Twitter Business Strategy - Case Study Example

Twitter Business Strategy Question Applying models and concepts from pre-requisite modules, critically evaluate Twitter’s business strategy in relation to its external and competitive environments. Introduction In 1996, Twitter co-founder Jack Dorsey had an idea about developing short messages communication platform that would help friends be updated on activities that others were doing based on posted status updates. Twitter has now developed to include other aspects that cover a range of issues apart from the original idea where friends were supposed to be updating each other about their day. Effectively, Twitter has ushered in a world of citizen journalism where the social media and microblogging site for instance has changed political communication profoundly. Before Twitter went global, political news and commentary was a reserve of a select group who were thought to be knowledgeable on certain areas. However, this is no longer the ongoing trend as both politicians and the average citizens have taken advantage of Twitter to sharing their political banter and opinions. On business front, Twitter has had a profound impact on business undertakings as enterprises have found new an avenue to make information about new brands though their smartphones. This makes Twitter an important platform for businesses to be in contact with market for easier provision of customer service, share unique contents among aspects that improve relations between businesses and their customers. On the social aspect, Twitter has made it possible for individuals to keep in touch with popular celebrities while the celebrities remain in contact with fans. However, the achievements that Twitter has been able to accumulate over the years are threatened by the uncertainty that is experienced in the social media and microblogging industry. As a company that is about to go public, Twitter is faced with the task of creating a sustainable business through addressing some of the short and long term problems affecting its business. Twitter as a product has had great success due to its attraction of users in their millions and who are pre-occupied with everything under the sun. In addition, to maintaining the company’s operation is an expensive endeavour even when venture capitalists have expressed their willingness to help with the necessary funding. Consequently, the current assay Analyses Twitter’s of the business strategy, their implications on the management of people and future innovation in addition to making recommendations on areas of improvement that will enhance its business success. Analysis of the Business Strategy Given the nature of social media and microblogging industry, Twitter’s main source of revenue is generated from selling advertising around content supplied by others. Up to 2013, Twitter’s revenue from advertisement was made up of 85% of the total revenue, which was about $317 million for the 2012/2013 financial year with the figure rising to 87% for the first six months of 2013. Twitter’s goal is to take advantage of the continued reduction in advertising that is being recorded by old media companies such as CBS. Lauria (2013) notes about 72 percent of CBS’ revenue was tapped from advertising in 2007 but the figure has been reducing up to 57 percent in the second quarter of 2013. This reduction in revenue from advertisement came even with the media house’s share being traded at all-time highs in 2012 when it was about $56.29 (Lauria, 2013). For Promoted Trends, business organizations are given a platform to feature a Trend related certain aspects of the business, launching a new product in the market for instance, at the top of this Trends list. By clicking on a particular Trend, users are redirected to the relevant conversation for that trend which in this case has the business’s Promoted Tweets attached to the top of their timeline. This platform offers immense exposure for marketers since all users on Twitter’s website see the trends. Promoted Accounts on the other hand recommends to users who to follow for certain information whereby Twitter finds the relevant users who are then recommended to a business account they are most likely going to find interesting (Whalen, 2011). Twitter has taken full advantage of the current trend where there is the dwindling of advertisement revenue collected by traditional media houses while those collected in digital media especially in social networks and mobile increase. Based on the statistical results from the eMarketer august 2013 report, digital media stand to attract the biggest share of dollars from advertisement in the United States of America over the next five years, which is bound to rise from about 25 percent in 2013 to nearly 31.1 percent in 2017. Based on the same report by eMarketer (2013), digital media was to record a return of $42.3 billion courtesy of advertising and increasing to about $61.4 billion by the year 2017. To attract a large chunk of this estimated revenues from advertising, Twitter is trying to position itself as the second screen to television for many viewers. This ensures that the Twitter generates revenue from companies that realise people are engaging with their Twitter accounts while watching television. In recent years, Twitter has been purchasing social analytics companies such as Bluefin Labs and Trendrr. This undertaking mitigates the impact brought about by the inability to diversify into new revenue streams by amplifying its value to brands from an advertising point of view. Twitter has in place various agreements with television networks such as A+E and The Weather Channel that is under the company’s Amplify program. These agreements makes it possible for television networks to promote a number of television programmes and shows by interesting tweeting clips and sports leagues such as the NFL in addition to tweeting out highlights of games. Such deals have resulted in increased revenue from as Twitter gets a share of what the television networks earn (Mcgirt and Laporte, 2013). Another