It has just been announced (in a Tweet of course) that Twitter CEO Dick Costolo has stepped down, under pressure from investors, because of a perceived failure to either grow the user base or revenue sufficiently.
The real issue here is what is this a failure of. Is it a failure of management to grow users and (advertising) revenues, or it is it a failure of expectation on the part of investors? I tend to see it as the later.
Twitter has the same problem that Facebook has in that the ‘clever’ chaps on Wall Street who had to stick a number on it when it started to prospect for investment used the wrong model. They assumed that it was a form of media and therefore took the standard, ad-funded, media valuation model and twiddled it a bit. And because the ‘audience’ for Twitter was enormous, compared to a traditional media property, the unquestioned assumption was that Twitter must be hugely valuable – it was just a question of how hugely valuable. But platforms like Facebook and Twitter are not forms of media, they are forms of infrastructure, which conventionally are funded by subscription rather than advertising. The problem, of course, is that subscription is not currently seen as viable for these services and advertising, in-so-far as it works at all, doesn’t work as effectively as it does in traditional media channels.
Twitter has the additional problem in that – unlike Facebook – it has almost zero real estate on which advertising can be placed. You sign-up to Twitter and then you drive it using Hootsuite or similar. It is thus barely even an infrastructure, it is more like a utility i.e. the stuff that flows through the pipes rather than the pipes themselves.
Of course, all of this was apparent to the ‘clever’ chaps on Wall Street at the time – but they got swept up in the get-rich-quick euphoria surrounding the explosive adoption of social ‘media’ driven by Facebook. You therefore have to feel rather sorry for Dick Costolo because there is probably nothing that he could have done (or that his successor can do) to generate the sort of revenues to justify the over inflated valuation. This is a problem that also afflicts Facebook (just look at its ridiculous imbalance between share price and earnings compared to Google or Apple) it is just that this sits further below the horizon than it does for Twitter.
Ultimately, the revenue opportunity for Twitter has to be based on a fundamental recognition of what it does and what it has. This takes us back to the issue of ‘being’ the stuff that sits in the pipes. Twitter is basically a pure Big Data play and the focus of future management has to be on this, rather than chasing advertising. It’s the firehose, stupid (or secondary products derived from the firehose). However, even if this can be exploited more effectively, and this is not without problems given the increasing resistance of users to having their data sold, it is still unlikely to generate enough revenue to support a share price at anywhere near its current level. But, it should probably be enough to generate a modest profit, partly because Twitter can shed the sales overhead associated with selling itself as a media platform to marketing directors: selling its data, or products derived from its data, is a much cheaper alternative.