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Can Twitter Find Success Copying Facebook?

If imitation is the sincerest form of flattery, Facebook (NASDAQ: FB  ) must be flattered as heck!

Twitter (NYSE: TWTR  ) is rolling out app-install ads to its advertising partners this week after Facebook has seen tremendous success with both app-install and app-engagement ads over the last year or so. Twitter has been spending heavily -- on internal R&D as well as acquisitions -- to improve its user monetization. Can Twitter see as much success as Facebook from app-install ads?

A mobile solution
The idea of app-install ads is genius.

App developers are able to advertise their product where their product lives: on the mobile device. As a result, these ads may be the most cost-effective form of user acquisition (certainly much less expensive than a national television campaign starring Craig Robinson).

App developers have flocked to the Facebook product, helping Facebook improve its mobile ad revenue to $1.3 billion in the first quarter, up from $377 million in the first quarter of 2013.

For Twitter, mobile ads are even more important than they are for Facebook. As of December, 86% of time spent on Twitter happened on mobile devices. Comparatively, Facebook users split their time between mobile and desktop 68% to 32%, respectively. What's more, mobile ads accounted for 80% of Twitter's ad revenue in the first quarter, while Facebook generated 59% of its ad revenue from mobile last quarter.

Can Twitter match Facebook's success?
Facebook collects much more data from its users than Twitter does. As such, Facebook's ad targeting is excellent, which allows it to charge more for ads, while keeping developers' cost per acquisition reasonable.

Although Twitter doesn't have as much data about its users, it can make relatively accurate assumptions about user interests and preferences. Additionally, there are some areas where Twitter excels beyond Facebook, such as live sports and television events.

Lately, Twitter has also made several key acquisitions to boost the effectiveness and ubiquity of its mobile ads. The biggest acquisition was the $350 million purchase of mobile ad exchange MoPub, to which Twitter will extend its app-install ads. This week, Twitter agreed to buy TapCommerce for $100 million.

TapCommerce provides a way for advertisers to track what users have done within apps, like add an item to a shopping cart or unlock a new game level. The acquisition could open the door for effective app-engagement ads on Twitter.

What about user growth?
While Twitter is spending heavily to improve its ad revenue, it's missing the other half of the formula that has made Facebook so successful. With about 250 million users, its seeing sluggish user growth.

Last quarter, Twitter increased its number of active users by 25% year over year. Average user engagement fell, however, resulting in just 15% growth in the number of timeline views. Comparatively, Facebook grew its user base 15% (off a much larger base), adding 166 million new users -- more than 60% of Twitter's total user base.

The ceiling is clearly very high for Twitter, as Facebook has shown, and the company can't be faulted for trying to increase its user base. It has worked to ease the onboarding process to get new users up to speed, and has tweaked its user interface to look more like Facebook's.

Still, most of Twitter's budget appears focused on monetization, but it's a lot easier to monetize users once you actually have them.

The bottom line
Mobile app-install ads will likely help Twitter improve its ad revenue per user. The TapCommerce acquisition will help make those ads, and similar ads across its MoPub exchange, more effective as well. Indeed, Twitter is taking great steps to improve its top and bottom lines, but its relatively weak user growth is concerning.

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Adam Levy

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinal mania

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