This Could Be Twitter Inc's Biggest Headwind

Twitter needs to makes it platform more relevant to grow user engagement.

Jun 26, 2014 at 7:00PM

Twitter's (NYSE:TWTR) biggest problem has been the question investors and observers of the company have been asking -- How does the platform stay relevant? As consumers are bombarded with numerous social media platforms, Twitter might have to address this problem seriously. The company's COO recently left after having disagreements with the CEO regarding the company's operating strategy. However, Twitter is still one of the leading social media platforms among teens. 

Relevancy issue
Twitter's stock has taken a beating after the company last reported earnings because the company's user growth and usage didn't live up to expectations of the Street. Twitter has struggled to grow the usage on its platform even though total user growth did come in at 25% year-over-year. Facebook(NASDAQ:FB) ,on the other hand, continues to see robust growth in users as well as user engagement, and that too from a much larger user base than Twitter. In Q1 2014, Facebook saw its user base grow 15% year-over-year to 1.28 billion and the number of active users visiting the site daily stood at 63%, a record high for the company. 

So the relevancy issue is not a problem that all social media sites are having but is more unique specific to Twitter. When a user goes to social media site like Facebook -- they know that they can share information in a close-knit environment with friends and family, and thus Facebook has a very personal connection for the user which yields immense network effects for the social media giant.

However, when a user goes to Twitter, the use-case for the company is not as straight forward. Twitter markets itself as the global platform for self-expression and conversation in real time, but that is not overly clear to many users (including myself). And Twitter's user growth would see a lot more increases, if the users on its platform could connect with friends and family more easily, and in the process, grow its user-base from 255 million MAUs. In fact, the company is heavily dependent on media personalities to grow its usage and distribute relevant content. 

The following paragraph from its 10K gives some insight about the company's user engagement pursuits and how it tries to make content relevant for users:

We seek to foster a broad and engaged user community, and we encourage world leaders, government officials, celebrities, athletes, journalists, sports teams, media outlets and brands to use our products and services to express their views to broad audiences. We also encourage media outlets to use our products and services to distribute their content. If users, including influential users, do not continue to contribute content to Twitter, and we are unable to provide users with valuable and timely content, our user base and user engagement may decline.

All about user engagement 
The value of consumer Internet company is directly related to user engagement. Facebook has a thriving platform because it provides information straight from their friends and families and thus the information is automatically relevant. However, Twitter on the other hand is very dependent on "Influential Users" who provide the real-time content which normal users view and retweet.

So a decline in the company's active influential users might in turn reduce its attractiveness in the eyes of advertisers and its data partners. Twitter earns 90% of its total revenues from advertising and 10% comes from data licensing partners, so the company's fortunes might be heavily affected with lower user engagement.

However, Twitter seems to have a reasonable footing among teens who are the next-generation of heavy social media consumers. According to a survey by Forrester, Facebook and Instagram are the most popular social media destination for teens and Twitter is slightly behind them in terms of usage. Forrester asked 4,517 U.S. youth between the ages of 12-17, about their social media usage patterns including which sites they are on "all the time". 

Not surprisingly, Facebook came out at the top with 28% of the youth using it all the time and roughly 22% of these young users are on Twitter all the time. However, Facebook has been adopted by almost 80% of the youth whereas Twitter is close to being adopted by 50%. So Twitter seems to be having good user adoption by younger users, and of course, has more room to grow.

The bottom line
Twitter grew its revenue more than 100% year-over-year in 2013 and the company does have a lot of room to grow its monetization through products like promoted tweets in a real-time environment. But the company has to ramp up its user engagement levels and user base to attract more advertisers on its platform.

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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