Recommendations for Twitter

Preface: The following essay was written for my Business Policy and Strategy class, so excuse the formal language - it's supposed to mirror a report a consultant would normally produce for a client. The report details some of the problems I see at Twitter, and well as recommendations to fix those issues. The essay is divided into three main sections: a company overview, the issues, and my advice to fix them. 

Overview

Twitter is a social networking service that launched in 2006, which was around the same time smartphones began to penetrate the U.S. consumer market. Unlike other social networking sites at the time, Twitter restricted users to sending short 140-character messages, called “tweets”, using SMS or the internet. Initially catering to technology enthusiasts and pundits, Twitter’s popularity rose when the founders advertised the service at SXSWi, a film and music conference filled with celebrities and prominent journalists. Explosive growth followed, leading the company to go public in 2013. As of July 2014, Twitter has approximately 275 million users and is competing with other social media companies for user attention. The company’s growth, however, has dramatically slowed in recent times, and it is no longer virally spreading. In addition, excessive administrative, infrastructure, and sales costs have cut deep into Twitter’s pockets, making the company post continuous net losses. The last, and perhaps most fundamental issue is the company’s unfocused executive team - one which does not understand its own service. 

Issues at Twitter

Slowing Growth

The business model for social media companies is entirely immature. Strategies to increase user growth, for example, will not be found in MBA textbooks or undergraduate business school classes. Thus, social media companies must improvise, research, and develop strategies as they go. Thus far, successful social networks such as Facebook, LinkedIn, Instagram, Tumblr, and Twitter have spread and engulfed the world only through one strategy - growth. For each of these services, growth is achieved by signing up as many new users as possible. By definition, a social network requires users to provide any value to those same users, since a social network is nothing without its community. 

Consequently, every social media company loves to brag about its growth statistics, and Twitter has not been able to do so recently. While the service reported 271 million monthly active users (MAU’s) in Q2 2014, year-over-year growth has been slowing for the past few years. For social media companies, this is anathema, and leads to eventual extinction because their business is entirely predicted on its users. The results of Twitter’s declining growth are twofold. First, Twitter will not be able to generate as much revenue, because advertisers are less likely to purchase ads on declining services. Continued slow growth will also necessitate Twitter to charge lower ad prices from these advertisers, further lowering revenues, in order to keep them from flocking to more successful, growing social networks such as Instagram and Snapchat. Second, less and less users are likely to join Twitter when they see that their friends are not on the service, which leads to a vicious cycle of continuously shrinking growth, followed by decline. Growth was how Twitter became successful in the first place, and how it continues to be a viable social network. The slowed growth in recent times is a dangerous red flag that may lead to the demise of the social media company, just as many other companies have faded before it.

Excessive Costs 

While it is true that profitability is an industry problem, Twitter is now a public company and must return value to investors. Those investors, however, have never seen Twitter post a profitable quarter since its IPO. Being a young company that only went public in 2013, many investors give Twitter the benefit of the doubt and expect profitability later. But as an industry analyst who follows the technology industry closely, I can assuredly say something is amiss at Twitter - and one must only look at their income statement. The company spent $1 billion in SG&A on a sales revenue of $665 million in 2013, losing more money on one line item than the total of its revenues. This is not at all surprising, as the company has been on a hiring spree, leaching designers and engineers from tech giants like Apple, Google, and Microsoft. Although this new talent is great, it’s extremely costly, as the company undoubtedly pays employees more than the tech giants to get them to leave for Twitter. It is normal for a company to increase SG&A spending as it grows, but costs should be scaled with revenues, which is simply not the case at Twitter.

Executive Team

Since inception, Twitter had a rocky road with its management team. Management turnover in the past four years is one for the books: the company started with Jack Dorsey in 2007, replaced him with Evan Williams in 2008, and again replaced him with the current CEO, Dick Costolo, in 2010. Besides the CEO position, most other executive positions similarly go through a lot of shuffling at Twitter. This butting of heads is not a good sign, implying that top leadership cannot agree on where to focus the company. Indeed, the company spent a record breaking $594 million on R&D, a 400% increase YoY, likely to find better ways to monetize the service and gain more users. As an outsider looking in, it appears that the executive team is not sure where to take the service, and is thus investing in R&D to find new outlets. This is hurting the company’s profitability, but also employee morale, which further increases employee turnover.

