Twitter and the Pursuit of Revenues

What happens when you cannot find new customers to sell your product to? Usually, you will try to squeeze out as much money as you possibly can from your current customers. That is precisely what is going on at Twitter HQ. 

During 4Q14, Twitter added 4M users. During the year 2014, Twitter added 47M users, which brings the total monthly active users (MAUs) Twitter has to 288M. If you’re a heavy Twitter user, you probably love the service and can’t imagine living without it. If you merely like Twitter, you probably use it occasionally whenever you have some downtime. This brings us to the average Twitter user: they made an account to try Twitter, but never came back; either because they didn’t like the service, found no use for it, or as I’ve written many times before, found Twitter confusing. 

So now we know that Twitter has a user growth problem, and for reasons above, the company can’t seem to get users to stay and use Twitter. We will circle back to MAUs later, but first let us check in with Twitter’s financials. You would think a company that isn’t gaining traction with the users is also not making much money, but you would be wrong. Before I begin discussing revenues, let me preface this by saying that Twitter is an extremely young company (it went public in November 2013), which means that there isn’t a large collection of historical data we an analyze. While that makes the job of the analyst harder since he is working with so many unknowns, it is invariably more interesting! 

Revenue Growth

Revenues increased 33% QoQ, and 111% FY14 vs FY13. Whatever Twitter is doing to get more advertising dollars, it is working splendidly. The company now earns roughly half a billion dollars every quarter. It is still a tiny business, but the way Twitter has been able to grow revenues is impressive. Twitter expects to earn $440-$450M in 1Q15, which is a slight decline from this past quarters’ performance ($479M). 

The first few years of a company after an initial public offering are always a mess, especially in terms of expenses. Usually, formal processes for expenses are not set up yet (employee credit cards, traveling costs, etc) and budgets are either nonexistent or valueless, since everything is constantly in flux. The company is tackling bigger issues such as growth and product, which makes the expenses side of things of secondary or tertiary importance. For these reasons, it is not fruitful to dive deep into the expenses of a young company such as Twitter - they’re not indicative of future trends. 

There are some interesting things going on in Twitter’s expenses, though. R&D, as a percentage of revenues, has been diminishing for the last year. I believe this is happening because management feels the opportunity cost of investing in R&D is too high. Instead, that money is being spent on Sales and Marketing (S&M). Twitter spent $0.43 on each $1 it made on S&M in 2014, which would be an atrocious statistic if not for the immaturity of the company. 

Twitter has never been profitable, and will likely continue posting net losses in the immediate future (1–2 years). You can look at Twitter’s net losses in one of two ways. As an investor, you should be risk-averse and be highly skeptical of Twitter’s ability to post a profit. Social networks come and go, internet bubbles burst and pop, but you aren’t going anywhere. Would Warren Buffet hold Twitter stock? Probably not. The alternative viewpoint you can take on Twitter is that you truly believe in the product and see it as an unbridled social network that advocates the freedom of information, or some other noble or cool pursuit. You may believe that Twitter represents freedom, and the profits will certainly come later, leading you to invest in the company despite continuous net losses. Which viewpoint you choose is a personal question, but now you are armed with the facts. 

If we take all of Twitter’s revenues and expenses, and spread them over MAU, we will get two rough estimates of profitability: total revenue per user, and total cost per user. Although MAU may not be the best metric to use as the denominator, it is a more accurate representation of per-user profitability than “timeline views”, which is the other metric Twitter provides. 

Unlike other analysts, I included all sources of revenue (advertising & licensing) as well as all expenses (cost of revenues, research and development, sales and marketing, and general and administrative) to compute per-user costs, because they provide the most comprehensive picture of profitability.

With that said, you can see for yourself that the total cost per user of running Twitter is higher than the total revenues - by approximately $0.34 per user in 4Q14. That is - Twitter is losing roughly 34 cents for every user of the service.