aspect of Twitter’s linkage with television and television viewers has been the creation of interactive television. Through this concept, Twitter is creating a shared experience amongst viewers of different television programmers and shows. This has especially been effective in live shows where the audience are watching live events while at the same time reading the comments from friends, favourite celebrities in addition to interaction with strangers. By ensuring people flock to Twitter during important live events, Twitter is generating more revenue that will change the company, which had previously lacked business acumen and steer it towards a pathway to real revenue (Mcgirt and Laporte, 2013). Using porter’s five forces model, Twitter has holds an upper hand in supplying data to companies that are in need of such informations. Due to Twitter’s positioning as a unique resource for breaking news and trend spotting, businesses will pay top dollar to get this information. Consequently, Twitter has managed to keep its licencing fees high thus increasing revenue generated from licencing its data where for instance, it brought in $47.5 million representing a 36% increase in revenue from data licencing at a time when prices had also increased by 30% (Levy, 2013). Buyers for Twitter services have continued to increase due to the uniqueness of the company’s products such as hash tagging, which enable users to communicate a lot in few characters while Twitter search has also attracted multiple companies who want to use it as a tool for market research. The acquisition of Topsy by Apple shows that big buyers are attracted to the company’s ability to generate accurate market trends implying number of buyers will continue rise as analytics companies develop new tools to analyse and filter the constant stream of Tweets (Levy, 2013). On competitive rivalry, Twitter has managed to stay ahead of its peers both big and small. Although Facebook has a higher number of users than Twitter, the later has been achieving a growth rate that is almost double that of competitors. The advantage Facebook has over Twitter is the allowance to use more than 140 characters with Facebook users having the ability to write characters in thousands. Although there are many other social media and microblogging sites many of them still have lower user base that attracts less advertiser traffic and therefore does not present a big rivalry to the company’s growth (Mcgirt and Laporte, 2013). Twitter faces great threat of substitution from other providers off similar products such as Facebook and google. Both Facebook and google have been attracting high levels of advertisers leading to splitting of revenue with the two companies that have bigger user base taking a large portion of the revenue. Consequently, if Twitter does not build its user base to much the competitors in future, there is risk of losing revenue stream to the competitors (Lauria, 2013). Twitters’ continued dominance in the digital advertisement sector is put under threat by the continued investment and development of Facebook and other social media and microblogging sites. Facebook has been targeting sharing of views about different cable and network television programs and shows. However, Twitter still has an advantage over competitors who try to enter into digital advertising given that its unique features that allow tapping into the consciousness (Whalen, 2011). Competitive Analysis In their endeavour to make their business a profitable one, Twitter faces a major task in rivalling other microblogging and social media cites with Facebook and Google being the marker leaders. The existing trend mean that on competitive front Twitter has to share a large chunk of revenue from advertisement with not one, but two large mobile ad competitors that are developing fast and enormously profitable. While Twitter is still struggling to increase revenue and break even, the current difference between the company and Facebook in terms of revenue and profitability is quite a big one. During the quarter ending in September 2013, Facebook recorded a 60 percent growth in revenue pushing the amount to $2 billion, which is in fact about twelve times recorded by Twitter whose revenue for the same period was $169 million (Shinal, 2013). Additionally, as Twitters loss from its operations during the quarter ending September 2013 tripled to $63 million, Facebook reported a 95 percent increase in operating income that went up to $736 million. The income reported by Google is even much more than that of Facebook due to the profits generated from mobile growth leading to 26 percent increase in income from operations resulting in an amount in excess of $3.4 billion for the same period. As the two market leaders in social media and microblogging industry report a net worth of $120 billion for Facebook and $344 billion for Google, Twitter’s worth was estimated to only range from $10 billion to $12 billion at the time the company went live in the public markets (Shinal, 2013). Advertisement revenue generated from mobile users accounts for about 70 percent of Twitter’s overall revenue which is not the same for Google’s 15- 20 percent of $12 billion or Facebook’s 49 percent of $1.8 billion. Even as these figures may seem as putting Twitter at a disadvantage, the company still has areas of competitive advantages over its bigger and profitable competitors. Twitter was founded on a simple service concept, which makes it more suitable as a mobile company than the competitors therefore becoming well positioned to take advantage of mobile traffic growth. This trend is evident for instance when analysing the rapid growth of Twitter s video-snippet service, Vine, which recorded over 40 million new users taking advantage of the concept under a period of one year since the launching (Sterling, 2013). Furthermore, Twitter has a better appeal to investors compared to Google and Facebook due to the company being smaller and young in the industry and is therefore, recording faster growth in terms of revenue. Twitters