Advice for Twitter

Increasing Growth

The service that Twitter offers is truly exceptional, and is like no other social media service out there. Political revolutions have been platformed on Twitter. Whenever an earthquake strikes, you can be sure to hear about it on Twitter before any television news network. Musicians, politicians, and statisticians equally make use of Twitter, talking with their supporters and communicating their ideas in a public forum. The issue for Twitter is stuttering growth, which is the result of a confusing onboarding experience and a lackluster design. 

When a new user wants to sign up for Twitter, they are presented with an awkward homepage that doesn’t clearly communicate the value proposition of the service. Once the user is registered, Twitter recommends he follow some popular accounts, from categories like music, sports, and technology. The result for the user is a timeline of tweets that does not actually fit the needs of the user well. This approach is fundamentally broken, and it is no wonder growth has been slowing, as the late-adopters cannot understand this ambiguous sign up process.

First of all, Twitter should redesign its homepage to better communicate its truly phenomenal service. The homepage background pictures should be removed, and replaced with a simple background, similar to the one Facebook uses. This will remove the clutter and bring focus to the site. Next, instead of three obscure sentences that describe Twitter, the designers should use bullet points; they are more succinct and easier to digest. Most importantly, the content of those bullet points should be the value proposition. Something along the lines of: “Twitter is where you get the latest news first. Twitter is where you talk to your favorite celebrities. Twitter is how share your experiences”. The goal of these simple phrases to create a tangible idea of how Twitter can be used by regular people, rather than the abstractions Twitter uses currently. 

Twitter should also redesign its mobile applications for straightforwardness. Even as an experienced Twitter user, I find the current apps impenetrable in their design. Replies to other users should be designed to look like text messages, since that is what people are familiar with. In other words, replies should be viewed in a sequential manner and flow by time stamps. Most people use social networks on their smartphones, which is why applications are most the important element Twitter should get right. Redesigned applications, coupled with a simplified homepage will improve the onboarding experience and strengthen user growth.

Managing Costs

Twitter is a publicly held corporation, which means that shareholders expect to be paid back for their investments through company profits. These profits can also be reinvested into the business in order to build stronger competitive advantages like service uptime. As previously mentioned, Twitter spends disproportional amounts on SG&A expenses relative to its revenues, which results in a significant net loss every quarter. This is not a viable business strategy and must be quickly remedied. 

While layoffs are never a popular option, that is what Twitter must do to manage costs. The company employs 3,300 employees, which translates to roughly 83,300 users per employee. For reference, Facebook, which is Twitter’s closest competitor, employs 6,800 employees, which comes out to about 184,000 users per employee. In the most basic terms, Facebook employees are roughly 220% more productive than their Twitter counterparts, which is a sign that Twitter needs to reduce its workforce. Just recently, Microsoft laid off 15,000 employees as part of a restructuring plan whilst growing revenues, so this method is not as drastic as it sounds. In addition to SG&A expenses, Twitter must also manage its cost of goods sold. This can be done by better scaling its infrastructure in order to reduce per-user costs. While this is an extremely technical undertaking, it is one that Twitter must commit to. As Twitter rolls out new features and gains more users, infrastructure costs will only increase, and the company must be able to scale its costscheaply. 

Executive Overhaul

Dick Costolo has been the CEO of Twitter since 2010, and YoY growth and profitability have been declining with each year. Many industry analysts have been extremely critical of Costolo and his executive team, mostly because management is unfocused and unsure of where to take the product next. The most alarming sign of this executive myopia is the lack of dogfooding by leadership. I went through the Twitter account of each person on the executive team, and nearly all are rarely active on the service. This lack of dogfooding in top management indicates that they have little idea of what the service is and where to take it. 