In Short

Given that Twitter is still such a young company, it is difficult to evaluate its performance in financial terms, since the expectations aren’t set yet. Twitter’s user growth, however, is a different story. MAU are not growing as fast as investors, and more importantly Twitter, would like to see them grow. Twitter probably has one more year to figure things out before investors start to really get antsy. As I’ve made abundantly clear before, the first problem I would tackle would be Twitter’s onboarding process, which remains a confusing mess. Twitter remains my favorite social network, and I remain rooting for the little blue bird even if it’s learning to fly very, very slowly.

Twitter: Introspective

Preface: This is the first of a new series of articles I will be writing, which are called Introspectives. For these types of articles, I will be doing some number-crunching and analysis, so that they are more in-depth and introspective (thus the name). They will include graphs/charts, followed by my thoughts on what the data shows. My hope with these introspectives is threefold. First, and with selfish intentions, I want to get better at data visualization and manipulation, and the best way for me to learn is through working with real data. Second, my hope is to share my opinions on what the data exposes, which the mainstream tech media did not pick up on. Finally, my goal for these introspectives is to create a narrative based on facts. In short, I want them to be strong enough to stand on their own. 

The first introspective will be on Twitter, partly because it's the social network I use most, and partly because it's not doing so well. For me, it's exponentially more interesting to dig into unsuccessful companies than successful ones. 


Income Statement Exploration

If you peaked into my spreadsheet, you would find a lot of work done on Twitter's balance sheet. While it's true that the balance sheet is fundamental to a company's analysis, it doesn't tell us much about the future potential, since balance sheets are snapshots in time. On the contrary, income statements represent data over a period of time (3, 6, 9, or 12 months), and provide us with more interesting information. Let's start with the basics: Revenues and Cost of Revenues. 

Revenue vs. Cost of Revenue

Revenue vs. Cost of Revenue

- This is a fairly simple chart, showing us the revenues and the expenses required to create those revenues. It's a healthy sign when a company has higher revenues than cost of revenues (from hereon abbreviated CoR), which is indeed the case for Twitter. 

- Notice how revenues and CoR began to divulge heavily starting with Q3' 13, which is when Twitter's revenue hit a growth spurt. Since social media is a young business, is it difficult to benchmark if Twitter's CoR is within industry standards, considering the industry is so young. You could compare Twitter to Facebook, or LinkedIn, but any differences wouldn't be an immediate cause for concern. 


Income Statement Breakdown

Income Statement Breakdown

This next chart includes revenues and CoR, but it also incorporates other elements of the income statement, notably Research and Development, Sales and Marketing, and General and Administrative expenses. 

- This chart is what Twitter should be concerned about. Total costs and expenses, which includes all of the above items, exceeds revenues by a significant amount. 

- R&D is almost half as large as revenues. Twitter started spending a huge amount on R&D in Q1' 14, probably to search for products and services that could be incorporated into Twitter. We've seen Twitter Music (which failed), the ability to tweet multiple photos, and detailed tweet activity, among many other small additions to the service this year. All of these features are great, but they don't fundamentally add new use-cases to Twitter the service. This leads me to think that the immense amounts that Twitter spends on R&D could be toned down, which to their credit, they seem to have done in Q3' 14. We will see what happens to R&D spending in Q4' 14, but my advice is to slow it down, since results are unsatisfactory. 

- The next highest expense on Twitter's income statement is Sales and Marketing, which is almost as high as R&D in Q3' 14 ($164 vs. $183 million). Here, I am not so confident that Twitter should reduce spending. It seems like S&M and revenues go hand-in-hand, since the company must advertise the service to advertisers (ironic, but that's how the online advertising business works). 

- General and Administrative expenses make up the lowest costs, but they too have been steadily increasing. Again, it's hard to say if this item is too high or too low, but it's worth noting that executive salaries are placed in here. Given Twitter's gross management turnover, I would expect G&A expenses to increase in future periods. 

 - As I'm sure you noticed, expenses ballooned in Q4' 13. Without getting too technical, the explanation for this is Twitter's stock-based compensation expense, which accounted for $406 million in restricted stock units (RSU's). They expensed these in Q4' 13 in no doubt to gain some favorable tax treatment in future years, where losses could be used to offset any profits. 


Revenue and Net Loss

Revenue and Net Loss

As a summary of the income statement breakdown, I've included a revenue and net loss chart that encompasses everything we've talked about previously. Some observations follow.

