After falling short of ad revenue expectations last quarter, Twitter (NYSE:TWTR) is looking for ways to boost its ad business. At the time of its earnings release, it announced the acquisition of TellApart and a partnership with Google (NASDAQ:GOOG) (NASDAQ:GOOGL) DoubleClick Bid Manager.
Most recently, Twitter introduced audience insights for advertisers. The new analytics tools provide valuable information for businesses, which could help them craft messages that resonate with their audiences better. The more information Twitter can provide, the better chance it stands of generating additional ad revenue from advertisers.
Twitter changed its ad pricing model last year to better align its interests with the businesses that advertise on the platform. Twitter now only charges advertisers when ads convert -- when someone takes an action such as buying a product -- as opposed to the cost-per-engagement pricing it previously used, in which advertisers paid anytime a user liked, retweeted, or clicked on a tweet.
Twitter pinned its slowing ad revenue growth on advertisers balking at the increased suggested bids for delivering leads further down the sales funnel. While that might be true to a certain degree, increasing conversions is the only real solution to that problem.
Think about app developers -- a group of advertisers Twitter admitted it saw particular weakness with last quarter. App developers have a pretty good idea how much an app install is worth to them based on historical data. The amount they're willing to pay per conversion isn't going to increase, but providing more data to advertisers about their audience and what works with them will ultimately increase conversions, which will help Twitter grow its revenue and advertisers to sell more.
Out of control
The only problem is that Twitter isn't in control of what advertisers do with the information it gives them. It's relying on other businesses to help it grow.
For Twitter to improve conversions on its own, it needs better targeting capabilities, which is why it acquired TellApart. Twitter plans to use TellApart to aid cross-device targeting, which will allow businesses to target users that saw their ad or website on one device and display another ad on a different device. Retargeted ads like that often convert better than initial ad impressions.
TellApart also brings a suite of measurement tools that enable Twitter to get the credit it deserves no matter where or when the purchase took place. That may increase the amount advertisers are willing to bid on Twitter's ads.
The partnership with Google's DoubleClick Bid Manager will also provide conversion tracking tools to advertisers that buy promoted tweets through the ad exchange. However, the partnership simply provides another way for Twitter to deliver more information to businesses through the trusted analytics of Google. Twitter will still rely on businesses to use that information to improve their ads themselves.
What those R&D dollars are for
Last quarter, Twitter spent 44% of its revenue on research and development. The company continues to develop new features for its apps, but more importantly is developing algorithms and such that it hopes will translate into improved ad targeting based on the data at its disposal.
And Twitter has some of the best data available on the web. The interest graph generated by who its users follow provides a very strong interest signal with much less noise than competitors.
Translating that graph into well-targeted ads has been a challenge for Twitter. For one, not all of its users take the time to curate their own interest graph, another area where Twitter has struggled. Improving its users' engagement, and the number of accounts users follow, will help the algorithms it's working on behind the scenes display more targeted advertisements.
In the meantime, providing businesses with as much data as it can is a short-term solution to some of the problems that face Twitter's advertising business.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), 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.