beyond salvation, but it does need to quickly fix the Swarm app and with it the power user experience, if it’s to grow in the way it needs to, especially since its future revenue is likely as dependent on the data its users generate as it is on monetizing users or even merchants. Twitter is at an earlier stage and still has a chance to get this transition right.

The challenges faced by these two businesses highlight the less challenging experience of creating mainstream experiences from the outset: neither Facebook nor Google have had to dramatically reinvent their core products since they were first invented. Their original product is their current product, though both are considerably richer than they once were. But they haven’t had to make the same niche-to-mainstream conversion as Twitter and Foursquare will. There’s a good lesson there for both startups and investors: it is possible to scale a niche business so that it becomes mainstream, but at some point you have to make a significant transition, and it can be a make-or-break moment in the history of a startup.

Advertising, App install ads, App stores, Facebook, Google, Google Play, Mobile advertising, Twitter, Yahoo

The limited opportunity for app install ads

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Today, Twitter formally introduced its new mobile app install ads product, joining Facebook and Google in what is becoming a crowded space, with Yahoo apparently waiting in the wings too. I had a quick look at this space in the context of Facebook’s Q1 earnings a few weeks ago, but wanted to drill down deeper, especially now that we know more about app revenue through Google Play. The upshot of all of this is that the opportunity for mobile app install advertising, though growing rapidly, is not big enough to provide a significant revenue stream for all these companies. In other words, there’s gold in them there hills, but not enough to justify the gold rush we’re seeing into this space.

First, a quick primer on mobile app economics. Some of the major app companies are public, and report data themselves, while several third parties also report data on the topic regularly, allowing us to draw a few conclusions:

  • Revenue from advertising is a factor for some apps, but the vast majority of revenue today (likely between 80% and 90%) comes from pay-per-download and in-app purchases. As such, the revenue numbers for the two major stores – Apple’s App Store and Google Play – likely account for a significant proportion of total revenues from apps 1.
  • Developers pay Google, Apple or other stores 30% of their gross revenues from these stores, keeping 70% for themselves. Thus, if they’re to make a living, it will be by keeping their other costs contained within that net revenue figure. That needs to cover development costs, ongoing operating costs (salaries, hosting, care, etc.), and costs to promote apps.
  • Sales and marketing costs for most successful app makers sit between 10% and 20% of gross revenues. App install advertising will come out of this budget, and may indeed make up most of it. This percentage may be significantly higher for apps early in their lifecycle and therefore promoting themselves heavily without yet seeing significant revenue, but it will tend to return to that average over time.
  • Thus, anywhere between 40% and 50% of a typical app developer’s gross revenue may go to the store commission plus sales and marketing, leaving about half for all the other costs of running the business.

Given these facts, let’s look at total gross revenue opportunity from the two major app stores. I’ve added 15% to my estimated gross revenue from the two stores to account for the advertising opportunity.

Total app store revenues from Google Play and App StoreNow, let’s think about the size of the market for mobile app install ads, which as we’ve already said will have to come out of that sales and marketing budget. To put it in context, we’ll compare it to Facebook’s mobile advertising revenues, since Facebook is the largest player in this market today and a substantial proportion of this revenue comes from app-install ads today. In the chart below, I’ve plotted Facebook’s mobile ad revenues against two views of the app install ad opportunity – one a bull case and one a bear case. The bull case assumes that the app install opportunity is 25% of total gross revenues, and adds 15% to store revenues to account for ad revenues. The bear case assumes that the app install opportunity is 15% of gross revenues, and adds a smaller 10% to store revenues to account for ad revenues. My own view is that the bear case is likely closer to reality. Continue reading →

Notes:

  1. For simplicity’s sake, I’m excluding the revenue opportunity through other stores, because they account for a tiny proportion of overall revenues. Adding them in would not significantly affect the numbers. ↩