Consequently, the executive team should be replaced with leadership who actually uses the service on a constant basis, similar to how a normal user would. I would recommend the board of directors to begin this executive reshuffle by searching for a new CEO from within the company first, before looking for outside talent. Twitter has many extremely capable employees at the midlevel, some of which could easily assume the CEO position. Whoever this new CEO is, they must be an active user of Twitter and have a vision for the company. This new CEO must also choose new executive talent to replace the old, in order to help steer the company in the right direction. Again, inspiration for this kind of corporate overhaul can be found at another company, Apple. After assuming reins of Apple in 2011, CEO Tim Cook made major changes in the executive team, replacing the SVP’s of iOS, retail, and other major departments with leadership he saw fit. Apple has had record-breaking quarters since. Once Twitter’s management begins dogfooding its own service, they will learn what it’s like to be a normal user. This will allow them to better evolve the product according to user needs.

Coda

Twitter is a phenomenal service with an amazing potential that is mired by slowed growth, excessive costs, and a lackluster executive team. Fortunately, all of these issues can be fixed. Slowing growth can be reinvigorated by an improved onboarding experience as well as simplified applications that can communicate the Twitter value proposition better. Layoffs will be necessary to reduce SG&A costs and normalize the company workforce to benchmark levels. In addition, per-user cost of goods sold should be brought down through improved scalability, which is of key importance as the service attracts more users. Finally, an executive housecleaning should be made, instituting new leadership that is not only a user of the service, but also has a vision for its future. A company has little chance for success without a leader who can steer a company toward a specific goal. 

These recommendations will turn Twitter into a profitable and successful social network. With a clear value proposition and redesigned applications, growth will rise again and may finally compete with that of Facebook. This will generate higher revenues, as Twitter will be able to charge higher prices from advertisers. In combination with a lower cost structure as a result of layoffs and scale, the company will finally be able to earn profits that can be reinvested into the business. This will only be possible with a new CEO and his handpicked management team, who will provide the company with a vision for the future. 

Twitter External Analysis

Preface: I was tasked with writing an external analysis for my Business Policy and Strategy class, and I chose to do it on Twitter. Below is precisely that. If you are interested, it's also available in PDF format.

Twitter Overview

    Twitter is a social networking service that launched in 2006, which was around the same time smartphones began to penetrate the U.S. consumer market. Unlike other social networking sites at the time, Twitter restricted users to sending short 140-character messages, called “tweets”, using SMS or the internet. Initially catering to technology enthusiasts and pundits, Twitter’s popularity rose when the founders advertised the service at SXSWi, a film and music conference filled with celebrities and prominent journalists. Explosive growth followed, leading the company to go public in 2013. As of July 2014, Twitter has approximately 275 million users and is still in the growth stage of the industry life cycle.

1) Risk of Entry by Potential Competitors

Economies of Scale

    Twitter is a web service, and it is powered by thousands of servers that allow millions of devices to send and pull requests for content, which in Twitter’s case is tweets that may include either text, images, or videos. While the details of the company’s server and web hosting costs are not public information, it is highly likely that the company has achieved economies of scale on their web infrastructure. Because of their immense web traffic, the company probably has deals with server, web hosting, and other internet infrastructure vendors for quantity discounts. It is unlikely potential competitors would be able to strike such deals, as their traffic would not be near Twitter levels when they launch, thereby reducing the risk of entry by potential competitors.

Brand Loyalty

    In addition to achieving economies of scale, Twitter also possesses a lot of brand loyalty. The Twitter logo is found on many company advertisements on television, sports commentators ask viewers to follow them on Twitter, as do celebrities and notable politicians. Most notably, this is often done voluntarily without the need for Twitter to advertise or solicit for their logo to be placed on the adverts. As a result, it would be extremely difficult for a competitor to come along and sweep Twitter users away, as the service is favored immensely by the community. This loyalty will reduce the risk of entry by potential competitors. 

