Will Twitter Grab This Opportunity?

| About: Twitter, Inc. (TWTR)


The small and medium sized businesses in the U.S. are expected to increase their spending on digital advertising from $5.4 billion in 2010 to $16.6 billion in 2015.

Recently, Twitter changed its Ad fee structure to target the small and medium sized businesses. Twitter can target Facebook's disappointed customers who are competing for limited space.

However, user growth and user engagement remain a key challenge for Twitter.

Twitter (NYSE: TWTR) has projected its fiscal year (or FY) 2014 revenue to be in the range of $1.31 billion to $1.33 billion. Recently, the company has taken many steps to boost its revenue including the change in its Ad Fee structure.

New advertising structure

The small and medium sized businesses (or SMBs) in the U.S. will increase their spending on digital advertising from $5.4 billion in 2010 to $16.6 billion in 2015. Currently, Twitter makes money from advertisers if a user interacts with sponsored advertisements displayed as tweets on their main content feeds. This includes re-tweets, replies, favorites, and clicks. In August 2014, the company changed its advertising fee structure to target SMBs. Twitter will allow advertisers to specify their spending based on the user activity. For instance, an advertiser may spend only if 1000 plus users visit their website monthly through Twitter ads. Currently, the new payment structure is available in beta for SMBs and certain partners worldwide, while the company will invite bigger advertisers at a later stage.

The new fee structure will benefit advertisers as they will only pay on performance and thus can increase their return on investment. This move will benefit SMBs disappointed with Facebook (NYSE: FB) as they compete for limited ad space on the social networking platform. In April 2014, Facebook altered the right hand column that led to fewer ads per page. This led to 25% decrease in Facebook's Ad Impressions, while the company's Ad revenue increased 67% year-over-year (or yoy) to $2.68 billion in Q2 2014. However, the advertisers ended up paying a higher price at auctions. Facebook Ads are costing more and reaching less audience due to the intense competition for Ad space. SMBs have limited financial and human resources for digital marketing. Hence they cannot afford to spend on advertising without getting sales for a long time.


Twitter has an opportunity to target SMBs by giving them better options. However, only 4.5 million SMBs have Twitter account with few advertisers. On the other hand, 30 million SMBs have "brand pages" on Facebook, and more than 1.5 million have advertised.

Facebook has over 1.3 billion monthly active users (or MAUs) with user engagement (daily active users/MAUs) of 62.9%. In Q2 2014, Twitter's MAUs increased only 6.3% quarter-over-quarter (or qoq) to 271 million. Twitter access through third party apps increased from 17% in Q1 2014 to 24% in Q2 2014. The company doesn't get Ad revenue from users who access Twitter through third party apps. In Q2 2014, the time line views/MAUs was 638, while it was 614 in Q1 2014 and 691 in Q2 2013. User engagement remains a key if Twitter wants to increase its Ad revenue from SMBs.

In Q2 2014, advertising revenue comprised about 88% of Twitter's total revenue. The company should ensure that the new fee structure doesn't hamper its advertising revenue. Last month, Twitter acquired small security startup Mitro that will boost the company's geolocation capabilities. This technology will help SMBs to target local customers and thus boast Twitter's advertising revenue.


I would conclude by saying that Twitter has an opportunity to boost its revenue from SMBs. However, user growth, and user engagement remain a key for targeting this opportunity.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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