Quality beats quantity at Twitter as it cleans house. Pity the market doesn't get it

Profile picture for user gonzodaddy By Den Howlett July 27, 2018
Summary:
Twitter reported mixed results but a record quarterly profit. It is concentrating on cleaning out toxic accounts but that didn't impress the market.

jack dorsey twitter
Jack Dorsey, CEO Twitter

Ever since we founded diginomica, we have consistently argued that quality beats quantity every time. THat's not to say that quantity is entirely irrelevant but quality matters much more. Twitter seems to have finally understood that as reported in its Q2 FY18 earnings call. Unfortunately, the market is still obsessed with Mary Meeker's 'internet eyeballs' theory which was discredited following the dot-com bust of 2001-3.

Eyeballs theory

For those who don't know, back in the early days of the dotcom bubble Kleiner Perkins Caufield & Byers partner Mary Meeker (then analyst with Morgan Stanley) (in)famously touted the idea that internet companies could be valued on the basis of the number of people using a system. Hence the eyeballs theory. At the time, I regarded this assertion as fundamentally crazy. Absent an obvious business model, I still believe that to be crazy, despite the fact companies like Facebook have shown that eyeballs can matter.

We see this issue ourselves. Very occasionally a story will go viral and we see a massive spike in traffic. Yay! You might think. But then when we analyze what those 'eyeballs' did, we find that in all cases, few got past the first couple of paragraphs and they were what I term 'drive-by' readers. In short, they're worthless.

My view is that if Meeker was right at all, it is about the network effects that accompany an advertising model. But that only seems to work in very rare cases (such as Google and Facebook) where the company has successfully cut out middleman interests. That's the basis of Stratechery's Aggregation Theory. Even so, it is an idea that spawned an awful lot of 'build now, acquire fast, figure out how to monetize later' ventures, a good few of which failed miserably.

How does this relate to Twitter?

In its latest earnings announcement, Twitter said that its monthly active user count declined by 1 million in aggregate. Pretty much all commentators on this story jumped on this, giving some credit for the fact that Twitter anticipated this and future losses arising from its proactive work deleting users it doesn't want. Here's one example of how it was reported from recode: 

It blamed the decline in users on its efforts to improve Twitter’s “health” — removing bots and spam and improving other nasty parts of the service that have plagued it for years. Its stock was down almost 17 percent in pre-market trading.

Notice the language of blame that recode has applied.

What the story failed to highlight, until it put up a graphic at the end, is that Twitter posted record profits of $100 million. That IS a big deal. The recode story does make an effort at balance by talking about improvements in the number of active users as Twitter cleans house. That's also important because, as the story says, Twitter succeeds when users feel it is a safe place. This from engadget puts it well:

If the company can eradicate toxic accounts, it should encourage users to stay on the platform and log in more frequently. That line of thinking is apparent in the company's steady daily active user growth -- Twitter didn't disclose the actual figure, but confirmed it had risen by 11 percent year-over-year.

And quoting CEO Jack Dorsey:

Our second quarter results reflect the work we're doing to ensure more people get value from Twitter every day. We want people to feel safe freely expressing themselves and have launched new tools to address problem behaviors that distort and distract from the public conversation.

Whats more, Twitter posted above analyst estimates for revenue at $711 million. Although welcome, that number could simply be from customers switching out of Facebook, which took a beating the other day. 

My take

Twitter has always been controversial but the fact its earnings call devoted so much time to 'health' issues is a strong signal that it fully understand the impact that toxic accounts have on the wider population of users. This has to be a net good. Despite the market giving Twitter an 18% valuation haircut in today's trading, I feel good about Dorsey's commitment. Of course, there is much more to be done in an uncertain world but for now, the company deserves credit for making the progress it has to date.

Finally, and as I have consistently said, market analysts are among the worst at understanding technology companies. Today'sknee-jerk reaction is yet another example of what we have come to expect.

Endnote

In his daily email, Dave Pell had this to say:

"We believe that Twitter's value as a daily service is enhanced when the conversation on the platform is healthier and people feel safe freely expressing themselves." So said CEO Jack Dorsey on Friday. It's hard not to agree with that statement. I'm a tech professional, an indie publisher with a personal brand, and I measure my self-worth in retweets. I'm addicted and have been since I was one of the first few hundred people on the service. I'm as likely to leave Twitter as a squirrel is to kick his acorn habit. Seriously, Jack will quit Twitter before I do. But I often wonder why civilians stick around to take the abuse; and I've watched from my behind my laptop as many users opt out and churn their way back into real life. So yes, improving the platform's health is critical. But as we learned from Facebook's stock slide (and now Twitter's), the fix can be costly. From Cnet: After years of unchecked harassment and abuse, social media's reckoning has arrived.

Nailed.