Every service has its power users, but the Twitter(NYSE:TWTR)user base in particular seems to be completely out of balance. A small group is constantly tweeting and reading content on the platform, while the majority of users only participate on occasion.
Twitter understands that it has something of an engagement problem, and after its only publicly available engagement metric started falling, the company stopped reporting it this year. To boost engagement, the company has invested in new features including emailing at-risk users about highlights from their networks. It seems Facebook (NASDAQ:FB) is mirroring that strategy with Instagram, as TechCrunch reporter Josh Constine found a "Highlights" email from Instagram in his inbox last weekend.
Engagement is a key component to both businesses, which rely on advertising as their main source of revenue. More engaged users see more advertisements and stick around longer, enabling the network user base to grow more quickly.
Is the new Instagram highlights email a sign the company is struggling with the same problems as Twitter?
What they have in common
On the face of it, Twitter and Instagram are two very different services, but when you dig further, you find they both operate off the same fundamental ideas. For example, both rely on a follower relationship (often a one-way street) instead of a friend relationship like you would find on Facebook. More importantly, both services have a small subset of users who produce the vast majority of content.
While the content on Twitter (primarily brief messages) and Instagram (photos and videos) may differ, the same social graph and content presentation structures produce very similar challenges. Mainly, users become inundated with content from power users, some of which produce less than stellar material. Unlike the Facebook News Feed, there is no algorithm that sends the most popular posts to the top of each app. Twitter did just introduce "While you were away . . ." to add that functionality, but it still relies mostly on a reverse chronological timeline.
That causes user fatigue, which eventually leads to abandonment. Last year, a survey from Cowen found that more users have abandoned Twitter than those who continue to use it monthly. Indeed, Twitter has publicly stated that it aims to fix its engagement and retention problems, particularly among new users. Unfortunately, management has conceded that some of its efforts, such as Instant Timeline, have failed to increase retention.
As a subsidiary of Facebook, Instagram can hide behind the social network and its 1.44 billion users who provide billions of dollars of advertising revenue every quarter. Facebook does not provide many details for Instagram, but it says the average user remains highly engaged, spending 21 minutes in the app per day.
What does this mean for investors?
With some analysts valuing Instagram significantly higher than Twitter, it is important to keep in mind that the service is not without its faults. Although Instagram is growing its user base faster than Twitter and may have stronger engagement overall, it is still susceptible to the same engagement and retention issues that have plagued Twitter over the last year or so.
And keeping users engaged is key to growth as the photo-sharing network ages. The Instagram user base has already surpassed Twitterdom, hitting 300 million users in December, while Twitter just passed 300 million at the end of last quarter. But Instagram's advertising inventory only lends itself to brand advertisers, and they want the largest audience possible. Instagram, therefore, must continue growing its user base, and user retention will be a determining factor in that as the company moves forward.
Facebook investors who expect Instagram to start producing significant profits for the company in the near future might need to tap the brakes and readjust their views. In fact, Twitter could provide a better model for evaluating Instagram than Facebook, considering Instagram is following a similar path to monetization. Keep in mind that Twitter is still not profitable on a GAAP basis, so expecting more from Instagram with similar user numbers and far fewer advertisers would be optimistic.