Is Social Media A Viable Business Model?


Is Social Media A Viable Business Model?

Twitter announced earnings today and they were terrible. The company missed on revenue and user metrics were weak (we'll look at that closer below).

First the highlights:

Twitter's first quarter revenue hit $436 million, missing expectations of $456 million. The company cited foreign exchange impacts took 6% out of annual revenue growth.

Twitter's first quarter adjusted earnings came in at $0.07, better than the $0.04 that was expected. But these still aren't GAAP numbers and so they're rather meaningless.

Average monthly active users totaled 302 million in the first quarter, in-line with expectation, up 18% from the prior year and up from 288 million in the previous quarter.

Average mobile monthly active users were 80% of the monthly active user total.

On the surface, the number don't seem terrible. But the chart everyone seems to be looking at (below) shows the real negative trend here.

The growth in ad engagement has fallen off considerably. While still growing, the steepness of the curve (which can be seen in lower revenue numbers) is troubling. Users are essentially rejecting ads on the platform. It seems as though Twitter hasn't created an ad product that is accepted by users. The more prevalent ads get, the more users dislike them, according to the data.

And this makes it expensive for advertisers to reach audiences. The cost per engagement is up on Twitter - never what an advertiser wants to see. This means its more expensive to reach a user and thus the ad campaign is more inefficient.

In a perfect world, this would mean ad prices are going up and Twitter is making more money. But that's not happening - revenues are down. This means that users are just more blind to ads and thus forcing advertisers to pay more.

twtr ad engage

The Twitter numbers bring back an interesting point made by Snapchat CEO Evan Spiegel, who incedentally, may have missed out on his chance to IPO

When the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease - compounding problems for Facebook and driving stock even lower. Instagram may be only saving grace if they are able to ramp advertising product fast enough. Total internet advertising spend cannot justify outsized valuations of social media products that derive revenue from advertising. Feed-based advertising units will plummet in value (in the case of Twitter, advertising spend may not move beyond experimental dollars) similar to earlier devaluing of Internet display advertising.

While the comment could apply to Facebook, perhaps it extends to all social networks. When innovation curves are so rapid and markets are expanding so fast, is it possible for anyone to win economically or will users just go to the next big thing at the slightest excuse?

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