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Is Twitter Jumping on the Subscription Bandwagon -- or Not?

By Evan Niu, CFA – Updated Jul 9, 2020 at 10:57AM

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The advertising market is taking a hit from COVID-19, and a paid subscription tier for power users could help mitigate those impacts.

Rumors that Twitter (TWTR) is developing a paid subscription service have persisted for years, including speculation back in 2017 that the social media company might roll out a tier that included robust features for power users. A Twitter job listing spotted this week has reignited that speculation; the company said it was building a new team for a new subscription platform codenamed "Gryphon."

Twitter quickly changed the language of the listing after it started to receive attention. Is Twitter jumping on the subscription bandwagon or not?

Woman walking by Twitter logo

Image source: Twitter. Image copyright Atsushi Nakamichi for Twitter.

Diversifying the top line

The initial listing didn't give much more detail around what a subscription offering would look like, beyond noting that the platform could be "reused by other teams in the future," and that the Gryphon team would collaborate closely with the main team as well as the payments team. Twitter briefly changedthe language to say it was merely looking for an "Android engineer," but as of this writing the listing still includes references to Gryphon.

Bloomberg reports that the tech company is exploring a potential subscription offering as part of its efforts to diversify revenue sources. Advertising represents the majority of top-line sales, nearly 85% last quarter, with the rest of revenue coming from the data licensing business. Those two segments are currently Twitter's only revenue streams.

In 2017, former CFO and COO Anthony Noto (now CEO of online lending start-up SoFi) had discussed the idea of adding premium services to TweetDeck, while reaffirming the importance that Twitter still remain free and accessible to everyone. TweetDeck is a more powerful app for the service that Twitter acquired for $40 million back in 2011.

Activist investors want more growth

Investors were clearly excited about the prospect, sending shares up by as much as 12% yesterday. Expanding into subscriptions could help mitigate uncertainties around the advertising market, which has seen ad spending decline precipitously due to the coronavirus pandemic. "There has been a rapid and significant decrease in global advertising spend due to COVID-19 which is also reflected in our numbers," CEO Jack Dorsey conceded on the last earnings call.

It's worth noting that Twitter is under pressure from activist investor Elliott Management to accelerate revenue growth. Elliott accumulated a stake earlier this year and was agitating to oust Dorsey over criticisms that he is CEO of two companies, Twitter and Square, and lacks focus as a result. Twitter reached an agreementwith Elliott and Silver Lake that bought Dorsey some time, while setting a target to grow monetizable daily active users (mDAUs) by 20% in 2020 while accelerating revenue growth.

The top line grew an anemic 3% in the first quarter, in part because of the public health crisis. Revenue growth in 2019 was 14%. Introducing a paid tier with more premium services for power users is a growth lever that Twitter should absolutely consider.

Evan Niu, CFA owns shares of Square. The Motley Fool owns shares of and recommends Square and Twitter and recommends the following options: short September 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

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