80 GlobeAsia November 2013

Technology

n a seemingly normal day in October, investors of defunct audio retailer Tweeter Entertainment woke

up to find that their penny stock had suddenly jumped nearly 700% in value. The company (currently in bankruptcy) had to scramble to figure out the cause.

Elsewhere, at 8:40 AM on October 10th, owners of the seemingly unrelated TW Telecom found that their stock too had skyrocketed in value from $30 to $300 in a matter of

seconds. The trades made the company jump from a market cap of $4.4 billion to $44 billion before NASDAQ stepped in and halted trading. Were these two completely unrelated occurrences of synchronicity?

Apparently not. Twitter’s impending IPO has investors and tech watchers all atwitter, chomping at the bit to get a piece of the pie. Unrelated stocks even remotely resembling their planned symbol (TWTR) have been soaring. Is all this excitement justified? With Facebook as a cautionary tale, will Twitter live up to the hype?

Now is a good time The massive interest in Twitter has many analysts recalling a time when the word of the day was Facebook and everybody thought they were going to get rich if they just invested early enough.

That was of course until after the IPO when the stock took a beating for several months. Now that Facebook has recovered to its IPO levels, revisionist investors have re-branded Facebook as simply a delayed success. This is an opportunity for other tech companies contemplating public offerings, because m

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What does Twitter’s IPO mean for investors?

November 2013 GlobeAsia 81

By Jason Fernandes

investors are more open to seeing tech IPOs in a positive light.

Another fortuitous series of events was Twitter’s acquisition of MoPub and their increasing success in the mobile ad industry. While Twitter’s ad delivery system had thus far been fairly rudimentary compared to the likes of Google Ads/Facebook, their recent acquisition is a complete game changer.

MoPub allows Twitter to offer real-time bidding on advertising not solely on the Twitter app, but across the mobile app ecosystem in general. An area that many social networks have struggled with monetizing, the mobile space appears to be one area Twitter is actually making some inroads. Last year, Twitter announced that they had made more ad revenue from their mobile app then they had from their desktop offering.

The 2012 passage of the JOBS act also changes the landscape somewhat. Twitter is using the new law to give it latitude to test the waters before it goes public. The act, which allows companies with revenues under $1 billion to file for an IPO in secret, does not require the company to release its S-1 to the public until three weeks before the actual IPO.

This was a huge boon for Twitter because while their final public document differs little from the secret SEC version, it allowed the company to get a better feel for things based on investor response before actually going public. The new rules also allowed Twitter to keep its most treasured secrets private a little longer, protecting them in the event that the IPO was delayed.

 Why investors should pay attentionPotential investors should look at Twitter very closely before making a decision. Like many social networks

and other internet-based services, the strategy for Twitter has always been to focus on and develop market share first before looking at modes of revenue generation. In a public company however, the paramount goal becomes revenue generation and keeping investors happy.

Twitter has been fairly successful at gaining market share, but not quite as

successful in turning those users into revenue streams. The company has managed to grow its user base to 240 million accounts but while it continues to add users, the rate at which it does so has slowed down quite a bit. More importantly, Twitter’s business is less mature than companies like Facebook which have been around for some time and have already successfully dealt with scaling upwards while maintaining user engagement.

Twitter will certainly hit the ground running with just under a $20 billion market cap, but the concern is that unlike its bigger rivals, Twitter’s revenues are relatively meager. Even worse, any potential excitement that their $254-million revenue announcement might’ve caused was immediately tempered by news of a ballooning net loss totaling $69 million. The loss represented a 40% increase from the previous year and could be attributed to Twitter’s recent

accelerated spending.Twitter’s S-1 filing has also raised

some questions. Most obvious is an overwhelming silence on exactly how it makes money. Unlike many other online services that often use advertising in conjunction with subscription fees etc., nearly 90% of Twitter’s revenue comes from ad sales. This means that its ad network is literally the lifeblood of the company, yet the S-1 is surprisingly silent on details.

The document does not discuss Twitter’s sales force, its advertisers, its ads’ effectiveness or the average length of an ad campaign on Twitter. While the filing ascribes its ad-growth numbers to an increased user base, that provides little information for analysis. In order for investors to properly evaluate a company that makes its revenue largely from ad sales, investors need information on the advertising business itself.