Absolute Cost Advantages

    In November 2013, Twitter went public on the NYSE with a market capitalization of $24.5 billion (is it worth $32 billion as of 09/14/14). As a public company, Twitter has access to cheaper funds, and is able to finance more Research and Development and Sales and Marketing spending. In addition, the company can invest more money into its infrastructure and mobile applications, making it even harder for competitors to match Twitter’s absolute cost advantages. For this reason, the risk of entry by potential competitors is further lowered. 

Customer Switching Costs

    Twitter is infamous for severely restricting access to its service and API to other application makers, making it very difficult to switch to another service or application. In fact, until recently, users of the service could not export their tweets even for archival purposes. Thus, it would be difficult for a Twitter user to import their past tweets into a competitor’s service due to the restrictions the company places on your content. Users of Twitter would also be hesitant to abandon the service after using it for years, as they have accumulated many followers and tweets on it, making it a powerful entry barrier to competitors. 

Summary for Risk of Entry by Competitors

    With respect to Porter’s Five Forces Model, it is our conclusion that Twitter faces a low risk of entry by potential competitors due to the aforementioned barriers. These barriers could not be overcome by App.net for example - a Twitter competitor that could not gain the traction to compete in any considerable way. It is also worth noting that the risk of competition is higher for Twitter from well established competitors, as they have the economies of scale and financial capital to compete with Twitter.

2) Rivalry Among Competitors 

Industry Competitive Structure

    The social network industry has been incredibly competitive in the last decade, with the rise of Myspace, Facebook, and now Twitter. In addition to these three technological behemoths, virtually thousands of other social networks have sprouted to compete in the arena for user attention. And yet, while the social media industry is extremely fragmented, Twitter has not yet faced any worthy competition in the last eight years of its existence. This is thanks to the above entry barriers that the company commands. 

Industry Demand

    The user demand for social networks is a difficult topic to tackle, since the definition of a social network is not entirely clear. For example, users are given the option to make their Twitter accounts private, essentially turning the social network into an antisocial one. That said, as a whole, as more people all over the world are purchasing mobile devices with internet access, the amount of users social networks such as Facebook and Twitter are gaining is steadily increasing every year. For this reason, we believe that this growing industry demand somewhat offsets the rivalry between the various social networks, lowering the risk of competitor rivalry. 

Cost Conditions

    Cost conditions for Twitter are based in majority on fixed costs, since each additional user requires a negligible amount of server load. Given that Twitter is a free service that is monetized by ad revenue, the company makes more money with more volume, spreading the fixed costs over a larger user base. Competitors that would like to enter the tweeting space, as a result lower user counts, would have higher fixed costs per user and thus not be as profitable. This further lowers the risk of competitor rivalry for Twitter.

3) Bargaining Power of Buyers

    In Twitter’s case, the buyers are companies and individuals who purchase ads on Twitter. Because the quantity of social networks and internet advertising placements is so large, the bargaining power of buyers is high, since they can switch to any other service such as Facebook, or Google AdWords. This can heavily reduce Twitter’s revenues, making it an extremely high risk element.

4) Bargaining Power of Suppliers

    Twitter’s suppliers are its users, who can switch to any substitute service (see analysis below) for free, but that switch brings with it intangible switching costs such as lost followers and prior tweets. That is, Twitter is dependent entirely on its suppliers, since they supply both the content and the impressions, which is how Twitter generates ad revenue. Because of this, the bargaining power of suppliers poses a high risk.

5) Substitute Products 

    In the social networking space, there is almost no limit for substitutes. Facebook, Instagram (now part of Facebook), Snapchat, App.net, Tumblr, LinkedIn, Quora, Foursquare, and Twitter all compete for user attention, but in different ways. Probably Twitter’s main competitor, Facebook allows users to post “statuses”, which are similar to tweets except they have no character limit and allow for more features. At the end of the day, the limiting factor is the users’ time, since a user can give only a certain number of hours per day for social networking, making the risk of substitute products very high for Twitter, unless it is able to distinctly differentiate its product.

