Twitter Has A Fundamental Revenue Problem

There are limits to what can be done within the confines of a ‘poor media’, low-engagement micro blogging service


What is Twitter's Share of the Social Media Market?

The social media sector will be worth USD 35.5 billion in 2015, but 91% of that will come from just four websites: Facebook, YouTube, LinkedIn and Twitter. Even by 2020, these four websites will still account for 83% of worldwide social networking revenues:

But Twitter will struggle as the social media market develops: the service accounted for 4.3% of worldwide social media revenues in 2014 and Twitter’s market share will hardly grow at all over the next five years – our projection is that Twitter will account for just 6.3% of worldwide social media revenues in 2020.

There are two main reasons for this so-so performance

  • Twitter lacks generic appeal; 
     
  • Twitter’s Average Revenue per User (ARPU) is fundamentally lower than Facebook, YouTube and LinkedIn.

Problem 1: Twitter lacks generic appeal

At the end of 2014, Twitter reported that its total worldwide user base was 302 million but we project that this will only grow to 611 million by the end of the 2020.

Meanwhile, Facebook’s worldwide user base will have increased to about 2 billion. Even LinkedIn’s worldwide user base will have increased to 602 million – about the same as Twitter.

The reason why we are projecting such a low rate of growth for Twitter is that the site simply lacks the generic appeal of Facebook and YouTube: it is clear that those actively using Twitter represent a subset of those who use mainstream social media sites like Facebook and YouTube.

Unfortunately, Twitter faces three problems in re-purposing its service so that it appeals to a far larger audience:

  • Changing the service too much runs the risk of alienating existing users – who provide Twitter with its current revenues;
     
  • Changing the service too much runs the risk of bringing Twitter into direct competition with either Facebook, LinkedIn or YouTube - which we think would be very unwise;
     
  • Changing the service too much could open the door to a start-up which might offer a replacement service - that might be promoted to disenfranchised Twitter users as "having all the features you loved about Twitter".

Problem 2: Twitter's ARPU is fundamentally lower than Facebook, YouTube and LinkedIn

All microblogging services are based on a very simple content format which essentially comprises a list of text messages.

This of course is the very reason why Twitter and other microblogging services have been so successful: it is easy to post new content and quick to scan a large number of Tweets in order to identify those that are of interest.

However, this super-simple content format carries with it a problem: there are fewer opportunities to insert advertisements into the content than is the case with sites like Facebook, YouTube and LinkedIn - which consist of a very rich content payload that includes copious textual content, extensive picture catalogs, videos, comment streams and much more.

It is this richness and complexity of content that has allowed Facebook, LinkedIn and YouTube to experiment with and then optimise a wide range of ad formats.

But with a starting point of what is essentially a list of text messages served on a mobile device it has been far, far harder for Twitter to undertake the same scale of monetisation activity that rival social media sites have managed.

Another way of looking at this would be to compare Twitter, Facebook, YouTube and LinkedIn with a conventional ad-bearing media form, such as a magazine, a commercial radio station or a TV network.

Clearly, in these cases, there is a limit to how many ads can be inserted into the content before the ads become obtrusive. As the richness of the content and volume of content increases, so do the opportunities to insert ads into that content - without overloading users.  

Returning to Twitter, it is now easier to see that Twitter has an ARPU problem: if the site retains its current microblogging format then Twitter’s ARPU must be structurally lower than rival sites that have a richer, more voluminous content offer.

But Twitter has another problem: A rich content offer does not just mean a service can insert a higher number of revenue-generating ad units, it also means that the service will have access to more information about how users interact with the content – and that information can be used to sell targeted inventory which attracts a higher market price.

The latest trends in the social media ad market involve selling to very precisely targeted audiences, either directly or as part of advanced ad campaigns (e.g. where audiences are re-targeted or where their behavioural data is sold to advertisers instead of ads, per se). It is clear to us that Facebook, LinkedIn and YouTube have a greater opportunity to take advantage of these emerging strategies than Twitter.

Twitter will remain a great service, but we should be realistic about how big it will become

We think that the above explains why Twitter’s average revenue per user (ARPU) has been structurally lower than Facebook, LinkedIn and YouTube for the last three years – and also why the company will be unable to close the gap.

The chart below shows that Twitter’s average annual revenue per active user is actually about half that of LinkedIn and Facebook:

We are not saying that Twitter cannot grow into a very successful company – actually, we are projecting that Twitter will be a success – but we want to point out that the microblogging format is fundamentally harder to monetise than other formats that are based on richer content. 

This means Twitter’s average revenue per user will always be structurally lower than content-rich social media sites, such as Facebook and Linkedin.