percentage growth in advertisement revenue for the third quarter of 2013 soared to 105 percent compared to the previous year which represents a bigger range compared to Facebooks 66 percent increase for the same period. With different professional sports leagues, cable and broadcast networks in addition to various entertainment companies showing their preference to work with Twitter in distributing content to the social and microblogging company’s 230 million users, Twitter is poised to record higher returns in the future as it aims to start making profits. This competitive advantage will translate to higher revenues in future given the rapid growth of mobile advertisement market, which is estimated to be about 10 times of the overall digital advertising segment. According to recent reports from Twitter, an estimated 76 percent of total users after the third quarter of 2013 were mobile. However, this percentage translates to only about 175 million users, which are still short of 45 percent or 874 million of mobile users (Shinal, 2013). Even as twitter continues to attract multiple advertisements from television, the company faces a difficult task in fending off competition from Facebook. In recent years, Facebook has shown great interest in the television advertising portfolio where continued investment into this area threatens Twitters revenue stream. Given that, Facebook has a higher user base than Twitter; advertisers will prefer marketing through Facebook than Twitter. For instance, studies on the chatters generated by viewers of CBS’s ‘NCIS’ shows that Facebook has about 17.8 million fans with Twitter only generating about 535,000 followers (Pash, 2013). Additionally, Twitter’s real-rime search that has shown great potential as one of the greatest asserts for the company faces competition from Facebook. Users have been attracted to the search due to its ability to track matters of current affairs by tapping into the consciousness of the public. In the past, Facebook has not been implementing an easy to use real- time search products for its users. However, the company has been improving this product with Facebook developers now increasingly updating their savvy at displaying company status updates within their search results. Consequently, while Twitter remains the leader in real-time search now, this might be eroded in the coming days as Facebook encroaches in the search area (Britton, 2010). External Analysis Given Twitter’s generation of revenue being highly reliant on mobile usage, the company faces high levels of uncertainty on how sustainable this source of revenue can be and for how long. The problem with relying on revenue from mobile usage is that many people do not like encountering advertisements in the websites they search. Additionally, for successful monetization of mobile usage, Twitter needs to come up with a combination of strategies that will ensure the company merges the different advertisements with aspects such as relevance of content to the specific location, activity in addition to the online communities that users belong to in order to yield useful applications. Without taking into account such variables, reliance on revenue from mobile usage could destroy Twitter’s monetization plans in the same way that it enables them (Hof, 2013). Even as Twitter continues to record high rate of growth both in revenue and usage, future prospects indicate a reduction in the growth rate. There is a possibility of the microblogging and social media being saturated due to the number of service providers increasing their market share in addition to reaching a point where the number of potential users becomes low. The slowing growth rate in terms of revenue can be attributed to the fact that the cost per advertisement continue to decrease. Advertisers continue to pay less due to factors such as the introduction of payment mechanism where an advertiser is charged based on a balanced distribution budget throughout the day. This makes the amount an advertiser eventually pays to be lower be every bid. If this trend continues, Twitter’s revenue will be affected the future especially if there are no mechanisms to offset the slowing rate of growth (Hof, 2013). On political and legal platform, Twitter faces a number of challenges as it aims to increase both its revenue and user bases. Different countries have different laws that regulate how information is shared between people within their boundaries; consequently, Twitter will have to conform to such laws in order to continue with its presence. Following opposition from some governments that were against how Twitter was being used for instance during the Arab spring, Twitter had to make several changes to be accommodated within the laws of such countries. Being forced to revise security issues through censorship police is against the original idea that the founders had which was for people to communicate without any restrictions (Star Tribune, 2012). The company has been forced to remove tweets from the countries declaring that local laws were violated with only Twitter users outside such countries being able to view the tweets. In such cases Twitter will be force to include a gray box to show the tweet has been censored instead of the original tweet in countries that claim violation of laws. However, Twitter has from time to time found ways to go round such political and legal obligations in order to continue being the most preferred means of passing information. For instance in 2009, the company has to postpone an impending shutdown in order to be available during the Iran postelection protests. However, this was only made possible by having a partnership agreement with Google. Additionally, such partnerships enabled the company escape ongoing crackdown on social media at the time of Arab Spring protests that took place in Egypt (Star Tribune, 2012). Twitter faces disparities in advertising revenue per timeline with the value obtained in the United States alone being much higher than what is collected from the rest of the world. This