- Since Q3' 13, it looks like Twitter has been attempting to contain its net loss to half of its revenues. Management can spin it any way they like, but these consecutive net losses are worrying and don't seem to be stopping in the future. Twitter is either too costly to run, or it can't find enough revenue streams to offset the high costs. Or perhaps both. 


Balance Sheets, Income Statements, and Narratives

As an accounting major, I can tell you it's very easy to get lost in the numbers, and forget about the big picture. While the details certainly matter (MACRS or straight-line depreciation), they don't tell us the true condition of a company. Think about the time you got a nice big juicy pimple on your forehead, which is extremely noticeable to everybody. Does this mean you have a life threatening disease? Of course not. But it may be a sign that you should cut back on that General Tso's Chicken you've been ordering every Wednesday night. At the very least, you know to skip the fortune cookie. 

Similarly, the expenses we looked into previously (CoR, R&D, S&M, G&A) are extremely obvious to everybody, and lend themselves to be preoccupied with. However, they don't tell us the true condition of the company - they only explain half the story. The other half of the story, which in the pimple example would be the functioning of your immune system, is the company narrative.  

Let's ease into the Twitter narrative slowly, starting with revenues, costs, and monthly active users (MAU's). 

Revenues, Total Costs, and Users

Revenues, Total Costs, and Users

- Only one new piece of evidence has been introduced into this chart, and that is MAU's. Revenues and total costs are both dollar-sign items, while MAU's are an intangible, but equally fundamental statistic to the salubriousness of Twitter. What becomes immediately clear from this chart is that user growth is not in as rapid as revenue or expense growth. In fact, user growth is downright sluggish, especially compared to the growth of Facebook and Instagram (found later in this analysis). 

- What Twitter has been able to do was to increase revenues much quicker than users. The goal of this analysis isn't to figure out how they've done it (although that is certainly interesting as well), but instead, the focus is on the future. At a certain point, there is a limit to what Twitter can charge an advertiser to place an ad on the service. That limit is monthly active users. Given the lazy growth of MAU's, revenues growth will eventually plateau to be in line with user growth. This is assuming that Twitter-the-service continues to be the main product for Twitter-the-company. Twitter doesn't have diversified income streams like WhatsApp and Instagram, which Facebook smartly purchased, so revenue growth is bound to hit a roadblock if nothing changes. One can only assume Twitter knows this, and is working on new products and services down the road. 


Sometimes it helps to visualize the same data in a different light. Below is a chart showing MAU's and revenues, as well as a logarithmic trendline of the MAU's. Note the y-axes, which correspond to different data points. 

MAU's and Revenues

MAU's and Revenues

- The MAU trendline tells the whole story. User growth started up rapidly,  growing from Q1' 12 through Q1' 13, and then slowing down thereafter. I wasn't able to find revenues for that period of time, since Twitter was still a private company, but if Q3' 13 is any indication, revenues were measly - there were no public shareholders to please yet. 

- It looks like there is some fanciful accounting going on in Q3' 13. As mentioned earlier, Twitter had a large stock-based compensation expense in Q4' 13, and I'm guessing they accelerated revenue recognition in that same quarter to make the loss look better. As a result, the next quarter (Q1' 14) had very little revenue growth. This is conjecture, of course, but accountants are known to manipulate revenue recognition like so. 


Normally, I don't like comparing social media companies to each other. Social media is it's own industry, but it's too adolescent to benchmark companies against each other. Facebook serves needs that are different from Instagram, and the latter serves different needs than Twitter. That said, they are all social companies, so some sort of comparison is allowable. Comparing Twitter to Facebook/Instagram serves to further explain its narrative. It's also a great tool for getting a feel for the size of Twitter. With that, let's look at the MAU's of Facebook, Instagram, and Twitter.

MAU's: Twitter + Facebook + Instagram

MAU's: Twitter + Facebook + Instagram

- Facebook is king. Zuckerberg's company simply engulfs Twitter and Instagram (reminder: it's owned by Facebook), and it's so large that comparing Twitter to Facebook would be futile. It does tell us one thing though - Twitter is not Facebook, and it will not be the next Facebook. 

