Twitter's Investors Should Not Expect Another Facebook

Question: When is a profitable, growing company with over 300 million dedicated users worldwide considered a failure? Answer: When the company is Twitter and expectations are unrealistic...


Twitter CEO Dick Costolo was fired this week for failing to deliver sufficient growth. The reason for this sad news is that some investors and financial analysts think that Twitter can reach 'Facebook scale', someday, somewhere, somehow.

But is this realistic? And how is Twitter really doing when you compare the company with Facebook?

In this research article I'll try to answer these questions by taking a look at the numbers.

To compare Twitter and Facebook, I normalised the launch dates. To do this I first extracted key quarterly operating metrics from both companies from the relevant SEC 10-Q filings up to the most recent quarter (1Q15). I then took Twitter's data (covering the period 1Q12 to 1Q15) and shifted it back in time by 8 quarters, which is the approximate difference between the launch dates of Twitter (Mar-06) and Facebook (Feb-04).

This then allows the two services to be compared on a like-for-like basis using a horizontal scale that is defined in terms of the number of quarters after launch.

Here's what I found:

Revenues

For 1Q15, Facebook's total revenue was USD 3,543 million, compared with Twitter at just USD 436 million - a dramatic difference of 8x.

Not only that, Facebook has always been far ahead of Twitter in terms of absolute revenue even when the differing launch dates of the two services are taken into account:

  • 24 months after launch Twitter’s revenues were USD 54 million but by the same stage Facebook had earned USD 345 million in revenue.
     
  • One year later, or 36 months after launch, Twitter's revenues had increased to USD 436 million but Facebook was still ahead and had earned USD 1,438 million in revenue.

What is more, the chart above shows that Facebook has managed to steadily accelerate its revenue growth in the 44 quarters since launch. But Twitter has failed to achieve anything like the same acceleration.

While this analysis applies to total revenues, the picture is the same if we focus on advertising revenues, which have consistently accounted for about 90% of Twitter's total revenues and over 90% of Facebook's revenues since the respective launch dates.

The only way we can put a positive spin on Twitter's revenue numbers is to look at revenue growth on a percentage basis.

So if we look at the revenues that Twitter and Facebook  achieved during the last 12 months (e.g. 2Q14 to 1Q15) and then compare those annual figures with the previous 12 months (e.g. 2Q13 to 1Q15) then we see that Twitter managed to increase its revenues by 98.3% whereas Facebook could only manage a 51.1% increase.

If we then move Twitter's quarterly revenue figures back in time so the launch dates of Twitter and Facebook are the same, then on this 'like-for-like' basis Twitter has done even better: Twitter's annual revenue increase was 98.3% compared with Facebook at just 36%.

However, while Twitter’s revenue growth looks great when viewed on a percentage basis, when it comes to absolute revenue numbers, Facebook is way out in front.

Monthly Active Users (MAUs)

If we look at monthly active users (MAUs) then a similar picture emerges:

When viewed on a worldwide basis, not only is Facebook managing to attract dramatically more monthly active users than Twitter, but the rate of growth in users has been higher - and continues to be higher.

If we look at the above chart then we see that Twitter has been adding an average of 13.6 million new active users per quarter (varied between 4.0 million and 19 million) - but over the same developmental phase, Facebook was adding an average of 56.5 million active users per month (varied between 49 million and 73 million):

When we look at MAU growth in the US then we see that the US market is cooling off for both companies but there is no sign of Twitter's growth in MAUs being able to catch up with Facebook: in the US, Twitter seems to be headed towards a saturation level that is dramatically lower than Facebook.

On the international side then once again, it is Facebook that is out in front, both in terms of absolute users and more importantly, in terms of the rate at which new users are being attracted to the service: for the last 8 quarters (from 2Q13 to 1Q15), Facebook has been consistently adding an average of 39.5 million new international users per quarter. The equivalent figure for Twitter is just 10.0 million new international users per quarter.