disparity is reflected in the price of advertisement for three months ended June 30, 2013 where revenue per timeline view in the US was $2.17 while advertising revenue per timeline view for the rest of the world was $0.30. This means that the company has concentrated most of its markets in the United States while neglecting the rest of the world. However, investment in markets outside the US offers a great opportunity for the company to increase revenue from emerging markets. There are a lot of potential from emerging markets in Asian, South American and African countries such as Japan, Malaysia, Brazil and South Africa. Investment in these markets will bring twitter higher revenue especially considering that around three quarters of users are found outside the US. Consequently, Twitter can improve revenue from advertisement by increasing presence in these markets by opening offices and finding local contents that will attract marketers (Hof, 2013). From the analysis of Twitter’s external and competitive environment, the company is well positioned to be a market leader in both digital advertising and selling of data licences. Even as it faces competition from market leaders such as Facebook and google, Twitter can peg the chances for future growth on the fact that it continues to attract higher rates of user and revenue growth than the competitor. The rapid increase in terms of user base and revenue implies that even when the company does not make profits currently, prospects that investors will begin earning dividends in the near future are high. Question 2: Critically evaluate the implications of Twitter’s strategy in relation to the management of people and future innovation. Twitter is at the forefront of the revolution that is taking place in advertisement through the company’s strategy to attract higher revenues. Twitter generates a large portion of its revenues from advertisement and has therefore concentrated most of its income generating activities on attracting advertisers as it also continues to record higher growth rates in terms of users. Twitter has continued to invest in new innovative means of attracting advertiser, which has uniqueness when compared with the competitors. Such aspects as cost-per-click, display, and social media advertisement gives advertisers a chance grow their business through Twitter’s 140 character messages (Kessler, 2013). Twitter has also invested in making advertisement a part of users experiences by integrating content with the relevant user preferences. Through promoted tweet, promoted account and promoted trend, Twitter has ensure relevance is upheld by using targeting techniques which focus user interests, similarity of the followers and geography among others (Kessler, 2013). Twitters innovativeness is however facing a compromise due to going public as more human and financial resources might be channelled towards making the company more profitable instead of investing in new ideas. Other companies such as Google and Facebook that had gone public before Twitter acknowledged the risk that going public might pose on innovativeness. In 2004 when Google listed its shares, the IPO filings contained an appreciation of how the company’s corporate culture, which has always encouraged innovation, creativity, and teamwork, might suffer as a result. This was due to the possibility that a rapid growth as a result of IPO might necessitate implementation of more complex organizational management structures. Consequently, the company will find it increasingly hard to sustain some of the original beneficial aspects of corporate culture. This implies that Twitter might have to adopt new measures or remodel some aspects of its traditional management practices (Kessler, 2013). However, the changes and growth that Twitter continues to achieve due to its business might not have adverse effects on the way the company manages people or on its ability to be innovative given the availability of systematic data to back up their strategies. Twitter has a lot to learn from IPO of Facebook, which recorded the highest sales of shares ever for an internet firm in 2012. The study done by Bernstein (2012) based on the effects of companies going public by analyzing patents filed by companies provides insightful implications of going public. The researcher found that when companies list their shares in the stock market they are bound to loss influential innovations, the best inventors are likely to depart from the company while inventors who remain become less productive. Miniaturization of Twitter as a company might result in a shift of incentives where focus is shifted from long-term innovations for fear that they may never work out with the managers mostly concentrating on short-term products that meet quarterly goals. Question 3: Based on your research, give strategic recommendations to Twitter to enhance its business success. Being a company that relies heavily on advertising for it to generate income (Lauria, 2013), Twitter needs to find alternative sources of revenue that will maintain the high rate of revenue growth it has continued to experience since its inception. Advertising does not offer a reliable source of revenue given that advertisers do not have long-term deals but temporary ones based on the products they want to create market for. Further, the shift of advertisement from cable and network television to digital platforms does not mean it is a permanent aspect. The preference might change in future making it difficult for Twitter to continue attracting revenue stream from advertisement. Further, the tendency of mobile users to avoid advertisements might indicate the existence of a limit at which users would accommodate them. Surpassing this limit will make the users loss interest on the services offered by Twitter. Given the risks involved in Twitter’s reliance on advertisement as the main source of revenue, the company needs to improve revenue generated by undertaking a diversification of services it offers while also finding ways of monetizing these services. Twitter