Why Can’t Twitter Make Its Advertising Model Work?

There is a fairly standard playbook emerging in online advertising. Create a product, offer it up for free, get people hooked, build a user base, and then slowly start rolling out revenue-generating features. Google all but wrote the formula, Facebook is perfecting it, and upstart Snapchat is trying to rewrite the rules all over again.

But what about Twitter? Why can’t a company that, for all intents and purposes, has accomplished the hard part – building a service that people like and use every day – find a way to monetize its network?

Great Expectations

Hopes were high for Twitter when it IPOed in late 2013 at a very respectable $41 a share. Those hopes seemed justified when the stock immediately climbed the charts, approaching $70 by the start of 2014. But since then, the stock has steadily declined. Revenue never hit forecasts. The user base became stagnant, and Wall Street got impatient. Twitter’s stock currently sits at $15.

The worse the situation gets, the louder the murmurs become of a more dominant player, like Google or Apple, swooping in and acquiring the struggling social network – the same fate that has befallen Web 1.0 superstar Yahoo. Like Yahoo, Twitter has found itself mired in organizational drama that has distracted the company from growth opportunities and avenues of diversification.

The 140-character messaging company found some synergistic success by buying the six-second-video app Vine in 2012. Periscope was acquired in 2015, giving Twitter access to the growing livestreaming market. But other than those two moves, neither of which cost the company any significant cash ($30M for Vine, $100M for Periscope), Twitter hasn’t been very aggressive in either internal developments or acquisitions.


Facebook and Google Are Pulling Away

Meanwhile, Facebook saw the writing on the wall and went all in on mobile. CEO Mark Zuckerberg was laser-focused on not being left behind as the desktop market shrank. He opened his pocketbook for record sums to both develop and buy big-name apps.

People gawked when he spent $1B for Instagram, which at that time was just a quirky photo-sharing app. They outright gasped when he paid $19B for WhatsApp to simultaneously access more foreign markets and get deep into messaging services.

But both decisions proved incredibly canny, and Facebook’s in-house Messenger app has become a force to be reckoned with in its own right. Zuck is clearly playing for keeps. If Snapchat’s CEO Evan Spiegel hadn’t had the audacity to turn down a $3B offer in 2013, Facebook might have owned that too.

If all that weren’t enough, Zuckerberg has already placed a $2B bet on the next potential major platform, virtual reality, by acquiring Oculus. In addition to diversification, Facebook has also slowly and steadily ramped up advertising on its primary product, the News Feed.

Google tried and failed to break into traditional social networking with Buzz and Google+, neither of which lived up to expectations, but were at least valiant attempts. Google has, however, managed to keep its revenue stream going strong with its first and still most popular product, AdWords.

YouTube, which Google acquired for what at the time was an unheard-of $1B for a video-sharing site, generated nine times that in revenue last year. It has also become something of a social networking platform itself. And Google didn’t miss the mobile boat either: Android controls 80 percent of the mobile space, putting Google’s products in the hands of billions.

More recently, Google introduced promoted pins for Google Maps and image search ads.

The end result is that Google and Facebook are pulling away from everyone else. Online advertising broke records in 2015, nearly hitting the $60B mark. Astoundingly, half of that money went just to Google. According to Pivotal Research analyst Brian Wieser: “Google scooped up $30 billion and Facebook gathered $8 billion, while other smaller companies lost market share.”

Snapchat is perhaps the only company that poses a threat to the two internet giants, and it now has managed to overtake Twitter in daily active users, with over 150 million people using the disappearing-messaging app every day.


One Last Chance

In an unusually candid statement, Twitter CEO Jack Dorsey acknowledged its rival’s success by telling the audience at a recent Recode tech conference: “Messaging on Snapchat is ‘very modern,’” and “He acknowledged that Twitter at times can be confusing and alienating—something he’s trying to fix.”

Another issue has been the high turnover rate at the head of Twitter. “While the average tenure of a Fortune 500 company CEO is around a decade, Twitter has had five leaders in that same period.” Further complicating things, Dorsey, back for his third time helming the company, now has the added burden of running the other company he founded, online payment processor Square.

Twitter is currently hoping to get back in the black by betting big on video and live events. A new deal with the NFL to livestream Thursday Night Football is being seen as a step in the right direction.

For most of its history, Twitter was able to coast by on its novelty and functionality. Now 10 years old, however, its days as a youthful and trendy startup are well behind it, and competing social messaging networks have proliferated.

Can Twitter make the jump into the next phase of the online advertising market? Or will it find itself sitting at the has-been table with the likes of AOL, Myspace, and Yahoo? There’s still hope, but it needs to move fast.