Does Twitter Need To Diversify Its Revenue?

It’s a social media company mired in controversy, but where does Twitter’s money come from and is it running out?

Oct. 24, 2020

Of all the major social media companies, Twitter (NYSE: TWTR) is perhaps the hardest to pin down. Not as obviously social as Facebook nor as straightforwardly professional as Microsoft’s LinkedIn, Twitter offers its users a strange mixture of both, as well as quirkier possibilities, like the chance to hobnob digitally with the movers and shakers of the world. With such an elusive brand identity, and enough controversies to give a PR department collective nightmares, it’s hardly surprising that the company only scored its first profit in early 2018, almost twelve years after it was founded by Jack Dorsey, Evan Williams, Biz Stone, and Noah Glass.

On the other hand, Twitter is a bonafide media giant, with more than 330 million monthly active users, including some of the most powerful and influential people on the planet. The announcements and arguments that take place on the site regularly feature in the news. Indeed, for many, Twitter simply is the news. And like its competitors in both the social media and traditional media spaces, Twitter makes most of its money through advertising.

Of course, Twitter has much more to offer advertisers in terms of accuracy than a major news outlet such as The New York Times (NYSE: NYT), which still relies to a surprising extent on intrusive and unsightly display ads. Instead, Twitter’s advertising business makes use of subtler and more sophisticated techniques. Driven by a powerful algorithm, most of the advertising on the platform takes the form of “promoted” tweets and products. Generally speaking, promoted content is targeted to specific users based on their searches and habits, and is designed to fit organically onto their timeline, resulting in a more seamless user experience, and — not incidentally — creating a uniquely powerful opportunity for marketers.

The algorithm’s accuracy has paid off. In Twitter’s earnings report for Q2 2020, for example, advertising accounted for roughly $562 million, or 82% of the company’s total revenues. The other $121.4 million took in during the same quarter came from data licensing and other sources.

A commonly raised criticism of Twitter’s main revenue stream is that the platform’s users aren’t nearly as easily monetizable as those of its competitors. Facebook, along with its subsidiary Instagram, provides users with an intensely personalized and networked experience. As a result, the service represents a goldmine for advertisers. By contrast, Twitter’s so-called “mDAUs”, or monetizable daily active users, have proven relatively hard to squeeze money out of. This was especially clear in July’s earnings numbers, which revealed that the company had seen a 34% surge in users but a 19% drop in overall revenue.

In order to bring in more significant revenues per user, Twitter may need to rethink certain aspects of the platform. Indeed, it appears the company is doing just that. Earlier this year, it was revealed that it is working on a somewhat mysterious subscription service that may allow users to support accounts they follow, not unlike sites such as Patreon. The project, if it amounts to anything, could go some ways toward bridging the gap between user numbers and earnings.

But in the process, will Twitter start looking like a different breed of social network altogether?

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