By Sotirios Paroutis, University of Warwick
As Twitter sets off on its IPO roadshow, most analysts are predicting a strong response. But the social media giant remains in a slightly odd position: its revenues in the first half of 2013 more than doubled that of the equivalent period last year, and yet its net losses have also increased.
What makes such a company so attractive? One of the key reasons is that markets and investors are more clued up about social media companies than even a year or two ago.
Twitter may have a unique business model, but without the confidence of business investors, this IPO would be pointless. And the expected confidence in Twitter is only apparent as investors have learned from its great rival: Facebook.
Every company wishing to seek investment on the US stock market must first submit an “S-1 form” with details of their finances. Twitter’s document provides a us with a rare glimpse into a company with just 2,000 full-time employees whose platform is behind the delivery of more than 500m tweets per day.
The S-1 clearly has been refined and diligently developed over recent months, and lessons have been learned from Facebook’s traumatic market debut back in May 2012. Twitter realised that investors need a precise business case for the future growth strategy of the firm, and that this needs to be linked with tangible and measurable outcomes for users, platform partners and advertisers.
Promoted Products, for instance, was launched for mobile platforms in February 2012. This service allowed advertisers to promote tweets and reach a wider group of users or to spark engagement from their existing followers. These products helped the firm increase its revenue stream from mobile devices and now over 65% of Twitter’s advertising revenue is generated from phones.
Investors now also have more experience in dealing with business models released by social media companies. Gauging the future growth potential of any one social media brand was considered a lottery not so long ago; as the industry matures, it is becoming increasingly easier to predict.
Unique in its simplicity
In the S-1 Twitter describes its platform as “unique in its simplicity”. This statement distills the fundamental business model of the firm and explains why analysts are still predicting further growth.
Stemming from its roots as an SMS-based messaging system, the limit of 140 characters per tweet means that it is relatively easy to attract new users while keeping current users actively engaged. The relatively low bandwidth short messages also puts less pressure on internet and mobile phone networks, which allows for a more reliable and integrated experience for users across various platforms and geographical locations.
Finally, the simplicity of the platform has allowed the firm to offer a set of reliable and non-complicated products for platform partners (twitter cards, twitter for websites, special development tools) and advertisers (promoted tweets, promoted accounts and promoted trends).
Learning from Facebook
By entering the stock market now, Twitter is also capitalising on what investors, and the market at large, know from Facebook.
First, Facebook’s eventual profitability helps deal with question marks about Twitter’s current losses. Second, compared to early 2012, platform providers and advertisers today have a much more advanced appreciation of how best to utilise user data, and deliver tailored services of high value to users. Third, Twitter services are much more embedded into mobiles and that has allowed the platform to remain relevant to the growing audience of smartphone users. Most users now access Twitter from their mobile, and the most engaged users are the ones using mobile applications.
There are issues still to be resolved, of course, not least the need to reach out to audiences and advertisers beyond the US. Though over three quarters of users are non-US, just 25% of the firm’s total revenue comes from advertising in this region.
The post-IPO future of Twitter might push the firm into building a more a profitable business case – provided the user experience is not affected. Despite the many challenges still ahead the company now seems poised to attract investors’ attention. But this would not have been possible without a little help from an unlikely source, Facebook.
Sotirios Paroutis does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.