When most investors think of Twitter's (TWTR +0.00%) revenue, they think of advertising. And with good reason: Twitter generated 89% of its revenue from advertising last quarter.
But that percentage is starting to get smaller. Last quarter marked the first time Twitter's data licensing revenue grew faster than its advertising revenue since before 2011, according to the company's S-1 filing. I expect that trend to continue this quarter after Twitter announced last week that it's partnering with IBM (IBM +2.44%) for integration with its enterprise solutions.
Twitter and IBM will work together on enterprise solutions. Source: Twitter.
Twitter's ad business is far from tapped out, but the bigger opportunity may lie in mining its data.
The state of Twitter's ad business
Ad revenue at Twitter is still growing rapidly as the company ramps up its advertising services. Last quarter, ad revenue increased 109% year over year to $320 million. Ad revenue per timeline view increased 83%.
The earnings report wasn't all roses, though. The average price per ad continues to decline as Twitter has opened its ad platform to more small and medium-sized businesses at lower prices. Last quarter, the average ad price declined 17%.
Twitter's strategy to increase ad revenue has been to show more ads per timeline view. It doesn't take a genius to know there's a limit to the number of ads Twitter can jam into timelines. At some point, the market will stabilize, and Twitter will have to work to increase average ad prices.
Twitter's ad business stands in stark contrast to Facebook's (FB +0.58%). Facebook is growing its advertising revenue at a healthy pace -- 64% last quarter -- despite showing fewer ads. Ad impressions declined 56%, but the average price per ad was up an astounding 274% compared to last year. There's no guarantee Twitter will be able to replicate Facebook's success with advertising.
So Twitter is diversifying
Last week, Twitter announced a new partnership with IBM to help enterprises take advantage of the valuable data Twitter users provide the company. Twitter and IBM are working together to build applications and services so businesses can integrate Twitter's data into their operations.
One thing holding back more companies from licensing data from Twitter is that they're not sure how they would use it. IBM's data analytics solutions -- like the Jeopardy champion Watson -- will help businesses make sense of Twitter's data and provide them with actionable information. In its press release, Twitter gave the example of a company asking, "Why are we growing quickly in Brazil?" and being able to receive a straightforward answer.
Twitter's acquisition of Gnip earlier this year is key to this partnership. Twitter previously licensed its data to Gnip, which aggregates social data from just about every major Internet outlet. Gnip's data makes the potential services developed with IBM far more attractive for enterprises, while Twitter is able to maintain control over the product.
IBM is looking to differentiate its analytics services from competitors, and adding Twitter's data is a big difference-maker. Twitter offers a very unique data set, and IBM's tools are very adept at analyzing Twitter's data. The more data IBM can acquire and analyze, the better it can answer questions and solve problems. As a result, its partnership with Twitter looks like a win-win.
Fully monetizing its users
Twitter seems to be encroaching on the saturation point for advertisements per timeline view, and at the same time, its timeline views per user are falling. The ad business is doing well now, but there's no clear indication that Twitter will be able to sustain its advertising growth.
Meanwhile, a big move into enterprise solutions with one of the leading enterprise service providers could help Twitter milk its user base for all it's worth. With 284 million-plus users talking about all sorts of products and services on Twitter, its data is very valuable to just about any company. Packaging those data for consumption is what IBM does best, and it should help Twitter grow its data licensing business.
