Twitter Inc. (NYSE:TWTR) may be the world's most important profitless company.
The pervasiveness of the microblogging service has become even more apparent in recent months as President Donald Trump has claimed the social network as his preferred method of communicating with the public, often tweeting multiple times a day. Meanwhile, many of his opponents have taken advantage of the medium in a similar way. When protests spontaneously popped up at airports nationwide following Trump's Muslim travel ban, it was Twitter that protesters used to share information and video coverage, and communicate to the world -- though of course, tools like Facebook (NASDAQ:FB) Live were also helpful.
Twitter has become an essential part of today's media, a place where anyone can share their views, from the president on down to the man on the street who sees something interesting or has an observation to contribute.
But even as Twitter has carved a new place for itself in the media universe, it faces problems similar to those that the traditional news business has been plagued with. Its finances are troubled, user growth has plateaued, and the company has been unable to report a GAAP profit.
Printing ain't easy
The advent of the internet was a liberating moment for news and information, but it also undermined the long-standing business model of newspapers. With little competition in most markets for local advertising, newspapers had long been the primary vehicles for classified and display ads. They often charged nominal prices for their subscriptions and individual newspapers, as keeping the price of a paper inexpensive led to higher circulation, which in turn helped support the ad business that actually paid the bills.
The internet changed all that. News sources began giving away content for free, but struggled to develop a viable digital ad model as search engines like Google and social networks like Facebook became better at targeting consumers, and advertisers proved unwilling to pay as much for "clicks" as for inches of newsprint. Newspapers also struggled with competition from upstart internet-only sites.
Today, even well-respected brands like The New York Times Company (NYSE:NYT) are still struggling in the environment that resulted. That company reported full-year adjusted operating profit of just $101.6 million, down from $136.6 million in 2015, which the company blamed on lower print advertising revenue and higher costs. That decline in operating profit came in spite of a surge in subscriptions following the election of Donald Trump. In other words, while demand for quality journalism is still strong, the business model for print media continues to weaken.
A similar pattern can be seen at News Corps' (NASDAQ:NWS) The Wall Street Journal, which recently laid off hundreds of employees and cut sections from its print newspaper as it confronts declining ad revenues.
And Gannett (NYSE:GCI), the nation's largest newspaper company and owner of USA Today, has seen its net income decline significantly over the last two years.
What Twitter can do
Twitter isn't a legacy print newspaper business, and it should therefore have more flexibility than its news-breaking rivals when it comes to turning a profit. With more than 300 million monthly active users, it also has a user base that newspapers would kill for. The New York Times, by comparison, only has about 3 million digital subscribers.
But Twitter's advertising problems have been apparent for years, as users are well aware. The ads it serves up often fit poorly with the interests and needs of their viewers, and its revenue growth has ground to a halt, even falling by 5% in the U.S. in the most recent quarter.
Those struggles last quarter are particularly notable because they came during the closing weeks of the election, a boom time for television advertisers. Increasing competition from Snapchat, Instagram and other platforms has not made things any easier for Twitter. Many marketers also complain that its ads are too expensive, and the company has struggled to show that engagement with its ads leads to sales. Facebook, with more data and more users, has done a better job at this.
Twitter has suggested that it will rely on video to driver further ad engagement and revenue, but the service is ultimately text-based rather than video-based, making a full transition to video ads unlikely. In order for the company to prove its value to advertisers, it needs to focus on better ad targeting, and show companies that ads placed on its platform do convert efficiently into sales. With its wealth of data, the company should be able to take steps in that direction, but the degree of competition it faces on the online advertising business won't make it easier.
As the newspaper industry has shown, simply attracting eyeballs isn't enough to drive advertising sales anymore. Twitter needs to follow the path set by Facebook rather than becoming more of a news service.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool recommends The New York Times. The Motley Fool has a disclosure policy.