The fact is increased user base does not always scale linearly with increased ad revenue. In many cases, advertisers are targeting a certain specific geographical market so the addition of even several thousand Indian or Chinese Twitter users would make little difference unless that increase was also coupled with a corresponding acquisition of advertisers targeting those markets. As Twitter begins to experiment with new forms of revenue generation this might fade in importance but, as of now, this is a huge concern.

On balance, there are some encouraging signs. Unlike Facebook, which sold 15% of its total float on just the first day and continues to flood the market, Twitter is only expected to sell $1 billion in stock, less than 10% of its total shares. This of course is designed to generate excitement and benefit early investors.

In order for investors to properly evaluate a

company that makes its revenue largely from

ad sales, investors need information on the

advertising business itself.

82 GlobeAsia November 2013

Technology

Going forward Twitter has a tough road ahead. It must grow as a company and mature as a business.

Minimizing the float is considered one of the key positive indicators linked to strong early returns from an IPO. This correlation was evident when LinkedIn went public. LinkedIn used a similar strategy, selling just 8.3% of its shares to the public. The limited supply resulted in LinkedIn doubling its first day trading volume. While Facebook’s earliest investors have seen only a 33% increase, LinkedIn’s are up 160%, clearly vindicating the strategy.

 What changes should you expect? While the everyday user-experience is unlikely to alter much post-IPO, judging from other tech companies Twitter is expected to invest more heavily in areas outside its core product. Google for example went on to develop a whole new mobile market with Android just four years after it went public. Facebook too has gone on to develop products like Facebook Home, which while complementary were certainly outside its primary focus.

It is likely that Twitter for its part will follow the same strategy and tweak its product line. This is already happening somewhat. The release of Vine and Twitter #Music is a positive indication that Twitter is giving serious thought to expanding its offerings.

The company has also been recently experimenting with displaying tweets to users that originate close to their geographical area. Ultimately all new

features are about revenue generation and this one in particular could be used by marketers to advertise to Twitter users based on their location (think in-store flash discounts).

Twitter will likely continue to experiment with new products, features and revenue generation options especially now that the specter of quarterly reports constantly looms on the horizon.

Design changes are also likely for Twitter going forward. The strategy for Twitter would be to de-emphasize its core product (the Twitter stream) and encourage users to explore other ways to interact with the service and discover new interests. These design changes would take place across the board and affect both its mobile apps and the website with the aim of increasing the services “stickiness” and corresponding ad revenue.

Twitter is also expected to continue its push into television. This year Twitter has quietly acquired not one but two TV analytics start-ups. Additionally it has also signed agreements with television networks that allow it to include TV clips within Tweets.

The purpose of this push is to take advantage and monetize a trend that finds an increasingly large number of people glancing at their cell phones and tweeting while they watch TV. These “second screen” enthusiasts offer advertisers a whole additional screen on which to display their commercials. When coupled with location-based tweeting, this could really be a killer product for Twitter especially because it allows for much better targeted ads.

Another possible change is Twitter’s relationship with third-party app developers. Third-party apps piggyback on Twitter’s system displaying Tweets but not ads. As time passes, however, there will be

an increased move towards either disabling these clients or otherwise forcing advertisements onto them.

The potential danger in this regard is that those using third-party apps do so because they prefer not to use Twitter’s default client. It is quite possible that shutting down these services or forcing ads on them might alienate third-party app users who unfortunately also happen to be Twitter users.

Going forward Twitter has a tough road ahead. It must grow as a company and mature as a business. These processes would likely involve several changes and it remains to be seen whether active user numbers will emerge unscathed. When Twitter goes public it will have to deal with skittish risk-averse investors, regular financial filings and a sense of always living under a microscope.

As early-stage employees cash out and move on, there will also be intense pressure on the remaining employees to continue to innovate. The company will have to maintain the delicate balance of experimenting with revenue streams without alienating their user base.

Overall Twitter’s prospects look good. If done right, Twitter can successfully navigate the various minefields and emerge successful. Its revenues, while on the low side, have doubled in the past six months as the company continues to experiment with new products. Quite a few of these products have great unrealized potential and could lead to new income streams for the company if it plays its cards right.

Now public, Twitter will really have to sell itself to investors, users and its partners. Can it do that in 140 characters or less? Thankfully, it doesn’t have to!

 Jason Fernandes is a tech commentator

and the founder of SmartKlock.