Please ensure Javascript is enabled for purposes of website accessibility

Twitter Confirms It's Considering Subscriptions

By Evan Niu, CFA - Jul 24, 2020 at 9:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The social media company wants to diversify its revenue sources in ways that complement the advertising business.

Speculation has been swirling all month that Twitter (TWTR 0.99%) might jump on the subscription bandwagon, following many of its tech peers into the realm of high-margin, recurring revenue. A job listing vaguely referenced a subscription platform that the company was building. Analysts have estimated that Twitter would need to charge $50 per year for U.S. users to offset lost ad revenue, assuming that such a service tier would remove ads.

Twitter addressed the rumors head-on this week when it reported second-quarter results.

Woman walking by a Twitter logo

Image source: Twitter.

What @jack is looking for

"We are also in the early stages of exploring additional potential revenue product opportunities to complement our advertising business," Twitter wrote in its shareholder letter. "These may include subscriptions and other approaches, and although our exploration is very early and we do not expect any revenue attributable to these opportunities in 2020, you may see tests or hear us talk more about them as our work progresses."

Responding to an analyst question on the conference call, CEO Jack Dorsey elaborated on the possibility. There's a lot to unpack in the full quote:

So, first and foremost, we have a really high bar for when we would ask consumers to pay for aspects of Twitter. And this is a start and we're in the very, very early phases of exploring. As you mentioned, there have been a number of ideas over the years. We have focused majority of our attention on increasing revenue durability, meaning that we have multiple lines of revenue to pull from. But most importantly, we want to make sure that any new line of revenue is complementary to our advertising business.

We do think there is a world where subscription is complementary. We think there is a world where commerce is complementary. You can imagine work around helping people manage paywalls as well that we believe is complementary. So that's what we're looking for.

Complementing, not replacing, ads

The comment about complementing the advertising business is significant, since most discussion around social media tech companies revolves around the idea of removing ads in order to mitigate some of the inherent privacy compromises. Facebook CEO Mark Zuckerberg said last year that any theoretical Facebook subscription would not remove ads and suggested that Facebook's data harvesting would still occur anyway.

Twitter would not be sacrificing any ad revenue, so the previous $50-per-year estimate is no longer relevant. Former CFO and COO Anthony Noto had once discussed the idea of premium features designed for power users, which could be complementary without segmenting the user base.

Managing paywalls is a platform play

There are various forms that this could take. Many tech platforms sell various third-party subscriptions, earning a cut of those sales in the process for monetization instead of charging a subscription fee that consumers aren't willing to pay for such a service. That usually includes the ability to manage billing, access, and cancellations.

Twitter has become an important distribution channel for media outlets and clicking links can oftentimes redirect users to paywalled content, even if they are paying subscribers to the publication. The current solution requires users to login via the in-app browser, which is inelegant and clunky. There a clear opportunity to innovate here for a better user experience, but monetization is less clear.

Another shot at e-commerce?

Many years ago, Twitter had dabbled in e-commerce by testing out a "Buy" button that merchants could use in tweets. The company suffered from an executive exodus in 2016 that included head of commerce Nathan Hubbard. Less than a year later, Twitter formally killed off the "Buy" button. In contrast, Facebook has continued its own e-commerce push and its Instagram platform is uniquely suited for selling stuff.

There's little indication around what type of commerce opportunities Twitter could be exploring that it hasn't tried already, and creating a full-fledged e-commerce platform seems a bit too ambitious.

Struggling to monetize engagement

Engagement on Twitter is soaring, with monetizable daily active user (mDAUs) growth accelerating to 34% in the second quarter. But COVID-19 has impacted the digital advertising industry and Twitter isn't immune: Advertising revenue fell 23% to $562 million.

That's a big part of why Twitter is so interested in diversifying its revenue sources, as the only other business segment (data licensing) has never been a growth engine. Investors will just have to be patient until Twitter is ready to share more details as its "work progresses."

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Twitter, Inc. Stock Quote
Twitter, Inc.
$42.94 (0.99%) $0.42
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$170.25 (1.88%) $3.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.