As a social media platform, Twitter’s (TWTR, Financial) early success seems to have been an inaccurate indication of its current popularity. With Facebook (FB, Financial) zooming past it in nearly every metric possible, the Zuckerberg-led friend finder seems to have been touched by the finger of fortune while the little blue bird was left with tepid user growth and not many opportunities to monetize its platform.
One of the biggest barriers to Twitter’s progress has been its user base. That metric has been growing but at a much slower rate than Facebook. Though much of that growth has been organic for both platforms, Twitter has not done anything to stay relevant to potential users. Of course, its current users are loyal for the most part, but they have little to offer in terms of appeal to advertisers.
It is that missing element that Facebook has so deftly avoided by adding Instagram and now WhatsApp to its fold. By multiplying its user base through acquisitions, Facebook is able to offer a much larger pool of users for its advertisers.
What is Twitter doing about it?
Although Twitter has been far more active than Facebook in the mergers and acquisitions space – with over 50 transactions in the last eight years –”‹ it failed to integrate its ad platform to serve multiple user bases the way Facebook did with Instagram.
Facebook has now realized that user engagement is one way to grow its revenue, and it's using video as an answer to its problems.
In a way it's a great strategy. As mobile data consumption has grown with each passing year, video consumption is also on the rise. To top that off, advertising rates on video are much higher than traditional display advertising.
The growth of mobile and video
“The average smartphone user will consume 8.9 GB of data per month in 2021, according to the latest Ericsson Mobility Report.” –Businessinsider
As desktop usage flattens out, mobile has picked up the pace and is now growing at breakneck speeds, thanks to the smartphones and tablets that are multiplying in our homes. It's a reality that most of our Internet reading has moved from desktop to mobile devices. Case in point: Facebook made nearly 84% of its revenue from mobile advertising in the second quarter this year.
Video is not just for engagement; it will also bring the greenbacks.
Given a choice between reading and watching a video, most of us would prefer watching a video, and that's the reason why engagement is much higher with a video ad than any other form of media. And this is exactly what advertisers and platforms are pursuing, to the benefit of both.
To gain insight into how effective video advertising really is, we need to look at YouTube – the granddaddy of streaming video. As a pioneer of user-generated video, YouTube knows what the stats will be on any video platform.
YouTube shows that video ad viewability on other video sites is about 54% against its own 91% – and mobile devices and video player size seem to be the key drivers of that visibility.
As such, it’s no surprise that both Facebook and Twitter want to be in the video space in a big way.
In Twitter’s case, it's taking the live streaming route. It is believed that since Twitter is generally conversation driven, the chatter around a live broadcast event will take engagement to new heights. The first test of this assumption is the political conventions that concluded last week. Engagement is far greater around such events, and Twitter is now going all out to rope in producers of content that it thinks will create the most engagement. Bloomberg has already inked a deal with Twitter to feed three business-based programs live to the platform, and the NFL has a similar agreement. With the upcoming Olympics getting massive coverage on Twitter, this will be the true acid test.
If Twitter can show higher engagement, then it can guarantee itself some cream-of-the-crop clientele as advertisers. At its second-quarter earnings call, it confirmed that big ticket advertisers like Sony (SNE, Financial) and Verizon (VZ, Financial) were already on board.
Revenue impact
Obviously, the biggest focus for Twitter right now – apart from engagement and user base growth –”‹ is revenue increase. With higher engagement, its average revenue per user is also assumed to grow. Its current ARPU stands at around $2 against $3.76 for Facebook. Obviously, Facebook, with a much larger user pool, can command a higher cost per click. Twitter’s only chance now is to take engagement to the level that it will impact how much advertisers are willing to pay for each user click on their advertisements.
With a strong suit of streaming video channels, Twitter can increase its overall revenue by at least 50% over the next fiscal. But it needs to move fast because Facebook is already planning a major video coup over the next two years. Facebook Live Video will be a direct competitor to Twitter’s live streaming efforts, and if the latter doesn’t move quickly to get premium video content producers onto its platform, it may once again be left by the wayside – much like it experienced on the user base front against Facebook.
Unfortunately, until we see some real gains from its video push, I cannot recommend a BUY on Twitter stock. We will need at least a few quarters of hard growth directly related to video before we can make that call. As of now, Twitter stock is nearly at a -30% year-to-date yield so investors will be watching keenly to see if the new video angle can actually recoup some of those losses before they would be willing to add to their positions.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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