Twitter's Bet on Social Television: Is It Enough?

With the Fed sounding upbeat regarding the U.S. economy, U.S. stocks managed to achieve another record-high close on Thursday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) both gaining 0.1%. The technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) fell 0.1%. And speaking of technology stocks, Twitter (NYSE: TWTR  ) announced today that it is acquiring video editing platform SnappyTV for an undisclosed amount, as part of its bid to push "social television." Does the acquisition make sense?

Source: Twitter.

SnappyTV enables broadcasters to create short videos of their content, which they can then distribute on Twitter. Here's an example of what that might look like:

For digital sophisticates, Twitter is an excellent complement to television, particularly with regard to live events, such as the World Cup. People who are on Twitter love to "discuss" content/ action in real time, especially when there's a solid critical mass of people who are watching the same event.

Whether or not, that process drives viewership, however, is another matter altogether. Last month, NBCUniversal's head of research skewered that notion when he told the Financial Times:

A lot of people want to show that they are on the cutting edge. One of the things that is on the cutting edge is social media. Why wouldn't I want to say to you, 'We have a potent new way in which we can drive ratings?'... It just isn't true. I am saying the emperor wears no clothes. It is what it is. These are the numbers.

Which brings us back to Twitter's fundamental problem. Twitter a fascinating social platform, and media is one of the areas in which it is having the greatest impact, as a working tool. However, its mainstream appeal is limited, and its value creation potential is therefore capped. That will probably continue to be the case, unless it mutates into something that looks quite different from what it is today -- which isn't entirely out of the realm of possibility, I suppose.

The ludicrous valuation the company achieved in the wake of its IPO was never supported by a realistic assessment of Twitter's prospects. Even with the shares trading at roughly half the price relative to their 52-week high, they still look expensive to me. There's nothing wrong with pressing on with "social television" and other such experiments; however, if Twitter is to satisfy Wall Street's expectations, I think a radical rethink of the core service may be required. The alternative would be for executive management to accept that the stock was/is radically overvalued, that the company isn't and probably will never be in a position to challenge Facebook, and press on with creating an outstanding niche service.

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Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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