Twitter Bird
Source: Twitter

Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB) take two different approaches to deliver content to their users. Twitter provides its users with the things people are talking about right now, presenting them in reverse chronological order. Facebook uses algorithms to try to provide the most important information to its users first. Each approach has merit, but its this differentiation that makes Twitter appealing to a lot of people.

Now, Twitter plans to start messing with people's carefully curated timelines. It already started showing "favorited" tweets from other people in users' timelines. CEO Dick Costolo's comments on the company's third-quarter earnings call indicated that timeline experimentation will continue: "We will continue to innovate on ways to better organize our content to deliver the right experiences at the right time for all types of users logged in, logged out and on syndicated partner properties."

So why does Twitter want to start curating more of what its users see?

It's all about new users
People who've been on Twitter since it started have grown to love the reverse-chronological timeline. They've spent countless amounts of time finding new people to follow (or unfollow) and enjoy the up-to-the-second feed of information.

For new users, however, Twitter is a bit intimidating. One of Twitter's biggest problems recently is getting new users to sign up and start using the service. To that end, Twitter cut the number of steps required to sign up for the service in half last quarter, and saw a 13% increase in users that started and finished the sign-up process.

But even after signing up for Twitter, most people don't know what to do. It's like being at a party where you don't really know anyone. Twitter thinks it can play a good host and introduce new users to people and conversations they might find interesting based on who they already know on Twitter.

Twitter added 13 million net new users last quarter to bring its total to 284 million monthly active users. That's an increase of 23% year over year. Comparatively, Facebook added 30 million net new users last quarter, increasing its user base 14% year over year to 1.35 billion monthly active users.

While Twitter is growing relatively faster than Facebook, it's not engaging those new users. Timeline views increased just 14% year over year, indicating new users aren't that interested in using Twitter. Meanwhile, Facebook has seen its primary indicator of engagement (daily active users as a percentage of monthly active users) increase across all geographic regions.

Engagement is key to future revenue growth
Right now, Twitter is able to mask its declining engagement because its still in the early stages of monetization. Ad revenue per timeline view increased a whopping 83% year over year last quarter.

That revenue growth is coming from the increasing number of ads it's showing, with ad engagements growing 150% year over year. That number indicates that Twitter is putting more ads in timelines, as cumulative timeline views only increased 14%. There's a limit to how many ads Twitter can put in users' timelines, so increasing the number of timeline views (i.e. engagement) is key to sustaining its revenue growth.

Facebook, by comparison, actually reduced the number of ads it shows to its users. Ad impressions declined 56% last quarter, but average ad prices increased 274%. Average ad prices at Twitter declined 17%.

If Twitter wants to sustain its revenue growth for the long run, which came in at an impressive 114% last quarter, it must figure out how to engage new users.

People hate change, but investors should love it
Twitter recognizes the issues facing its business, and is working to solve them. The ongoing process is getting easier, and timelines are starting to look more familiar (i.e. they look more like Facebook).

While longtime Twitter users might dislike the idea of tweets showing up in their timelines from people they don't actively follow, new users might appreciate the guiding hand from Twitter. It's doubtful many users will abandon Twitter; its network is too strong. Twitter taking an active approach in improving engagement -- especially that of new users -- should be encouraging to investors.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook and Twitter. 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.