- The story of this chart is actually lies with Instagram. Just recently, Instagram announced it has 300 million MAU's, which makes it larger than Twitter. To be fair, Instagram is primarily a photo sharing service, while Twitter focuses on 140-character text messages, but you can bet Twitter would love to have Instagram under its portfolio. If you recall, Twitter wanted to purchase Instagram, but likely got outbid by Facebook for it. Regrets, I've had a few

- Analysts like to dig extremely deep into the details, but all we need to see about how Twitter is doing is right in this chart. Twitter's MAU growth was not able to match that of Facebook, and eventually, people realized Twitter is not Facebook and will never be as large as Facebook. Stock markets adjusted, and everyone moved on. Now Instagram, another product in Facebook's portfolio, outpaced Twitter's growth. The trajectory of Instagram shows it's going up, while Twitter's is slowing down and might even level-off. This doesn't make Twitter a bad company, it just signals that it will no longer be a growth company, which led investors to invest in Twitter in the first place. 

- You're probably now thinking Twitter should be worried about Instagram's success. They should be worried insofar as to why Twitter can't match Instagram's growth rate. But I wouldn't worry about Instagram in the competitive sense, since they are two entirely different social networks. I haven't looked into the data, but I would venture to say that many people use both Twitter and Instagram (in addition to Facebook), and use of one service doesn't take away users from the other. I also don't see Instagram adding any functionality similar to Twitter, since the beauty of Instagram is its elementary simplicity. In short, Twitter shouldn't be actively preoccupied about Instagram's success, and instead focus on their own issues (of which there are many). 


This final chart displays the same data as above, in a slightly different view. Note that there is no Instagram MAU's for Q1' 14 and Q2' 14, because Instagram didn't release this data to the public. 

MAU's: Twitter + Facebook + Instagram #2

MAU's: Twitter + Facebook + Instagram #2

- It's easier to see by how much Facebook trumps both Instagram and Twitter in this chart. Facebook is huge.

- Q3' 2014 is when Instagram overtook Twitter. It's worth reiterating that this doesn't mean much in itself, it only tells us how successful Instagram was in growing.



As I was writing this introspective, I was faced with a conundrum. On one hand, I wanted to present my findings about Twitter. On the other, I wanted to give my advice on what Twitter should do to grow as a company. Since I have no higher body to report to, I chose to do both. Sprinkled within this analysis are my opinions, which I believe are good strategic decisions for Twitter. That said, the focus of this analysis was not recommendations, of which I have many. If you are interested in my recommendations, or just have a comment to add, feel free to contact me via email, or fittingly, by Twitter.


Download the PDF of this report: Twitter Introspective

Twitter's New Strategy Statement

I’ve written quite a bit about Twitter in the last month, beginning with my External Anaylsis, followed by my recommendations for the company. Yesterday, the company announced their long-term strategy to allay investors who are worried about declining growth. That strategy?

Reach the largest daily audience in the world by connecting everyone to their world via our information sharing and distribution platform products and be one of the top revenue generating Internet companies in the world.

Pointed out by many, this new strategy doesn’t even fit in 140 characters. It is a sign that the company is just as unfocused as before, if not worse. Every internet company wants to be one of the top revenue generating companies in the world. Just stating so doesn’t make it so. Fortunately, investors weren’t duped by the new strategy, and Twitter stock fell the day after the announcement by about 6%. What this announcement means to Twitter users is a different, although similarly depressing, story. The story is a simple one, it’s more ads. 

Twitter doesn’t charge users to use the service, so the only way investors can expect greater revenues is through more ads. I’m a user of Tweetbot, a third party Twitter client that doesn’t display any ads (yet), but most people use the official Twitter app. I would expect lots more ads in your Twitter feed if you use the official client. 

Twitter is my favorite social network by far, so I’m extremely saddened by the unfocused management team. The latest strategy statement only makes matters worse, indicating the company is yielding to investors instead of coming up with new innovative ideas. I always believed that Twitter should have stayed private and raised equity through other means, but now, it looks like it's learning how harsh the realities of being publicly traded really are. 

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. 


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.


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 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,, 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. 


    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.