Is Twitter running in 'geometric eccentric circles' or just round in circles?

Profile picture for user slauchlan By Stuart Lauchlan October 27, 2014
Twitter's CEO says we need to think of its business model in terms of geometric eccentric circles, but Wall Street seems to think more in terms of going round in circles.

The good news: the Twitter user base grew by 23% in the last quarter.

The bad news: user engagement was down 7%.

The even worse news: Wall Street's rumbled it and the Twitter stock price collapsed 9% in after hours trading yesterday.

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Dick Costolo

Even that 23% increase in the number of reported monthly active users disappointed, perhaps unfairly given that the previous quarter's 24% bump had benefitted from the World Cup.

Actually CEO Dick Costolo is at pains to insist that the World Cup had no impact on the numbers:

In Europe there was no change in monthly active user growth over the time of the world Cup. In fact monthly active user grow slowed in line with expected seasonality in each successful month of the World Cup.

In Latin America there was a slight acceleration of net ads on the World Cup, but at most of the World Cup added 600,000 users which is immaterial and quite frankly we probably saw a derogation of those users in the following month before the quarter ended.

The US actually added more net adds this quarter than last quarter which is interesting on a sequential basis.

But the harsh reality is that Twitter now has 248 million active monthly users. That sounds a lot, but later today Facebook's going to be boasting about its billion strong subscriber base and suddenly things get put into an unfortunate perspective.

So what's the party line on this from Twitter HQ? According to Costolo:

We continue to make progress in user growth adding 13 million net new users in the quarter, including another three million net new users in the US for the second straight quarter. That brings us to 43 million new monthly active users for the year and 284 million monthly active users in total.

You should think about the size of our total audience as a series of geometrically eccentric circles. At the core, you have our monthly active users. They are our most engaged users contributing and consuming the vast amount of great content on Twitter. Those contributions are the fuel that powers the entire system.

In the circle beyond that, we have the logged out audience on our owned and operated properties. Hundreds of millions of users that come to Twitter every month, but don't log in. We've talked about the size of this group of users as another one to 2X the size of the core and that remains the case.

In the third circle beyond this are the people we reach in syndication via embedded tweets and timelines across the web and now across the mobile app ecosystem through our new mobile developer platform Fabric.

Everyone should think in terms of those three circles, he adds, arguing that then we will understand the strategic objectives the firm has, which includes:

improving the new user experience and getting new users a high quality timeline the moment they sign up for the service.

Second, providing much better rich media creation and consumption tools and experiences to drive more breadth and depth of content and lastly, adding functionality to our direct messaging service to enable users to move fluidly between the public conversation and private conversation all on Twitter.

Fabric of growth

A lot is riding on the successful uptake of Fabric, components of which Costolo says are already in use by tens of thousands of developers around the world collectively reaching well over one billion IOS and Android users:

We believe Fabric can be the one SDK that any global app developer needs to embed in their application. We provide crash reporting, beta testing and analytics from the moment a developer is getting started, when developers are ready to launch their production apps, we provide identity services in the form of Twitter log in and Digits, our next generation native mobile sign-up service.

Digits provides developers with multiple competitive advantages over other sorts of identity services including building their own native mobile sign-up and finally developers can easily turn on the MoPub kit, our mobile ad exchange when they're ready to monetize their apps at scale harnessing our best-in-class ad mediation and exchange technologies.

Costolo admits that Twitter needs to get better and quicker about monetizing new offerings:

it is critical that we increase the pace of execution and you just referenced that.

When I talk about pace of execution, I'm really talking about faster iteration from hypothesis to prototyping against that hypothesis, to experimenting against that prototype, to launching against that experiment, and the iterating across that cycle.

It's that kind of clock speed and coordination that I want to see more of from product and engineering working together and that's a combination of both one, as a CEO I think you always want to see those kinds of things and then two, infrastructure capabilities we need to develop to enable the team to move more quickly.

Eccentric circles?

A prime example might come from the firm's buy button and the acquisition of commerce vendor CardSpring. There's clearly interest in ecommerce, but no coherent strategy to date and certainly no commitments:

The CardSpring acquisition is definitely related to tying that team together around our ongoing commerce efforts.

I wouldn’t extrapolate too much from what you’ve seen around the Buy Now button that we've launched on Twitter to any sort of forward-looking expectation.

We're continuing to explore the way we think about in-the-moment commerce and 'now commerce' and the different kinds of opportunities we see in that area and also to continue to play around with explorations there and look at opportunities in that area.

In other words, it's still at suck-it-and-see stage and no-one should get too excited just yet. It's the same vague messaging around advertising:

With a sizeable audience one that we feel confident we can monetize once we know the consumer experience. Our approach has been to really know the consumer experience and to have high levels of engagement for introducing advertising.

Our advertising team are very much in favor of being able to monetize this universe of users because they come with a very specific intent, especially when they are coming from a search engine or do a search on our own properties where they come from embedded tweet on someone else's property.

We know what their interest is and that's a key element of being able to target the advertising for them. At the right point they are monetizable, but the exact magnitude differs between one versus the other.

We would tell you our goals have the largest daily audience in the world and that will drive the largest value for shareholders.

That, as the saying goes, is as clear as mud when it comes to strategic delivery.

My take

Geometrically eccentric circles? I thought at first he might have meant concentric perhaps, but maybe eccentric circles is a better analogy given how random and all over the place the strategic direction appears to be.

I like Richard Holway's take on the stock slide last night over at Techmarketview:

Nobody is doubting either Twitter’s success or its business/social value. Indeed, there is a high chance you will be reading this HotViews post after being alerted on your Twitter feed. But we pay nothing for that and neither do you.

But if growth is slowing, how can Twitter justify a valuation of 13x forward revenues? It could actually dispense with its growth ambitions and become super profitable. But that would unfortunately justify an even lower valuation in the eyes of investors.

Perhaps, as with Amazon and others, we are seeing the dawning of the Age of Reality?

Right, that's Yahoo! and Twitter out the gate; let's see what Facebook has to offer.