Ben Thompson wrote a piece asking if Twitter should pivot to a new business model.
It's a great question, and that's what we'll get into in this article.
Something's not right
Twitter's cultural relevance is as considerable, and some argue, more significant than Facebook's. So why are its financial results so different?
We'll answer that question in a minute, but first, let's compare Twitter's revenue and stock performance to Facebook's and the other social media stocks.
- Last quarter, Twitter did $1.3 billion in revenue. Facebook did $29.0 billion.
Twitter's stock performance
- Since going public in November 2013, Twitter's stock is down 1.3%. Over that same period, Facebook's stock is up 566%. And although Snap and Pinterest both went public a few years later, Snap is up over 100%, and Pinterest is up 58%.
Back to our original question
Why is Twitter struggling on the financial front?
The reason, Ben says:
Social networks depend on advertising. Primarily, direct response advertising. When you are leaning back and relaxed why not click through to that Shopify site to buy that knick-knack you didn’t even know you needed, or try out that mobile game?
When you are leaning forward, though, you don’t have either the time or the inclination.
Pivoting to a paid model
Ben argues they should try a paid model. Because it’s clear direct response advertising has a ceiling with Twitter.
- If Twitter charged, it would cut its user base by a third, to 141 million daily active users.
- Twitter would only need to charge $4/month to exceed the $4.8 billion in LTM revenue.
- Twitter could bring back API access, charge for its data, and let developers build on top of its platform. But as Chris Dixon, a VC from a16z pointed out, Twitter was a developer platform in its early days. But since it chose advertising as its business model, it needed to own its users directly and not through third parties. Naturally, therefore, it had to cut off API access, and in the process, sunk a bunch of companies who built their businesses on Twitter.
Will users pay?
The problem from going from a free to a paid product is the initial rollout. Could investors stomach Twitter losing millions of users, hoping that a hard-core base will pay a small amount per month? I doubt it.
But, I don't think people willing to pay is out of the question. I started paying $3 bucks for Twitter Blue for one feature: The ability to organize bookmarked Tweets.
Twitter will be a fascinating company to watch over the next five years. And if they can nail a better business model, I don't see any reason they can't match Snap's market cap of $80 billion, which is more than a double from Twitter's current $35 billion market cap.
- Profile of Twitter's new CEO (NYT)