Twitter's IPO filing arrives on the eve of a battle over digital advertising dollars. Twitter is pitted against Facebook (NASDAQ:FB) in a war to attract buyers for mobile advertising products. Here's what you need to know about Twitter's S-1 and how it positions Twitter relative to Facebook.
#How the Twitter IPO compares to the Facebook IPO
Twitter plans to raise $1 billion with its IPO. Facebook's IPO was initially going to raise $5 billion, and that rose to $16 billion by the time trading began
Twitter has 218 million monthly active users and over 100 million daily. Facebook's S-1 cited 845 million monthly active users and 483 million daily active users.
Twitter's revenue last year was $317 million, and though that's on track to more than double this year, Facebook reported $3.7 billion in revenue in the year preceding its IPO, and was turning a profit of $1 billion annually. Twitter is not profitable, and lost $80 million last year and $69 million in the first half of this year.
Concerned as potential investors should be about Twitter's growth and profitability, they should also realize that it's the company's ability to innovate mobile advertising products that will determine its success in winning advertising dollars and achieving profitability.
#How Twitter is facing the mobile revolution and its problem with scale
Even before Facebook went public, the number of social media users accessing services via mobile devices has been increasing dramatically. At the time of Facebook's IPO filing, it faced criticism over its lack of significant mobile revenue
A full 65% of Twitter's advertising revenue comes from mobile advertising, and that seems like a lot compared to the 41% that Facebook earned through mobile advertising in the second quarter of 2013. But Facebook earned $4.3 billion in advertising revenue last year, and Twitter earned $269 million.Will Twitter be able to leverage its mobile advantage to overcome its big problem with scale?
The sheer mass of Facebook's revenue and user base, even at the time of its IPO, far exceeds Twitter's. And Twitter generates about $0.55 per monthly active user versus Facebook's $3.67 per user in the US and Canada and $1.41 per user in other countries worldwide .
Twitter's $0.55 per monthly active user breaks down like this: 75% of Twitter users access the platform via a mobile device, but Twitter earns more money per ad view on desktop applications than on mobile applications. Additionally, 77% of Twitter users are outside the U.S., and these international users account for only 25% of advertising revenue. Less-advanced mobile technology abroad impedes access to Twitter's latest advertising innovations and hurts advertising revenue.
To fix this gap in mobile advertising revenue, Twitter will need to create new, mobile-tailored advertising products, or make the current products more visible – and profitable – on mobile applications.
#The war for advertising dollars is more than a popularity contest
A big concern for Twitter is whether the platform can become as ubiquitous as Facebook. About a fifth of U.S. Internet users uses Twitter at least once a month, while over half of U.S. Internet users uses Facebook every day . It's relevant to ask if Twitter can manage to go mainstream. Clearly, it hasn't yet.
That hasn't stopped advertisers like CBS and the NFL from making large advertising deals with Twitter. Promoted Tweets will drive viewers to TV programming and bring them back to Twitter to discuss. Facebook is working to sell advertising to TV networks as well, and differences will emerge in the type of ads that the two social networks offer.
Twitter isn't a sure bet as an investment, and the biggest concern is that its revenue model is so significantly hurt by its difficulty becoming a mainstream choice among U.S. Internet users. I'm not waiting for Twitter to catch up to Facebook, but I am going to watch for Twitter to innovate new mobile advertising products and win more big advertising contracts. Even Twitter admits that it has a lot to prove, and I'd be cautious about investing without knowing that Twitter has a concrete plan to stake its claim on digital advertising capital.
Fool contributor Jess Bolluyt has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.