Today, news broke about Twitter (NYSE:TWTR) amending its advertising fee structure to provide more choices for advertisers over how they spend their budget on the platform. The current structure that is in place gives Twitter payments if a user interacts with sponsored ads in any way. Included in that are retweets, replies, favorites, and clicks. The new interface will allow advertisers to decide exactly how its budget is spent. For example, an advertiser could only pay if a user clicks on an ad, generates a new follower, or if users download their app. This adjustment pivots Twitter's advertising structure to be in line with Facebook's (NASDAQ:FB).
There are several key implications of this change. The first takeaway is that Twitter's current structure is not transparent enough to allow advertisers to discern the ROI they are receiving on their ad dollars. A second implication is that ad prices will increase greatly after this alteration. However, the number of paid interactions will decline to a prodigious extent as well. The path to success with this novel structure would be for Twitter to be able to acutely target ads to consumers and generate a substantial number of interactions in the way prescribed by the advertisers. Unfortunately for Twitter, it simply lacks the targeting capabilities in order to achieve this end. Unlike its competitor, Facebook, who has a treasure trove of information to make this strategy work, Twitter simply pales in comparison with regard to its user data storage.
In my previous article, "Twitter: Unlikely To Follow Facebook's Path," I opined that Twitter was overvalued, as it faces decelerating user growth, declining user engagement, and a lack of competitive advantage that Facebook enjoys. This updated advertising model faces many headwinds, and the flaws in Twitter's business model are beginning to percolate. With Twitter's ad revenue accounting for essentially all of its revenue, Twitter is seriously risking a crisis. I would avoid Twitter at these elevated levels and suggest taking a look at Facebook, which is cultivating a natural monopoly.
Disclosure: The author is long FB. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I also own FB LEAP call options