6) Complementary Products

    Complementary to Twitter are 3rd-party mobile applications such as Tweetbot, Tweetdeck, and various other services that add to Twitter’s features. These complementors add value to Twitter, and by proxy, Twitter’s users. Most competitors to Twitter do not provide such an extensive API for 3rd-party’s to work with, making the risk from complementors weak for complementary products.

Macroeconomic Forces

    There is a slew of macroeconomic forces that affect Twitter, namely privacy and government regulations. With the recent NSA leaks, user privacy has been on the forefront of tech news. How Twitter reacts to government data requests and how secure it keeps user data are important given the public demand for privacy. Twitter must walk a fine line between government requests and user demand for privacy. 

Conclusion

    In the past, Twitter has been very accommodating to the demands of users, and much less so to the demands from government. While this is great news for users, it’s worth questioning whether the political forces will impose stricter regulations on Twitter, thereby upsetting users and profitability. It will also be vital for Twitter to handle user privacy with the utmost privilege, given the amount of data leaks and hacks in the past months. This is because in the last few years, security and user privacy has been on the social radar, demanding internet services to fortify themselves against breaches. How Twitter handles these demands will be a powerful asset, or a destructive liability, for the company.

Google 2014 Q1 Results

I've been quite busy with schoolwork, "work" work, and learning to code, so forgive me for posting so sporadically. I may not be posting very often, but I've still been consuming all of the latest tech news as vigorously as ever, so all is dandy. Anyway, that's enough of my solipsism. This week we have a small treat from Google, with their 2014 Quarter 1 results. Below is a transcribed (and beautified) income statement. Percentages are mine.

Google Q1 2014 Income Statement. Q1 2013 included for comparison. 

- Items highlighted in red reduce net income. 

- Items highlighted in green increase net income.

- Items in black are totals. 

Some things of particular interest:

• Revenues grew healthily, despite what Wall Street skeptics will say. As many analysts have noted, Google revenues closely follow the amount of Google users (due to advertising). For revenues to continue growing, the user base has to expand. The U.S. is saturated already (pretty much everybody is a Google user), so revenue growth will either have to come from 1) international users, or 2) other ways of monetizing current users. It's also worth noting that international users are less profitable than U.S. ones.
• For every dollar earned, Google spends $0.14 on Research & Development. Google Glass, Google Maps, self driving cars, Android, Google TV, I can go on with other projects Google is involved in. The good part is that they are constantly innovating. The bad is that many, no - most products never leave the lab. Overall, it's great to see a large company spending so much on research and innovation. Looks like it's not stopping. Google spent 31.5% more on R&D this Q1 compared to last year. 
• Large increase in General & Administrative costs. Are they hiring up? Becoming larger and thus less efficient? Hard to say, but the increase is there and worth pointing out. 
• Net Income rose by 3.17%. Not bad, but not exactly stellar performance either. Considering revenues rose 19%, I would like to see net income follow revenue growth more closely. Trim down the fat (SG&A expenses). That said, technology companies are rarely efficient, so this is nothing to worry about, but again, worth pointing out. 

That's all for now. In the future, I would like to make some comparisons over a longer time period (10 years), but for now, this will do. As always, you can contact me here (I don't bite) or in the comment section below. 

Business School Curriculum Must Get Updated

Lately I've been fascinated by the characteristics that make a company succeed or fail. I'm not the first, and certainly not the last student of business strategies. As a business school student, I'm forced to read about many traditional business strategies used in the last century. You know what I'm talking about. Product Differentiation, Cost Leadership, Michael Porter's Generic Strategies, Lean Supply Chains...I can go on and on. The books they make us read then go on to give examples of successful companies that implemented, and continue to implement such strategies. Hewlett-Packard, Dell, and Motorola are just some of the companies that most often get mentioned. And every damn time I read these textbooks, I think to myself: "These companies lost. They are caricatures of their former self". Why are we learning this again?

