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

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Jumping into the discussion is alluring to the chatty and vivacious, but intimidating for those who are still unsure of their voice. Twitter will have to find ways to get more users to overcome their timidity so they become more active – and more attractive targets for advertisers. According to a recent Associated Press-CNBC poll, 29 percent of people with Twitter accounts never tweet at all.

Twitter’s user growth is already slowing, triggering alarms among some analysts. It took Facebook eight months, from August 2008 to April 2009, to go from 100 million to 200 million users. For Twitter, it was 15 months, from September 2011 to the following December. Facebook, only two years older than Twitter, now has 1.2 billion users.

Last week, Facebook surprised investors by acknowledging that fewer young teenagers are logging in to its site daily, a trend that threatens to undermine the social network’s vitality. This hasn’t emerged as a major problem for Twitter, but it probably will have to keep spending heavily to develop features to keep the younger part of its audience hooked.

One of the company’s biggest problems may present its greatest opportunity. Most of Twitter’s user growth is outside the U.S. at the same time that the company has gradually introducing more advertisements on its service. The ads have quickly turned into Twitter’s main source of revenue, which has soared from just $28 million in 2010 to a projected $650 million this year.

Even so, there’s unevenness in the way Twitter generates its ad revenue. Just 26 percent of its revenue comes from abroad, even though more than three-quarters of its users live outside the U.S. Put another way, Twitter generated $2.36 per U.S. user in the July-September quarter compared with just 24 cents per user in the rest of the world. Facebook, by comparison, generated 52 percent of its revenue outside the U.S. in the same period, fetching an average of $4.83 per U.S. user and $1.07 per international user.

In its IPO documents and video presentation to prospective investors, Twitter says it plans to bring in more international revenue by hiring more sales representatives in Australia, Brazil, Ireland and the Netherlands. The company also says it will introduce technology that will make it easier for marketers in other countries to buy ads.

Ramping up advertising growth will be difficult in many countries that lack the affluence and marketing-driven culture of the U.S., predicts Andrew Sheehy, an analyst at Generator Research.

In its IPO documents, Twitter listed Saudi Arabia, Russia and South Africa among the countries where it expects to gain a significant number of users in the next few years.

“Unfortunately, the international side of Twitter’s business is less of a monetize-able beast than the U.S. is,” Sheehy says. “This dynamic is not going to go away overnight.”

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