Here’s the ridiculous, intractable problem that Twitter CEO Dick Costolo just can’t seem to fix:
He’s running a tech startup that has 255 million users, and it just more than doubled its revenue to $US250 million a quarter. It’s on track to do well over $US1 billion in sales this year and it’s a hair away from being profitable already.
Yet everyone seems to hate Twitter. Investors have taken more than half the price off the stock at its peak. As Mashable points out, insiders are considering cashing out their stock and quitting. “Dick is the kind of guy you either love or you hate,” a former employee told Mashable. “There’s no real middle ground with him.”
If this were any other company — Snapchat! Clinkle! WhatsApp! — Costolo would be praised as a genius. Failing to make money, or having a ton of users and no revenue, is almost a badge of honour in the topsy-turvy world of new tech companies.
Twitter is virtually printing money, and Costolo is getting no credit.
Costolo lost his grip on the media narrative around Twitter back on Feb. 5, when he delivered his first ever earnings call. The news was good: Revenues were $US242.7 million, up 116%. Earnings per share were $US0.02 — an actual profit at a tech company! Amazing!
But the stock declined 17% immediately because of an obscure user metric that most people outside the company didn’t even know existed: Timeline views. This measure of how many different ways users looked at their Twitter news feeds declined sequentially.
Since then, the entire Twitter story has been about users, users not growing fast enough, and users not being engaged enough with Twitter. The stock has fallen on the user story.
Twitter does have some issues — it’s still balky to use. But the company is being punished for being successful: If Twitter becomes easier to use then users will engage with it less, and engagement metrics will go down. Multiple clicks to drill through Twitter content might look like good engagement — but it’s also a design failure. Users shouldn’t have to click multiple times just to get a look at a photo in a tweet.
Investors seem to believe that users are the future, and the more users you can get the bigger your potential revenue is. That, after all, is how Facebook’s stock is judged.
But it’s not at all clear that Twitter should be judged like Facebook, where getting the next billion users is an obsession. Rather, it probably ought to be judged more like LinkedIn, where the quality of the user base is more important than the size of it. Twitter is an important business and media tool that forms a huge part of the web’s social communications structure. Its revenues prove that its business model is sound. Two of its more important businesses — big data analytics and the mobile ad network MoPub — are largely being ignored by investors and the public right now. So is its new deal with Amazon.
Oddly, Costolo isn’t making a clear case for them either. When he spoke on his Q1 earnings call, he earnestly argued that Twitter was a mainstream business that reaches billions of users. That’s true, but it may also be wrong: It’s also a business-to-business tool that helps marketers and media companies reach billions of users.
Costolo can turn this around, of course. But that will depend on how he feels about cutting his losses and moving on. If he stays to fight the user metrics battle with Wall Street, he will lose as long as there is no user growth. But if he fights the revenue battle instead, he will surely win. There are, after all, very few other mainstream tech companies that double their revenue every quarter.
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