Twitter admits its user numbers were wrong; Wall Street sends the stock price up 20%

SUMMARY:

Twitter’s been handing out the wrong user numbers, but Wall St didn’t mind. Meanwhile Alphabet is playing the long game.

When your revenue stream is overly-dependent on advertising which is in turn dependent on the size of your captive audience, there’s little that could be potentially more damaging to your prospects than having to admit that you’ve been misleading the world about the number of users you have.

That’s what happened to Twitter yesterday, as the social media firm was forced to revised down its previously reported numbers by 1 to 2 million users for each of the last three quarters. Twitter said had wrongly counted people who logged into applications associated with the company’s Fabric software platform, which Twitter sold this year to Alphabet Inc’s Google.

Of course that’s not the only issue facing Twitter. Of late its been under intense scrutiny over its attitude towards online abuse and bullying, climaxing in women around the world staging a boycott of Twitter after it temporarily suspended the account of actor Rose McGowan.

The firm is also one of the social media companies facing questions about its role in last year’s US Presidential Election, which now leaves it facing scrutiny from the US Senate Investigative Committee in the near future.

Meanwhile revenues are down 4%, the third consecutive quarter of decline, while eleven years on from launch, there’s still no profit.

So how did Wall Street react to all this? Joyously, of course, with Twitter’s stock price soaring 20% following a conference call with CEO Jack Dorsey, whose turnaround program finally look as though it might be paying off.

The net loss might still be there, but it is getting smaller. And while the company might have mistated its numbers in the past, bt it managed to add four million users in the last quarter to take the accurate total to 330 million users worldwide.

But perhaps most importantly there are some indicators that Twitter might be opening up some new revenues streams to wean it off of its dependence on advertising. So while there was an 8% decline in ad revenues in the most recent quarter, income from data licensing and other sources was up 22% year-on-year, the third consecutive quarter of growth here, with what Dorsey called “a significant number” of enterprise deals in the mix.

Future new revenue sources may well include video, suggested Dorsey:

In terms of video discovery, the way we are thinking about this is just adding more personalization across the board to Twitter. So our biggest efforts are really applying machine learning and deep learning to every single tweet; some tweets carry text, some tweets carry images, some tweets carry video, and we want to make sure that if we infer, or you explicitly tell us you’re interested in something, that we’re delivering the right media format for you at the right time. Sometimes that is text, sometimes that is an image, sometimes that is video, and then want to go even deeper and really understand a video as well.

So, we are thinking about this more from a broad based perspective, and being somewhat format agnostic so that we can make sure that we’re delivering what is something that matters to people, and something that is going to really feed what their interest is in particular.

On the controversy around its role in enabling online abuse and harassment, Dorsey said:

We’re more focused than ever on making Twitter a safe place for everyone. We made this a priority in 2016, updating our policies and increasing the size of our teams. And in 2017, we rolled out a number of product updates, with an increased sense of urgency. We know this isn’t enough, and we’re taking a more aggressive stance in our abuse rules and how we enforce them. We’re addressing this from a policy, enforcement and product perspective. And just last week, published a calendar of the upcoming safety work we have planned through January 2018. This is the first time we’ve shared this level of visibility into our work, and we hope it builds trust along the way.

As for that US Election controversy, Dorsey had nothing to say on the analyst call, but later announced that the company is “off-boarding” advertising from all accounts owned by Russia Today and Sputnik. In a PR move designed to get ahead of the issues, Twitter will also be donating the projected $1.9 million in earnings from RT global advertising “to support external research into the use of Twitter in elections, including use of malicious automation and misinformation.”

Google it

Alphabet, Google’s parent company, is also caught up in the allegations around Russian meddling in the election of Donald Trump as US President, launching an internal investigation to determine if its ads or services were used by Russia to influence voters in the 2016 election. The firm has found that Russia-linked, “inauthentic” accounts bought around 3,000 advertisements since mid-2015. These ads were focused on “amplifying divisive social and political messages across the ideological spectrum.”

As part of its own Q3 results announcement, CEO Sundar Pichai didn’t address this issue directly, but did go out of his way to allude to supporting freedom of speech, particularly in relation to the media:

Our teams are making a big effort to support journalists and other people who produce high-quality information around the world…As new threats arise, we are committed to protecting journalists and media organizations from hacking and denial-of-service attacks. For example, we just launched the advanced production program for Google accounts, which is designed to protect the accounts of those most at risk of targeted attacks, including journalists and other public figures.

From a commercial perspective, Alphabet turned in a quarterly profit of $7.8 billion, up 33% year-on-year. But like Twitter, underlying numbers indicate the need to break dependencies on online advertising models. Traffic Acquistion Costs (TAC) have shot up 31.6% year-on-year to $5.5 billion although Cost Per Click is down 18%.

Pichai pointed to other revenue streams as examples of longer-term bets for the firm, including cloud, hardware and – inevitably – AI and machine learning:

One of the unique things about how we approach product development is we’ve always, at Google, care about building our products for everyone. And be it Search or Gmail or Google Photos or Chrome, we work hard to drive it across all platforms. Obviously, some products, their ability to make it work well on other platforms versus our native platforms, there are differences and so we understand that. It’s partly why we are very committed to driving success on our platforms, both through the ecosystem and our hardware efforts as well.

So we think about it holistically. But you’ll continue to see us put a lot of effort into other platforms as well…We see areas where there are clear user problems and we think about whether we can use computer science and our technology advantage as Google and Alphabet to give a differentiated offering for users. And we do that and then we think long-term.

My take

A tale of two social media firms. Twitter got a hefty boost from Wall Street yesterday, but of course such developments are fickle. It’s worth bearing in mind that a year ago all the talk around Twitter was of a supposed Salesforce takeover bid that never came to pass. Meanwhile Alphabet continues to talk a long game plan. Both face questions about the role of their respective platforms in terms of societal and ethical obligations and both will come under greater scrutiny from opportunistic politicos in the months ahead.

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