Twitter (NYSE:TWTR) was once a simple micro-blogging site which let users send bite-sized text messages to followers. Today, it aspires to be a video site, mobile payments network, and instant messaging app all at once. Let's take a look at Twitter's current problems, and how they could be exacerbated by expanding too quickly into other businesses.
Twitter by the numbers
Twitter had 284 million monthly active users (MAUs) at the end of its third quarter, up from 241 million at the end of fiscal 2013. By comparison, Facebook's (NASDAQ:FB) Instagram doubled its MAUs from 150 million in Sep. 2013 to 300 million in Dec. 2014. This raised serious concerns that Twitter, despite its high brand visibility, was becoming marginalized in the social media industry.
Twitter is unique because people often use it to follow celebrities or companies instead of tweeting anything themselves. Last April, analytics firm Twopcharts reported that 44% of Twitter's users never tweeted. Twitter also has a fake follower problem -- last July, Entrepreneur reported that nearly 15% of followers of major U.S. retailers were either "fake or suspicious" accounts. Meanwhile, grey market websites sell thousands of fake followers to publicity-seeking users.
During the first nine months of 2014, Twitter's revenue soared 119% year-over-year to $924 million, but its net loss widened from $134 million to $452 million, due to a 149% jump in total expenses. An active Twitter user is worth $1.27 in revenue per quarter, compared to $2.77 per Facebook user.
Spreading itself too thin
Twitter generates revenue in three main ways -- Promoted Tweets, Promoted Accounts, and Promoted Trends. Ad revenue from those three sources rose 120% to $824 million in the first nine months of 2014. However, Twitter is complicating its business by adding new features.
In May 2013, Twitter introduced "Amplify" to let broadcasters send live video to the News Feed, and TV ad targeting, which helps advertisers send out Promoted Tweets when their commercial airs.
Last year, Twitter introduced "Video Cards" for marketers, which were later rebranded as Promoted Videos. The following month, Twitter started testing a "Buy" button which let users purchase goods directly from a retailer via a Tweet. In October, Twitter partnered with Groupe BPCE, France's largest bank by number of customers, to launch a Tweet-based money transfer system called S-Money. Earlier this month, Twitter launched a group chat feature for private conversations. The iOS and Android apps can now even record 30-second videos and edit them within the Twitter app.
Expanding a business is usually a good idea, but with so many moving parts, Twitter is looking a lot more like Facebook than itself these days.
Masking the real problem
On the surface, Twitter's cluttered expansion looks like a way to counter Facebook's video ads, payment system, and stand-alone Messenger app. But Twitter's real problem is its lackluster user growth.
CEO Dick Costolo once set a goal for Twitter to hit 400 million MAUs by the end of 2013. Last quarter, MAUs only climbed 23% year-over-year to 284 million. In the previous two quarters, MAUs rose 25% and 24%. That slowing growth rate means that it could take Twitter several more years to hit 400 million MAUs.
About half of Twitter's recent expansion efforts target marketers instead of users. There are a few problems with that plan. First, aggressively launching new services could keep Twitter's expenses high and its bottom line in the red. Second, marketers will realize that Twitter's MAU growth has stalled, and take their business to Facebook or Google (NASDAQ:GOOG) (NASDAQ:GOOGL) instead.
Last but not least, since nearly half of Twitter users don't actually tweet, flooding Twitter's microblogging platform with "buy" buttons and video ads could turn its News Feed into a river of spam, which could cause MAU growth to slow down even more.
No easy fixes
There aren't any easy fixes for Twitter's current dilemma. The company wants to become more than a microblogging network, but risks losing its identity by becoming a fragmented version of Facebook.
Twitter has done well over the past year with its existing MAUs by more than doubling ad revenue, but it now has to pile on new marketing tools -- which weigh down its bottom line -- to generate more. The only way to break that cycle is to grow MAUs at a faster rate, but ruining the site's minimal format with more monetization tools could drive them away.