November 5, 2013

Challenges abound for Twitter heading into IPO

The San Francisco company’s history of losses totaling nearly $500 million sparks questions about its ability to turn a cultural phenomenon into a sustainable business.

By Michael Liedtke And Barbara Ortutay
The Associated Press

SAN FRANCISCO — Twitter has built a digital town square that’s teeming with activity but riddled with financial potholes. Seven years after co-founder Jack Dorsey sent the first tweet through the online messaging service, more than 500 million posts are shared each day by everyone from the Dalai Lama to Justin Bieber.

But all the chirping hasn’t translated to profits – nor is it expected to any time soon.

As Twitter prepares to complete its initial public offering of stock this week, the San Francisco company’s history of losses totaling nearly $500 million is raising questions about its ability to turn a cultural phenomenon into a sustainable business.

Facebook and Google were already profitable by the time they went public. By contrast, Twitter’s coming out is a throwback to the late 1990s, a more perilous time in Internet investing – when hundreds of dot-com companies completed IPOs without ever having earned a profit.

“They have a nice and interesting base to build upon, but an exciting business with lots of users doesn’t necessarily generate returns,” says James Gellert, CEO of Rapid Ratings, a subscription service that examines the financial health of companies.

Rapid Ratings gives Twitter’s financial fitness a rating of 19 on a scale of 100. Gellert says that between 1991 and 2011, 90 percent of companies that defaulted on their debt received a rating of 40 or below. By comparison, the firm rated Facebook at 73 just before its May 2012 IPO and Google at 80 ahead of its August 2004 offering.

ENTHUSIASM VERSUS REALITY

With 232 million users and an IPO poised to as much as $2 billion, Twitter is unlikely to go bust like so many of the companies that disappeared after the dot-com bubble burst in 2000. So many investors are optimistic about the company’s future that Twitter on Monday seized on the demand for its stock and raised the projected price range of its IPO to $23 to $25 per share, up from an earlier target of $17 to $20.

Despite that enthusiasm, Twitter faces a slew of hurdles that range from an outsize proportion of international users –who generate less revenue than their U.S. counterparts– to concerns about a slowing rate of growth at a time when its user base is less than a quarter of Facebook’s.

Although they both compete for people’s attention and posts, Twitter and Facebook work differently.

Facebook gives its users control over who’s in their social circle and which of their online friends can see specific posts. Twitter is set up so users can “follow” anyone – whether it’s a celebrity, politician, sports star or a pithy teenager – who also has an account on the service. This flexibility makes Twitter like an open book that can be read by anyone.

Twitter’s openness has left the service with a bit of an identity problem. While Facebook is known as a to connect with friends and family and LinkedIn is the go-to place for exploring career opportunities, Twitter’s purpose is more difficult to define, says Scott Kessler, an analyst with S&P Capital IQ.

In its IPO paperwork, Twitter highlights the simplicity, accessibility and spontaneity of its service and depicts it as one big conversation. Gartner analyst Brian Blau believes many people see it as a “giant party line.”

Blau’s analogy is apt. Long before Twitter, a party line was a telephone line shared by multiple subscribers. Think of it as a line for you, your neighbor and maybe Mrs. Smith around the corner. In rural areas, an entire town might share a single party line. If the line was in use, other subscribers could pick up their telephone and either eavesdrop or join the conversation.

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