If only Twitter earnings were as delicious as these cupcakes. Image source: Twitter. Copyright Asa Mathat for Twitter, Inc.

The first quarter is usually a down one for most digital advertising companies. It's the point where they reset for the year after marketers make a big holiday push in the fourth quarter. That trend can be seen in both Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google and Facebook (NASDAQ:FB), and it's even more pronounced in the United States overall.

But those companies usually grow revenue sequentially in the second quarter, and often revenue can surpass the levels seen in the fourth quarter. That was the case for both Google and Facebook this year, but Twitter (NYSE:TWTR) failed to surpass its fourth-quarter advertising revenue in Q2. Most devastating is that U.S. ad revenue declined from $343 million in Q1 to $313 million in Q2, even while active users increased in the country, with the company saying it was at 65 million U.S. monthly active users in Q1 and 66 million in Q2.

However, it's unlikely Twitter actually added 1 million net new users in the United States last quarter. Because of the way the company rounds its active users to the nearest million, these numbers are bound to be off to a certain degree.

A massive decline in domestic ARPU

Twitter doesn't break out average revenue per user (ARPU), which leaves me to do a little math. Dividing the $313 million U.S. advertising revenue by the 66 million monthly active users reveals that Twitter generated $4.74 in ad revenue per domestic user in the second quarter. That's a 10% decrease from the $5.28 per user during the first quarter and a 25% decline from the fourth quarter's $6.31. If Twitter had merely met its fourth-quarter ARPU levels, it would have boosted revenue by over $100 million.

By comparison, Facebook saw its average advertising revenue in the U.S. and Canada climb 16% sequentially last quarter to $13.74. That's also a 5% improvement over the fourth quarter's $13.06 per user that the company brought in.

The problem is most pronounced in the United States for Twitter, but it's not completely immune outside the U.S., either. International advertising ARPU failed to reach the same level Twitter saw in the fourth quarter, too. Last quarter, the number fell to $0.90 from $0.95 in the fourth quarter. By comparison, Facebook saw an increase in the second quarter compared with the fourth quarter for every geographic region.

What management had to say

Twitter's management has an explanation, albeit not a very good one. There are two factors affecting the decline in revenue.

The first is an explanation for slower growth, as Twitter's largest portion of ad revenue comes from direct sales to large brand advertisers. Twitter is no longer growing the number of brands it does business with and is now focused on driving average revenue per advertiser. So it's transitioning from two growth drivers to just one.

The second factor, and the main reason for the decline in revenue, says Twitter, is those marketers transitioning from promoted tweets to promoted videos. "We've had a couple of quarters now where they move from traditional promoted tweets into our video ad products," CFO Anthony Noto told analysts on the company's earnings call. "In general, we view the shift into video as a good thing, but it's a multi-quarter approach."

But there's no clear explanation as to why marketers would spend less on video ads compared with promoted tweets. After all, management believes video ads are more valuable to those businesses compared with its promoted tweets. It wouldn't be making the transition otherwise.

In the company's letter to shareholders, it noted, "... it will take time for marketers to understand the impact of video ads on mobile vs. the alternative." Advertisers have been buying mobile video ads from Facebook and Google for several quarters now, though, and Facebook hasn't seen a dramatic negative impact on its ad revenue or even its ad prices. In fact, Facebook's ad prices continue to climb.

What does that mean?

There are a few takeaways from management's comments. The first is that it's probably pricing video ads too high. Management made several comments about its ad pricing during the earnings call and in its letter to shareholders. It also changed how it counts a video view, lowering the requirements, in an effort to move its pricing more in line with the rest of the industry.

Second, it's not increasing its share of U.S. brand advertisers' budgets. Even as more ad dollars shift from old print media to digital, those dollars are going to Facebook, Instagram, Snapchat, and YouTube before advertisers look at Twitter. The companies behind those products are heavily invested in mobile video, and Twitter's product looks like a me-too implementation with a less engaged audience.

That could change this fall, as Twitter rolls out its new live-streaming content, including 10 Thursday night football games. Twitter is making a big bet on live-streaming premium content, and the transition to video ads now, even if it's losing ad dollars in the process, could pay off in the long run. That's another big bet, and only investors willing to accept that kind of risk should be holding on to Twitter stock.

In the meantime, investors can expect continued struggles in the third quarter, as the company forecast no revenue growth sequentially -- indicating another domestic ad revenue decline offset by international growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.