Twitter’s post-advertising opportunity
Building a distribution platform for creators in real time
Few media platforms have been both the main source and the main disseminator of news as Twitter has in recent years. Conversations on Twitter go viral and are endlessly analyzed in mainstream media. Important announcements are released there first. And, of course, there was the case of a certain former US president who was also a prolific tweeter. These developments have been a good thing for Twitter’s bottom line: Its stock doubled in value in a year, and its Q4 results look solid. Revenue surged 28% YoY to $1.29 billion, while monetizable daily active users climbed almost by the same rate to 192 million. Ad revenue grew in lockstep, rising 31% to $1.15 billion for the quarter.
This all looks pretty good on paper. However, when most people think of Twitter, “advertising company” isn’t the first thing that comes to mind; yet that’s precisely what Twitter is, since advertising represents the bulk of its revenue. History played a role here: Getting labeled as a social network so that it could access growing social media ad budgets – rather than an interest graph and content distribution platform – both enabled Twitter to make its pitch to advertisers and slowed its ability to pursue revenue diversification. We believe that Twitter has an incredibly timely opportunity to explore other revenue streams beyond advertising, perhaps taking a cue from China’s mobile-first generation of platforms: by focusing on distribution for a new class of super-creators, tying together different channels (e.g., email/newsletter, video, audio, etc.), and exploring new native content formats.
One of these things is not like the other
Twitter, or Twttr as it was known back in the day when Web 2.0 made vowels scarce and expensive, was borne out of Jack Dorsey's idea for a real-time communication system, inspired by his interest in dispatch systems for bike messengers and cabs. (The founders wisely decided against other names, including "FriendStalker.”) In March 2007, the nascent platform became the belle of the internet debutante ball at SXSW when attendees used Twitter to stay in touch. Twitter use tripled during the event, leading Wired to proclaim that "Twitter Is Ruling SXSW." Following SXSW, Twitter use continued to skyrocket. In 2007, Twitter recorded about 400,000 tweets per quarter. That may seem puny by today’s fledgling platform usage standards, but it was rather unprecedented growth at the time. By 2010, there were 50 million tweets on the platform each day.
Not long after Twitter’s highly anticipated initial public offering in 2013, a book about the company’s early days revealed an infamous quote attributed to Facebook CEO Mark Zuckerberg:
This struck us as an apt description of Twitter, which had long seemed to contort itself into a social media category that was never a great fit.
We understand the calculation: This was an era in which advertising was the default method of monetization – for everything – so Twitter rolled out ads under early execs Dick Costolo, Adam Bain, and Anthony Noto. In the process, Twitter was classified as a social platform, often compared to Facebook despite glaring differences. Facebook relies on a social graph – your college acquaintances, family, friends, etc. – while Twitter uses a mix between a social graph (people you know) and an interest graph (people you enjoy following on certain topics). The latter overtook the former in value pretty quickly during Twitter’s evolution, but the social media platform definition hasn’t adapted (though it needs to). Twitter got lumped into this category, where it for some reason continues to reside today.
Close but no cigar(s)
It's almost uncanny how close Twitter was to huge creator trends that it couldn’t capitalize on and that later snowballed. The two most glaring recent misses were around video livestreaming and short-form internet video.
Twitter bought Periscope, an early livestreaming app, in 2015. Periscope faced stiff competition immediately: It was released shortly after Meerkat, a leading (yet short-lived) mobile live-streaming app, and shortly before Facebook Live. Instagram Live debuted in late 2016, and YouTube introduced livestreaming a year later. Twitter operated Periscope independently before integrating its functionality into its own app. Twitch emerged on a similar timeline and established itself as the go-to platform for livestreaming, even as other platforms were adding livestreaming as a feature. Twitch is used by 500,000 performers every day and has created a whole new economy for gamers. Could a similar outcome have been possible for Periscope?
And there’s Vine, an early version and possible model or inspiration for TikTok. In 2012, Twitter paid $30 million for Vine, a tool for creating and sharing 6-second videos. Vine drove a wave of experimentation among creators, and it seemed for a time that it would become the de facto video-sharing tool. Young stars like David Dobrikemerged, with the service peaking in 2014. Former executives point to Instagram's 2013 introduction of 15-second videos as the beginning of the end, and Vine failed to differentiate. Snapchat also became a factor. While executive churn and Twitter's own business woes contributed to Vine’s demise, Twitter notably flubbed creator monetization: It completely missed that creators – especially early momentum builders – should be paid. This responsibility to make sure early creators are compensated always rests with the platform they’re creating on, since there was not yet an off-platform market for that type of entertainment or content.
Twitter announced that it would shut down Vine in October 2016, about a month after the debut of the video-sharing social networking app Douyin in China. TikTok, Douyin’s international version, launched in September 2017. It is now a cultural phenomenon.
A necessary transition
Twitter deserves much credit for executing tremendously well on its social media path when that was the only way to monetize. However, we are approaching a different post-advertising era that requires a different playbook and an embrace of diversified revenue strategies.
The challenge, in a nutshell, is that for advertising-supported platforms the key audience isn’t the end user, but the advertiser. For their own viability, platforms must prioritize user experience, and that’s difficult to do if the needs of your users (who don’t pay you) are different from the needs of your advertisers (who do). Over time, too much advertising fatigue sets in that both affects desired advertiser outcomes and consumer confidence and satisfaction with platform UX. This is why platforms in China limit the number of ads a user can see in a given day. WeChat, for example, limits ads to three per day. Interestingly, this increases the hype and value of the ads while also emphasizing other ways of directly supporting creators, such as subscribing to their content or buying digital assets. WeChat and other Chinese platforms can do this because advertising is usually at best no more than 20-25% of their revenue. In contrast, advertisers are the main customers for platforms that monetize through ads. More often than not, advertiser priorities win.