Very few people buy HP computers anymore, and the few that do are probably enterprise customers stuck in a contract. Dell, after years of faltering revenues, struck a leveraged buyout in order to go private. And Motorola, oh the beloved Motorola, the company that supplied the U.S. Military, NASA, competed with AT&T during the cellular revolution, and brought to the world a mobile phone that actually had some semblance of design (remember the RAZR?) was recently sold off to Lenovo for a paltry $2.91 billion. The theme here is that none of these textbook business strategies kept these companies alive when faced with modern competitors.

Which makes me raise the question: are these strategies worth teaching anymore? Yes, they are, but only as a historical record. Business school graduates should know what worked in the past in order for them to avoid repeating the same mistakes in the future. 

More importantly though, business schools should embrace new business strategies that work for successful companies today. But before we do anything else, let me try to predict what you might say. You'll counter my idea by saying that these new strategies aren't tried and tested, that they aren't guaranteed to work, that they may be simple, dumb luck. My answer to all of those questions is maybe, but that doesn't mean they shouldn't be taught at universities. If there is one thing I learned about business strategies, it's that they are constantly disrupted by new strategies. The truth is that there is no single, true strategy that will eternally propel a business into success. The times change, the environment changes, the people change, and the strategies change with them. Business strategy isn't like math, it's malleable and constantly adjusts. Therefore, you must be on top of the latest ideas in order to compete successfully. 

With that out of the way, let me list out a few modern business strategies that work (note the word work, not worked) today (not yesterday) for successful companies. I will list one influential book (just one, or else this post would quickly turn into a business encyclopedia) that outlines some of these strategies, and then I will give two examples of companies that use them successfully. 

The Innovator's Dilemma
This is probably the most popular business book in the modern age because it reads very simply and states exactly what you need to know. It's also laced with examples, which always makes ideas more relatable. There are many strategies presented in it, but here is a tease of my personal favorites (paraphrased in my own words).

- Companies must disrupt and cannibalize themselves. Don't let a competitor get there first.
- The customer is NOT always right. The problem they want fixed, however, is.
- Research and Development will lead to innovation. Innovation keeps you successful.

The Innovator's Dilemma is not a perfect book. No book is. But it's a great reading for business school students since many companies today use similar strategies successfully.

Case-Study: Apple
- The iPod was an extremely successful product for Apple. It sold millions of units every quarter, and analysts predicted sales would only go up. What did Apple do? It released an iPhone that cannibalized its iPod sales, which today make up only a small portion of Apple's revenue. That couldn't have been an easy decision, especially since it was so risky, but nonetheless it worked, making Apple one of the most profitable companies in the world. In other words, Apple disrupted its existing, and very successful product, in favor of a product that would be profitable in the future. 
- Apple is almost notorious for refusing to budge to customer demands. It's not because Apple is stubborn (although sometimes, it certainly is), but because the company truly believes it knows what the customer wants better than the customer thinks he wants. This keeps their products simple and easy for people to understand. 

Case-Study: Google
- There has never been a company that lives and breathes R&D as much as Google. Nearly every product and service Google offers is a test to see if it sticks. You may not realize it, but Google has been testing hundreds of different products throughout the years, discontinuing many, and further improving those that work. Remember Google Buzz? Gone. Discontinued in 2011. Picnik? Shuttered in 2012. May you rest in peace iGoogle (2013). You get my point. Google has been pouring money into the development of new products throughout the years. It's like rollling a die, eventually you'll land on a six and win. But most of the time, expect failure. 

The Times Change, And The Education Should Follow
Computer Science students often complain that they are learning programming languages from the 1970's, and would rather learn something modern. The thing about Computer Science is that although the syntax changes, the fundamentals of programming haven't changed at all. Once you learn to think like a programmer, you can learn any other programming language. The same applies to Mathematics. Both subjects remain essentially the same from the time you learned them to the present. Business is nothing like that. Sure, a profit is always a profit, and revenues must always exceed expenses, but the strategy for earning revenues constantly changes. It would be foolish to use old business tactics when new, innovative ones exist, especially considering that traditional tactics are likely to fail. There is very little logic in business strategy. After all, who would think that disrupting your own product is the right business move?