1. Ad Dependency
The microblogging platform has 238 million daily active users, and earns primarily from two sources: advertising and data services. In 2021, about 89% of Twitter’s $5.1 billion revenue was from ads. Twitter grew this revenue stream by 41% in 2021. In comparison, LinkedIn, a task-oriented platform with 774 million users, earned about 30% of its $10.3 billion revenue from ads in 2021. Similarly, YouTube, which has primarily been an ad engine, has started making money from its premium, ad-free offerings.
Reliance on advertising is seen as a negative in some tech companies, especially as Meta felt the impact of changes to Apple’s data collection policies. Its investment in the Metaverse is a result of that. For Twitter, reliance on advertising could be a risk. Advertisers such as General Motors and Audi have already blocked ads following Musk’s entry. A diverse stream of revenue underpins this, and also indicates that users see value in the platform, not just advertisers.
2. Beyond the Blue Tick
One revenue stream Musk is targeting is users paying for account verification. In the US, Twitter will charge users $8 per month for blue ticks. It will be expanded to other countries, including India, though perhaps for less. In 2021, Twitter had about 423,000 verified handles—0.17% of its registered user base. There are many public figures and influencers.
The $8 monthly fee has sparked debate. However, Musk has indicated that Blue Tick will come with additional features such as being able to post longer videos and have greater visibility. LinkedIn has 49 million premium users, each paying upwards of $39.99 per month for access to features like emailing, even those not connected with them. Thus, the target market is larger than the people who will pay to maintain their verified status. Musk is targeting users who would pay for the utility value of being on a platform. On Twitter, the growing number of verified users will also appeal to relevant advertisers about bots.
3. Margin Play
It has often been observed that the constant churn under its leadership, a key element of governance, has given Twitter a lower valuation than its peers such as Snap. However, a big factor is its low operating margin. Twitter has reported consistently positive operating margins over the past five years, but it’s still a fraction of the meta, which was over 50% in 2018, and is still above 30% after facing a tough few quarters. (Twitter’s operating margin turned negative in 2021, but that’s due to a one-time litigation settlement.)
Ashwath Damodaran, a professor of corporate finance and valuation at New York University’s Stern School of Business, explained in April after Musk’s bid for Twitter that even after changing operating margins, “there has been no sustained upward momentum.” More recently, Musk noticed that Twitter was losing $4 million a day.
4. Sorting Effect
One lever that Musk is pulling for less losses is to reduce employee costs. Jack Dorsey, who will lead Twitter until December 2021, recently tweeted that he “takes responsibility for everyone in this position: I grew the company too quickly. I apologize for that.” From 3,920 employees in 2018, that number increased to 7,500 by the end of 2021. Twitter’s pay bill cannot be traced as it reports it under multiple heads.
For each employee, Twitter generates less than half the revenue compared to its rivals Alphabet and Meta. In a recent conversation with investor Ron Baron, a supporter of the Twitter deal, Musk said the layoffs would help the company save $400 million annually. However, Musk may be moving too fast for Twitter’s own good. According to news reports, Twitter is already reinstating some employees fired from its engineering team.
5. Productivity issue
Many tech companies take pride in their engineers, which manifests themselves in new products and features. Twitter has continuously evolved, with products such as Twitter Spaces, launched in response to Clubhouse, the social audio app. It has experimented with themes, moments and circles to enhance the user experience, while also facing criticism for missing key features such as editing options.
In 2021, Twitter’s spending on research exceeded sales and marketing. Still, it has chosen to acquire rather than build. For example, he bought Revue in response to Substack. Interestingly, Twitter plans to shut down the review, which some of Musk’s supporters see as a sign of a clear product roadmap. Musk’s bigger challenge will be to continually launch new products and features that retain its users, and strengthen the network effect, rather than going to rival apps like Mastodon.
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