Average Revenue per User (ARPU)

On first sight, Facebook is also besting Twitter on ARPU:

  • For the last four quarters (2Q14 to 1Q15), Facebook’s quarterly ARPU has averaged USD 2.39 per MAU, with a steadily increasing trend (up from USD 2.06 to USD 2.34 per MAU per quarter).
     
  • But if we look at Twitter over the same period (2Q14 to 1Q15), then we see that Twitter’s quarterly ARPU has averaged USD 1.15 per MAU, also with a steadily increasing trend (up from USD 1.05 to USD 1.32 per MAU per quarter).

So on this basis Facebook is currently earning about 2x more revenue per MAU than Twitter.

What could explain this?

Well, because Facebook has had two more years to 'learn' how to integrate ads within its service proposition, then we might expect the company to be currently doing rather better than Twitter.

But how is Twitter doing if we remove the effect of Facebook's 'learning advantage'?

If we normalise the data to take account of the differing launch dates of the two services, then it becomes clear that Twitter has been doing very well when it comes to ARPU:

If we look at the period of 24 to 36 months after launch for the two services (above) then we can see that Twitter has in fact, done a better job of monetising its users than Facebook:

  • For most of this period Facebook's quarterly revenue per MAU was flat, whereas Twitter was managing to consistently increase quarterly ARPU.
     
  • For the last three quarters of this normalized period, Twitter's quarterly APRU actually exceeded Facebook (USD 1.33 per MAU for Twitter, compared with USD 1.18 per MAU for Facebook).

The key question is whether Twitter can maintain this rate of growth in quarterly ARPU, which I’ll look at below.

Analysis

24 months after their respective launch dates, Facebook's US monthly active user base was 3.8x larger than Twitter.

Over the next three years, Twitter closed the gap somewhat, but Facebook’s US monthly active user base remained 3x larger than Twitter.

It is extremely hard to see how Twitter can close the gap, or even come close to closing the gap in the US.

It seems that Twitter's US user base is approaching a natural limit: quite plainly a lot more people in the US find Facebook more interesting, than they do Twitter. My analysis is that in the US, Facebook's addressable market is 2.5x as large as Twitter.

  • Twitter's value proposition is weaker than Facebook: Twitter essentially remains a microblogging service whereas Facebook has become far broader and richer. For instance, some users see Facebook as a place to store their pictures. Others avidly use Facebook messenger. There are no equivalent features with Twitter.
     
  • Twitter is harder to use than Facebook: The somewhat geeky and quirky user interface presents a learning barrier. Then, having surmounted that barrier, users have to invest time building a following, which - for most users - proves to be a long and tortuous process. This means that most users just follow others, rather than contributing, and this is why engagement time is lower for Twitter than Facebook.

The only way to increase Twitter's addressable market is to add (or acquire) new features that appeal to a far larger market than the core microblogging service - without alienating existing users.

These arguments are even more applicable internationally:

It is interesting that some new internet users in some markets (e.g. Indonesia), think that Facebook is the internet. Facebook - the thinking goes - offers so many features that it is, in effect, a surrogate for the internet.

If successful, Facebook's internet.org initiative, which aims to connect the world's unconnected, will reinforce this perception.

Not only does Twitter not have an equivalent vision (at least not one that has been communicated), but the core service is too niche for it to be perceived in a similar way to Facebook.

None of this analysis is intended to suggest that Twitter is in any way a bad service, nor that the company cannot become very successful. Indeed, we project that Twitter will continue to grow to around 550 million monthly active users by 2020. But by then Facebook’s active user base will have exceeded 2 billion. 

In summary, the richness of features offered by Facebook means that Facebook's addressable market is at least 3x that of Twitter when viewed on an international basis.

This means that it is unrealistic for investors to imagine that Twitter can ever reach a similar scale as Facebook.

But if the last two years are anything to go by Twitter has done a far better job of monetising its users than Facebook managed at a similar developmental stage.

The trends suggest that Twitter's user base will saturate at a far smaller size than Facebook, but also the company may ultimately be more profitable than Facebook when viewed on a per-user basis. 

Those investors who see Twitter as another Facebook might not realise it, but they're looking at a mirage.