How Twitter could become a creator-centric platform
So what can Twitter do to monetize outside of advertising?
Pro tiered accounts: This would be the easiest path and take advantage of the different ways that users, such as celebrities, governments or companies, use the platform. Someone with less than 100 followers has much different needs than someone with 10,000 or 1 million. A paid tier could emphasize a better user experience and offer enhanced tools for filtering, CRM, audience management, analytics or content recommendation, providing creators with less noise and more signal. The napkin math is compelling: If we apply the 80/20 rule, where 20% of users generate 80% of all content and value, Twitter’s target here would be about 38.4 million users. Would they pay, say, $10 per month for better audience tools? That’s a potential $384 million in additive revenue – every month. And it would allow the company to create different versions of Twitter and capitalize on user trends that are already occurring organically on top of the platform. Though Twitter has largely ceded this opportunity to third-party tool developers, it wouldn’t be too late to make this interesting move, either by building the product in house or supercharging the effort by acquiring a company that has already built some of this functionality.
Paid subscriptions: Packaging Twitter’s role as an information dissemination platform would mean creating a paid tier of Twitter accounts (pay to follow, pay to engage with, and pay to discuss a certain topic live all seem like they could be viable models). Twitter’s acquisition last month of Revue, a free service that allows writers to start and publish their own editorial newsletters, seems to point in this direction. This capability gives Twitter users a way to monetize their feeds, and Twitter said it will continue to support new ways of audience-based monetization. Giving creators more options for how they choose to monetize will certainly contribute to an interesting environment in which they can experiment and create even more content.
Lists and Moments: These are severely underutilized but incredibly powerful as platform-specific native formats and curation tools. Moments allows users to combine different tweets on a single topic. Lists function similarly but at the account level, so I could create lists of everyone in ad tech, for example, or those who discuss specific topics. It would make sense for users to pay to follow a list; yet tools to create, curate, and disseminate these two formats today remain quite primitive and in stark contrast to their potential.
Live commentary: There is a joke that Twitter is real time and Facebook shows you what happened a week ago. That’s why Twitter should lean into live vs. asynchronous commentary. People already live-tweet any number of happenings, but live commentary of an event experienced by many could be especially impactful, whether it’s the Oscars or a TV show premiere. For the Australian Open, for instance, I might want to subscribe to (and pay for) live commentary from a particular tennis pro instead of listening to the network talking heads. Discovery tools that would introduce users to new creators are crucial but – you guessed it – currently underdeveloped.
Amazon and Instagram seem to be focusing on commerce, which leaves this huge space that we call knowledge. Twitter should focus on knowledge work and act as a creator tools platform and distribution network, allowing creators to produce different types of content for different platforms. Twitter does real-time notification better than other platforms, so it could provide the home and needed distribution push.
Payments: Square peg in a round hole
Unlike in the United States, where the internet was born, China avoided the browser-based internet step, skipping roughly 20 years of internet evolution.China immediately leapfrogged into the mobile web, with a mobile-first mentality. Its platforms are natively equipped with payment functionality, making it easy for users to pay their utilities or send money to others in the same place. That means that apps can attach a monetary action to every interaction. The WeChat interface essentially serves as a one-stop shop for socializing, shopping, networking, banking, etc. Douyin offers commerce, digital content consumption, discovery, reviews, and the ability to transact in endless ways. The culture accepts that internet content isn't free. Users can browse serialized digital content, for example, where they can pay to read individual chapters of a book.
In the United States and most of the Western internet economy, payments are an afterthought. Twitter, by virtue of CEO Jack Dorsey also being the founder and CEO of payments platform Square, may be the US platform that is most aware that payments are integral to a post-advertising future. A potential partnership with Square could enable this critical capability to scale on Twitter. An infrastructure for micropayments could allow Twitter users to pay a buck for a subscription to someone's feed, for example. This is extremely clunky if even feasible with today’s US payments infrastructure, which isn't geared toward frequent microtransactions. There is a great opportunity here to remove this friction. A Twitter-Square linkup could be the answer.
It’s not easy to change a wheel on a car that is already moving. Switching monetization methods in a scaled company is difficult – but not impossible.
The best example that comes to mind is Adobe, which transitioned from selling new releases of its software products in 2013 to selling subscriptions for its software products. Software as a Service (SaaS) allowed Adobe to boost its recurring revenue from $200 million to $5 billion. At the same time, the new model has brought Adobe much closer to its customers and provides the company with a ton of usage data that can be used to improve its products.
The main challenge for Twitter here is that operationally, a creator-focused content platform and distribution network looks much different than an advertising business. That may have been a challenge for Twitter in the past based on its early acquisitions, which might have needed different patterns of support, investments, organizational structures and skill sets to make them work. The people piece is a huge obstacle: Companies may not have the people ready to lead these types of transitions. For a public company, it may also be difficult to justify any investment that doesn’t immediately connect to revenue. These types of moves may not pay off until years later – a tricky proposition for companies that report earnings every quarter.
Companies need revenue that is prudently diversified in order to build resilience against unpredictable macro events (hello, COVID) and ensure long-term viability. Here’s the trap for Twitter: If it doesn’t make this transition now, Twitter may miss a window of opportunity and potentially become the next generation’s MySpace or Friendster.
Is social media as a category definition useful anymore, especially as more platforms diversify revenue streams? What comes after the social platform era? Distribution and creator monetization tools?
Thanks for reading,
Ana & Maja
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