“Twitter’s IPO is creating excitement”

OVUM COMMENT

Eden Zoller, Principal Analyst, Consumer, Telecoms, Ovum

“Twitter’s IPO is creating excitement”

“Investors see social media and mobile as sweet spots and it is therefore no surprise that Twitter’s IPO is creating so much excitement and is oversubscribed. Twitter’s valuation just ahead of its IPO stands at US$17.4 billion at the upper end, and this is high given that Twitter is still not profitable and has a much smaller user base than Facebook did at the time of its IPO. It is critical for Twitter to move quickly and effectively post IPO to address the challenges it faces in achieving growth and profitability. Twitter needs to step up and deliver on the expectations that are fuelling its valuation, and show that it has what it takes to provide a sustainable business model.

The two foremost challenges Twitter needs to address are linked: how to keep users engaged while driving advertising revenues.  To achieve these objectives Twitter will need to innovate in both services and advertising, but the format constraints that make Twitter such a dynamic and immediate service also limit its ability to innovate compared to a much broader platform like Facebook. Twitter has a difficult balancing act whereby it must introduce new ad formats into the Twitter stream without compromising the user experience. If it fails to get this right it will jeopardize user engagement and with it advertising spend. At the same time, investing in new service and advertising features will also push up costs, which if not carefully controlled will further impact Twitter’s ability to generate profits.

Twitter must also build advertising revenues as a matter of urgency outside of the US. 77 percent of Twitter’s user base is outside of the US but advertising is not keeping pace, with only 26 percent of advertising revenues generated from international markets. We expect to see continued strong growth in Twitter’s international user base and it literally cannot afford not to monetize this base.

 Mobile will be a key metric to watch once Twitter goes public and from a mobile advertising perspective this is one area where Twitter is further ahead of the curve than Facebook was at its IPO.

Twitter’s filing revealed that over 75 percent of Twitter’s 218 million users interact with the service via mobile and that over 65 percent of the company's advertising revenues are generated from mobile devices. This is promising and Twitter must ensure it builds momentum behind mobile. But this will not be easy as Twitter faces competition from an increasing number of home-grown social network and instant messaging services, particularly in Asia where the likes of WhatsApp, Kakao and Line are very popular.”