can pursue several potential revenue generators such as investing in search twitter.com that it acquired in 2008. Among the applications built on top of Twitter API search, which possessed the potential to be very popular with its initial use indicating capacity to overpower Twitter’s servers. This informed the decision not to have a search box but to hide it at the bottom of the results page in addition to being used successfully during the Iran postelection protests out. This search tool could be developed further and then be included in the monetization plans of the company (Buttry, 2013). Another area that Twitter needs to pay attention to is the how it handles data privacy even as it seeks to monetize operations. Social media and microblogging businesses rely on being able to track the users for understanding and predicting what interests consumers and their intentions. However, to maintain the confidence that users have on the company, Twitter needs to draw a line between necessary customization procedures and Big Brother manipulation. Twitter needs to avoid the potential conflict that might arise from monetization of information provided by users in order to keep them tweeting. There is need for the company to conduct further research to determine user reaction to new and potentially more intrusive ways of obtaining data about them for the purpose of monetization. Lack of proper mechanisms to identify user preferences will result in a situation where users are wrongfully identified and advertisement that is not relevant sent to them. In such cases, some users might perceive this as being bothersome and distracting them from tweeting with friends. Further, wrong identification of user interests might result in lowering the number of tweets as users will not find content on their pages relevant to their needs, which will result in boredom and potential loss of users. Therefore, monetization should also take into account how the user will receive the advertisements on their accounts Revenue collected from advertisement has shown that the global market for Twitter is skewed with the United States accounting for most of these revenues. Given that the rare of losses from operations continue to be higher than that of revenue, Twitter needs to make further investments in regions that have shown potential of further development. To increase revenue from advertisement in other regions apart from the United States, Twitter needs to improve its infrastructure in new areas. The company should open offices in other regions that have potential of generating more revenue from advertisement. By having offices in a number of regions, Twitter will be able to indigenous it content to suit the local users while also attracting local advertisers. This will also be an effective strategy for identifying the needs of people in different regions. Given that Twitter introduced itself in the social media and microblogging industry as a platform that allows users to exchange short messages freely without restricts, current realities calls for the firm to balance its original objects with new demands that spring out. There is need for the company to work within laws and regulations in different countries to ensure that all its users access their services (Sullivan, 2012). However, political and legal requirements must not make the company abandon its culture that has made it possible to attract many users. Twitter must therefore find ways to ensure users continue to access their accounts and tweet to friends. Since Twitter’s growth has always been recognized based on its ability to attract more users in addition to increasing revenues, the company should also research on ways of cutting costs of operations. As a public company, investors will not want to take long before starting realizing profits from their investments. However, with the current trend where the company continues to record increased costs of operations, it might take a long time before investors get returns for their investments. The company can begin by outsourcing some services that are expensive to maintain as a strategy of cutting costs. Buying of applications from developers might also provide a way for the company to access new and innovative technologies at a lower cost. This will be more effective as opposed to spending resources on experiments that might not be effective or will take a long time for results to be seen. References Bernstein, S. (2012) Does Going Public Affect Innovation? Available at: http://siepr.stanford.edu/system/files/shared/IPOsInnovation%20-%20Bernstein%5B1%5D.pdf. [5 February 2014]. Buttry, S. (2013) Twitter search gets even better with twXplorer. Available at: http://stevebuttry.wordpress.com/2013/09/19/twitter-search-gets-even-better-with-twxplorer/ eMarketer (2013) US Total Media Ad Spend Inches Up, Pushed by Digital [Online], Available at: http://www.emarketer.com/Article/US-Total-Media-Ad-Spend-Inches-Up-Pushed-by-Digital/1010154#JkxFEQX2vofOgvSC.99 Hof, R. (2013) IPO Filing: Twitter Still Losing Big Money Even As 2012 Revenues Tripled. Forbes [Online], Available at: http://www.forbes.com/sites/roberthof/2013/10/03/revealed-in-ipo-filing-twitter-still-losing-big-money-even-as-2012-revenue-tripled-to-317-million/ [5 February 2014]. Kessler, S. (2013) For twitter, a hit to innovation could just be part of growing up. Fast Company. Fast Company. Available: http://www.fastcompany.com/3019680/for-twitter-a-hit-to-innovation-could-just-be-part-of-growing-up Lauria, P. (2013) How Twitter’s Business Model Is Just Like Broadcast TV — Only Worse: More dependent on ads than even the old media giants. Retrieved from BuzzFeed Business [Online], Available at: http://www.buzzfeed.com/peterlauria/how-twitters-business-model-is-just-like-broadcast-tv-only-w [5 February 2014]. Mcgirt, E. and Laporte, N. (2013). 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(2013) Twitters Immense Supplier Power [Online], Available: http://www.fool.com/investing/general/2013/12/04/twitters-immense-supplier-power.aspx [5 February 2014]. Read More