Twitter (NYSE:TWTR) ran an experiment last month, showing some users more ads than they would typically see. People did not like the change.
Users seeing more ads than normal reported the quality of the advertisements in their feed was well below average, even scammy, as BuzzFeed News put it. Twitter's failure to surface relevant and quality ads for its users as it increases its ad load is indicative of how far behind its ad business is compared with bigger competitors like Facebook (NASDAQ:FB).
It's also a troubling sign for investors looking for continued revenue growth, since ads are Twitter's main source of revenue.
Twitter CFO Ned Segal has repeatedly told investors the company has plenty of room to increase ad load.
"We continue to be more demand constrained than supply constrained when we look across the surface areas across geographies across times of year," Segal said at the J.P. Morgan Global Technology, Media and Communications Conference last month. He has also said some iteration of that sentence at every investors' conference and earnings call for the past two years or so.
Twitter's ad-load experiment has never made that statement clearer. There's not enough quality ads for Twitter to show its users if it increases its ad load.
That may be, in part, due to the slashes management made to the company's sales team a few years ago. Twitter laid off 9% of its workforce, mostly focused on ad sales, in October 2016. It's really hard to attract new quality advertisers without a sales team.
If Twitter could attract more quality advertisers by increasing its sales force, it would behoove management to ramp up investments in sales. While sales and marketing expenses increased 16% year over year last quarter, Twitter seems to suffer from a lack of interest in its platform from advertisers. That could be the result of Twitter's smaller audience or potentially lower return on investment compared with competitors. That would indicate much more of a structural problem with Twitter's ad business than merely needing a bigger sales team to attract more advertisers.
Another reason Twitter might be surfacing less relevant ads as it tries to ramp up ad load is because its targeting data isn't up to par with Facebook's. While users might tolerate a higher ad load in a Facebook or Instagram feed, it's only because they're actually interested in the messages of a relatively high percentage of those ads.
The average American user spends about 38 minutes per day on Facebook and 27 minutes on Instagram, according to estimates from eMarketer. Twitter engagement, by comparison, is much more fleeting with various studies reporting it averages just a couple minutes a day. And Twitter's efforts to increase time spent in the app with things like live video streams aren't as effective in gathering ad targeting data (nor are they as monetizable as scrolling through the feed). While Twitter does gathers data from web publishers including its code in their websites (think "Tweet This" links), Facebook and other digital advertising companies do this as well.
Twitter just doesn't have enough data on its users to target advertisements effectively.
Can Twitter keep growing revenue?
Twitter's ad load experiment shows it's not ready to increase the number of ads users see in their timeline -- the main product people think of when they think of Twitter. But Twitter has been having success with live streaming video, and video ads have grown to become a bigger source of ad revenue than all other formats combined.
Continued investments in live streaming content will provide the high-quality ad inventory that brand advertisers are interested in. That could be a path to continued revenue growth for Twitter, which increased ad revenue 24% last year and 18% in the first quarter this year. However, that's a much more expensive path to revenue growth than increasing the ad spend against user-generated content in the timeline.
Twitter investors should be worried about the backlash from users during last month's experiment. The inability to attract more high-quality advertisers and target ads effectively appears to be a structural problem within Twitter, indicating it may never maximize the potential for advertising in users' timelines. Meanwhile, other paths to growth are more expensive and less profitable for the company.