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Will Small Business Ads Help or Hurt Twitter, Inc?

After announcing an outstanding second quarter in late July, Twitter (NYSE: TWTR  ) has been on a roll. The problems from the past: primarily slowing user growth, questions about engagement, and how Twitter will continue to monetize its service, have been put on the back-burner. For now.

But with Twitter's incredibly high valuation given its current sales and 271 million active users -- both pale in comparison with industry-leading Facebook (NASDAQ: FB  ) -- it won't be long before Twitter followers once again start asking about sustaining growth. Toward that end, Twitter recently announced its intention to actively pursue what could be a significant market niche. The concern is how Twitter's efforts to increase revenues will impact the people who matter most: its users.

Twitter wants your business
When Facebook announced its Fit campaign earlier this year, it was clear the social media giant wants to make friends with more small business owners. Fit is the moniker for a series of seminars Facebook is hosting intended to help small business owners better utilize Facebook to market their products and services. The potential of this relatively untapped market is enormous.

As it stands, Facebook has about 30 million businesses with active pages, up from 25 million the end of 2013. But of all those businesses, a "mere" million or so actually advertise on Facebook; something its Fit campaign hopes to remedy. But even a million small business customers can make an impact. Imagine if those million business customers spent only $50 a month, or $600 a year on Facebook ads? The result would be $600 million in annual revenue. By comparison, Twitter's recent "blowout quarter" included $312 million in revenue.

The potential of small businesses seems to have come to the attention of Twitter. In an effort to make placing an ad easier and more cost effective for small business owners, Twitter has changed its payment structure. The result is a much more flexible platform that gives owners, particularly small business owners, multiple ways to target and pay for ads.

A few concerns
Finding new and better ways to grow is a necessity, and Twitter's focus on small business is a step in the right direction, as Facebook can attest to. And it wasn't long ago Facebook was facing the same concerns as Twitter is: how to monetize its user base without altering the experience and causing a mass defection.

The quickest way to upset users is to inundate them with ads. Sure more ads mean more revenue, but making the experience less appealing could backfire in a big way. Especially considering the majority of Tweets are sent with a small-screen, mobile device. Facebook faced the same concerns, but was able to use its reams of data to deliver results to its ad customers, who willingly pay more per spot.

Twitter's user engagement continues to raise questions, too. According to a study earlier this year, there are a number of folks who've signed up for Twitter but found it too cumbersome, became overwhelmed with tweets that aren't relevant, and nearly 70% of the users who aren't active simply forgot about it. Making the Twitter experience better is an on-going battle, particularly doing so while still growing. But changing things too much, by inundating users with more ads for example, could add fuel to the user engagement fire.

Follow the leader
Targeting small business isn't the first time Twitter followed on the heels of Facebook. When Twitter announced it was rolling out mobile app install ads earlier this year, Facebook was already up and running. Mobile app install ads give developers the ability to sell ads within Twitter's app. The feature has been a boon for Facebook, generating nearly $1 billion in revenue.

Twitter knows a good thing when it sees it, which is why it's also testing out video ads, just as Facebook has been doing for some time now. Facebook's not quite ready to pull the wrapping of its video ads for mainstream users, but that's expected to happen sooner as opposed to later. Though a bit late to the video party, Twitter's wise to explore what is expected to be a nearly $6 billion market this year.

Final Foolish thoughts
Twitter fans can breathe a sigh of relief after a solid second quarter, and many likely did. But in a world of "what have you done for me lately," Twitter is wise to keep focused on what it can do next to drive growth. But Twitter should make sure the work being done to appease Wall Street doesn't have the opposite effect on its users. And you can be sure cluttering up Twitter with more ads would do just that.

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Tim Brugger

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.

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9/2/2015 4:00 PM
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