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Twitter's Ad Revenue Can't Keep Up as User Growth Stalls

By Adam Levy - Sep 30, 2015 at 9:08PM

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A new forecast shows Twitter's ad revenue missing expectations as Facebook exceeds them.


Source: Twitter.

If you've been seeing more ads than usual on Facebook (META -0.76%) lately, it's because ad spending is accelerating faster than anticipated. eMarketer recently published a forecast estimating 2015 social-media ad spend at $25.14 billion, about 6% higher than it expected back in April.

One company not participating in that higher-than-expected growth, however, is Twitter (TWTR 2.25%). The company's slow user growth in 2015 has led management to revise its initial outlook for the year downward, with analysts following suit. Now, three quarters into the year, eMarketer thinks it has a pretty good feel for how the company is being affected by its slowed user growth.

61.8% estimated ad revenue growth
Twitter is still the fastest-growing company of all the major social networks, but its estimated 61.8% growth in ad revenue this year is a decline from the 66.9% rate eMarketer originally forecast

The biggest factor driving down eMarketer's forecast is that Twitter's audience size isn't keeping up with the competition. With just 304 million users logging into its app and website every month, Twitter is well behind Facebook's 1.49 billion monthly active users, as well as Instagram's 400 million users. "Advertisers want to reach a mass audience," said eMarketer principal analyst Debra Aho Williamson. "And that's harder to do on Twitter than on Facebook."

The majority of Twitter's ad revenue comes from brand advertisers, who buy ad products such as promoted hashtags. With a smaller audience, those branded advertisements simply aren't worth as much as they are on Facebook or Instagram for that matter. And while Twitter claims its audience is much bigger than its logged-in users, branded advertisements typically don't extend outside of Twitter's core user base.

Instagram recently introduced trending tags and curated photo collections. Those are features that easily lend themselves to brand advertising and could directly affect Twitter's ad sales. eMarketer expects Instagram to generate $600 million in ad revenue this year for Facebook and expects it to grow quickly over the next couple of years.

What Twitter is doing right
It's not all doom and gloom for Twitter, though. Williamson pointed out that it has improved its ad targeting this year. The acquisition of TellApart, which specializes in cross-device retargeting, has helped improve conversion rates. Twitter CFO Anthony Noto says there's still a lot of work to be done with targeting, and the company continues to invest in improving the data it gives to advertisers.

Williamson also says that Twitter "has a lock on real-time conversation." That can be extremely valuable to advertisers, especially when they craft a message around real-time news and events. For example, Oreo had a slam "dunk" of an ad when it quickly put together an ad referencing the power outage at Super Bowl XLVII. Twitter will aim to capitalize on its real-time prowess with Project Lightning, which will curate content from Twitter around events. It will have the opportunity to display ads in the stream, and it could be the first major opportunity for brands to access Twitter's logged-out viewers.

There are several more potential catalysts to keep Twitter's ad revenue growing without user growth. Noto says its ad load is still relatively low, about one-third of the way to its long-term goal of 5%. Additionally, he expects its upcoming partnership with DoubleClick to increase the amount of ad spend coming into Twitter and increase the perceived value of Twitter ads. Finally, Twitter could opt to start monetizing its micro-video platform, Vine, which has 100 million monthly users.

While there are plenty of ways Twitter could reinvigorate its ad revenue growth to keep up with Facebook, the fact remains that it's fallen short of achieving success. With the looming threat of Instagram advertising, and the recent announcement that the photo-sharing network continues to grow as Twitter stalls, management needs to pull some levers. Otherwise, it risks missing out on better-than-expected growth in social-media advertising.

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