If you ask most people to name the two most popular social networking sites in the U.S., they'll likely mention Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR). Yet a recent survey by Pew Research Center found that Facebook ranked first in usage among online American adults with a 71% usage rate, but Twitter ranked fifth with just 23%. LinkedIn (NYSE:LNKD.DL) ranked second, followed by Pinterest and Facebook's Instagram. Why is Twitter falling behind these other networks, and should investors be worried?
Two things that matter the most to social networks
In the social networking industry, two things matter the most -- MAU (monthly active user) growth and ARPU (average revenue per user).
Pew's survey confirms fears that Twitter's MAU growth is slowing down. Back in the fourth quarter of 2013, MAUs rose 30% year-over-year to 241 million. But in the fourth quarter of 2014, MAUs only climbed 20% to 288 million. The good news is that Twitter is generating more revenue per user with new marketing tools, which helped ARPU rise 64% annually to $1.66 in the fourth quarter.
Pew's survey bodes well for LinkedIn, but the professional network isn't faring that much better than Twitter. LinkedIn's registered members rose 25% year-over-year to 347 million in the fourth quarter, but that's a notable slowdown from the prior year quarter, when its user base grew 37%. Based on its registered users during the quarter, LinkedIn's ARPU rose 15% annually to $1.85. Instead of reporting MAUs, LinkedIn reports "unique visiting members," which grew 23% to 93 million per month last quarter.
Instagram reported that its MAUs doubled from 150 million to 300 million between Sep. 2013 and Dec. 2014, but its revenue has never been officially reported. However, analysts at Cowen & Co. expect Instagram to generate $700 million in revenue in 2015 and $5.8 billion by 2020. eMarketer believes that Instagram's U.S. user base will grow about 20% annually in 2015. If overseas MAUs rise at the same rate, MAUs could hit 360 million by the end of 2015, giving Instagram an estimated quarterly ARPU of around $0.49.
The two things that Twitter lacks
Beyond MAU and ARPU growth, Twitter lacks two important qualities -- focus and profitability.
Every successful social network serves a clear purpose. Facebook keeps people connected to their friends and family. LinkedIn lets users make professional connections without revealing too much personal information. Instagram lets people share filtered snapshots and videos. Pinterest lets users "pin" things they love on digital pinboards.
Twitter's purpose is less clear. At first glance, it's a digital soapbox which encourages people to follow famous people and brands. Yet Twitter also wants to be a source of real-time news, a "second screen" for TV shows, a mobile payments platform, a video sharing site, and a mobile messenger for group chats. It's a messy approach, and the site's archaic 140-character limits and heavy use of hashtags can also confuse new users.
As for the bottom line, only Facebook is profitable on a GAAP-adjusted basis. LinkedIn and Twitter failed to report a profit in 2014 even as their registered users and ARPU rose. Twitter could have posted a profit if it slashed its stock-based compensation, which gobbled up 45% of its revenue in 2014. By comparison, LinkedIn spent just 14% of its 2014 revenue on stock bonuses.
The U.S. market is just a small piece of the pie
Pew's survey reveals some other interesting data points about Twitter's performance in the U.S. market. However, investors should remember that the U.S. market is declining in importance to most social networks.
According to eMarketer, North American users will decrease in importance to Twitter, dropping from 24% of its user base in 2014 to just 19% in 2018. That's bad news for Twitter, since ad revenue generated per timeline view was $5.65 in the U.S. last quarter, compared to only $1.16 for the rest of the world.
By comparison, nearly 70% of LinkedIn's members are overseas, while just 15% of Facebook's 1.39 billion MAUs are in North America. Investors should remember those figures when reading reports focused solely on the U.S. market, like the recent claims that U.S. teens are abandoning Facebook.
In my opinion, Facebook is a safer investment than Twitter or LinkedIn, thanks to its clearer focus, profitability, and ecosystem growth.
Twitter might be frequently mentioned in the media, but the network suffers from an identity crisis, various accountability issues, and a tendency to enrich employees with stock bonuses at the expense of shareholders. LinkedIn has a clearer focus, but it could eventually be rendered obsolete by Facebook, which recently launched its rival professional social network, Facebook at Work.