Twitter Inc. is in trouble. User numbers are growing slowly, actual usage of the service may be declining, and the stock is trading at record lows. Co-founder Jack Dorsey has his work cut out for him.
The burning question going into earnings Wednesday is whether Dorsey is willing to fundamentally change the product — including the chronological timeline — to attract new users. Any mention of change can trigger a #RIPTwitter-type reaction among power users, and yet Twitter must move beyond the power users — the people who live on Twitter — if it wants to be as mainstream as Facebook, WhatsApp and WeChat.
All signs point to big change coming: Dorsey is pushing a revamped feed that would allow users to see popular tweets from accounts they follow rather than in chronological order, which would be an expansion of the current “while you were away” feature. There’s also talk of lifting the 140-character limit on tweets.
“It’s not clear when/if product/UI [User Interface] changes can stabilize or reaccelerate user and usage metrics,” Mark Mahaney, analyst at RBC Capital Markets, wrote in a research note.
For the fourth quarter of 2015, Twitter is expected to report a loss of $118.8 million, or $0.17 per share, down from $125.4 million, or $0.20 per share, in the year-earlier quarter, according to analysts polled by Thomson Reuters. Revenue is expected to grow to $709.9 million, up by 48 percent from $479.1 in the fourth quarter of 2014 and a record amount for the company. Twitter posted guidance for revenue between $695 million and $710 million.
Under the leadership of COO Adam Bain, the company has been very aggressive in squeezing revenue from its current user base. This week, Twitter introduced its version of a homepage takeover ad: A new product called "first view" lets advertisers pay for a tweet to be shown to all Twitter users when they first open the app or log in.
And yet making money from Twitter's users has never been the problem. “Twitter monetizes its user base at about half the rate of Facebook, and we are not sure it can close the gap entirely,” Mahaney wrote.
User growth, however, is a problem. In the last quarter, Twitter’s user base increased to 320 million monthly active users, up by 11 percent year-over-year. Meanwhile, the much-bigger Facebook reported a 14 percent increase in users last quarter. Twitter's user base pales in comparison to Facebook’s 1.59 billion monthly active users and Instagram’s 400 million monthly actives.
Dorsey re-joined the company as CEO six months ago, and so far his changes have failed to impress. Moments, the human-curated feature that was formerly called Project Lightning, was expected to be a significant product shift, but it has faced criticism since its release in October. “Our gut-sense is that the new Moments product hasn’t had much traction,” Mahaney wrote.
At a $10 billion market capitalization, Twitter makes an attractive takeover target for other big-name tech companies, media organizations or private equity firms. There have been reports of News Corp. and Silver Lake mulling the buy. Facebook and Google have previously made many successful multibillion-dollar acquisitions.
Key executives have left Twitter in the last year, but there's consensus on what that means. "Jack’s back. … It’s a shake-up for good reason,” said Michael Davis, head of creative at Conversant. “No large ship gets turned around in five months. There’s new leadership, and there’s culture changes.”
For now, Dorsey is taking tighter control. With former product head Kevin Weil and former engineer head Alex Roetter out, Dorsey said he would be overseeing product and engineering along with Chief Technology Officer Adam Messinger. He has also added a new member to the C-suite, Leslie Berland as chief marketing officer. Twitter’s board is also expected to reshuffle.
There have been reports of a big media executive joining the board. Television producer Shonda Rhimes has been named as well as Oprah Winfrey and rapper Kendrick Lamar, Re/code reported.
Then there's actual Twitter usage. Twitter does not release numbers that make this key metric easy to track, but there have been several negative signs. Tweets during the Super Bowl were down this year. Leaked API data obtained by Business Insider indicated a steep dropoff in actions on Twitter. Twitter said the data was inaccurate but declined to comment further.
Nothing is sacred under Dorsey's leadership. The addition of a more algorithm-heavy feed could mean a better on-boarding experience for new users. That's especially true if they are familiar with how Facebook works and not in the fast-paced world of Twitter. For the non-Twitter user, “You look at the big Twitter stream, and you’re like, 'There’s no way I can read all that,'” said Kim Forrest, vp and senior equity analyst at Fort Pitt Capital Group.
Now an algorithm will surface more relevant content. Nick Edwards, CEO of Boomtrain, a service for machine learning and predictive algorithms, said he was surprised Twitter did not introduce such a feature sooner. “Algorithms can filter the signal from Twitter's immense noise and make the platform a much more accessible and relevant source of information for 99 percent of its users,” Edwards wrote in an email.
But while Facebook has created a revenue machine, last posting $5.8 billion for the fourth quarter of 2015, Twitter has yet to achieve a billion.
Some point to a lack of user interest in the ads on the site. “I will fully look over the sponsored links on Twitter,” Forrest said. “It’s very much like TV, where it’s an interruption to what is on the product. TV we’ve gotten used to it, and TV commercials are so entertaining.”
Twitter has been working to improve ads, in part by creating more options. Brands can now pay for custom emoji and branded Moments. Last month, Twitter released conversational ads that allow brands to tweet video combined with a call to action. Ads can also be better targeted through the custom audiences feature.
So how will Twitter achieve more revenue gains? Better ads and more views from a larger user base could help.
For the fourth quarter of 2015, response rates on Twitter were 36 percent faster than they were on Facebook, according to data from Sprout Social. It's that kind of in-the-moment relevance that has long been Twitter's best selling point.
“In a lot of instances people take to Twitter first,” said Andrew Caravella, VP of Marketing at Sprout Social. “Twitter and the rapid fire nature and the stream, consciously or subconsciously, contribute to people’s expectations. That’s also gaining momentum … In the public and the [direct messaging] sphere expect to see a lot more.”