Twitter (NYSE:TWTR) reported its quarterly earnings recently, and the situation in its ad business isn't looking great.

In this segment from Industry Focus: Tech, analyst Dylan Lewis is joined by senior tech specialist Evan Niu to discuss Twitter's ailing ad business. Find out how much the business is declining by, how much competition from the likes of Facebook and Google is hurting Twitter, and why this could be such a huge problem for Twitter in the future.

A full transcript follows the video.

This video was recorded on Aug. 4, 2017.

Dylan Lewis: Why don't we try to move over to what's going on with the ad market dynamics for Twitter? One of the things that I kind of talked about last time we were looking at the results is, the platform's ad rates continue to free fall, and I think that's really troubling if you're relying on advertising for the majority of your revenue. Cost per engagement was down 53%, and that's on the back of a 64% decline a year ago. Now, historically, before the last couple quarters, they've been able to continue to grow revenue and stay afloat by making it up on volume. This quarter, total engagements were up 95%. But, it's clearly not happening to the extent where they're able to grow revenue anymore. We saw this last quarter, we're seeing it again this quarter with the year-over-year declines. And as MAUs are stalling, I just wonder how sustainable what's going on with their ad business really is.

Evan Niu: Right. There's a fundamental disconnect, because here they are touting all these engagement gains, like the DAU increases, and at the same time, ad revenue is falling down 8% year over year. We mentioned Trump earlier, and there was a lot of hope that Trump would boost engagement, which would subsequently boost the ad business. It seems, on one hand, it might be boosting engagement, even though, like we mentioned earlier, the U.S. user numbers are not great, either. But there's a big disconnect somewhere in there, and I think it boils down to execution, because they're not really successfully monetizing this engagement, and you can see that in the ad revenue numbers. 

Lewis: Yeah, and management keeps talking about declining ad prices as an opportunity. It becomes more appealing for advertisers to come to the platform and advertise on Twitter if it's more affordable for them to do it. The problem is Facebook and Google are scooping up market share in the digital ad space, and really they have a duopoly right now. I think advertisers have seen such great ROIs on that platform, and they know that all of the demographic trends are moving in the right direction for them, where they have these growing user bases and are maintaining their relevancy, that it's going to be really tough for Twitter to command any pricing power at any point. I'm sure they're going to hit a bottom just because of the way that pricing dynamics eventually work. You can only decline for so long before you hit some point of stabilization. But that's also not a huge bullish signal for me.

Niu: Right, and anecdotally, they mentioned in the letter that the increases in engagement are partially due to better targeting and better elements. But, anecdotally, when I'm on Twitter, compared to when I'm on Facebook, the ads that I see...I feel like they're less relevant, and they're not very well targeted. Not that I click a lot of ads in general. But the stuff I see on Facebook is incrementally a bit more relevant like, it's a little more interesting than the stuff I see on Twitter. I just don't think Twitter is very good at targeting. They don't have as much user data, because they're a much more narrowly based service, so they don't have an opportunity to collect as much data, which also means they can't target as well. To their credit, they're saying that they're getting better.

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.