Twitter Inc. (TWTR), the social media network that supposedly incited the Arab Spring, needs a revolution of its own. (For more, see also: The Case for Social Media During the Paris Attacks.)
Since April of last year, the company’s share price has fallen by more than 60% on the back of a slew of a disappointing earnings reports. User growth has stalled. Product improvements have failed. The cumulative results are none-too-impressive revenue figures.
Executive churn has further exacerbated the company’s problems. This year alone, the company has seen the departure of seven executives from its management suite. The latest departure was that of Natalie Kerriss, a former Apple Inc. (AAPL) executive who left her position as head of communications after only six months in the job.
Twitter’s future doesn’t look too bright either.
Increased competition from other social platforms, such as Pinterest and snapchat, is expected to undercut its share of the digital advertising pie. According to research firm eMarketer, Snapchat’s user base will surpass Twitter’s this year. By 2020, the Venice Beach-based service will add 26.8 million new users, double the number of new users added by Twitter during the same time period. As the number of users on its platform increases, Snapchat will attract more advertisers as compared to Twitter.
Three Reasons Why Twitter Is a Great Acquisition
Given the company’s dire prospects, it would seem counterintuitive to suggest that it will make an excellent acquisition target. But a second look provides a number of reasons to make the case.
First, Twitter’s finances are in excellent condition. It has $3.5 billion in cash on its books. More importantly, its operational cash flow is a net positive. Thus, even as it made acquisitions, the company has laid off employees to manage costs. Earlier this year, S&P Capital IQ estimated that Twitter can last another 412 years at its current cash burn rate. In effect, a company acquiring Twitter will not have worry about its fiscal fitness.
Second, Twitter’s product is a natural fit in the current media ecosystem. It extends the reach of media entities, whether they are legacy media companies like Comcast Corporation (CMCSA)-owned NBC or CBS or a technology company dabbling in media, such as Apple. Thanks to a robust presence of journalists in its ecosystem, the service already has the ability to surface trending topics faster than other social media networks.
Live streaming deals, such as the ones it inked recently with NFL and CBS News, play to Twitter’s strengths because they highlight its ability to coalesce and foster conversations around events and issues. Twitter’s previous foray into live events has resulted in substantial engagement uptick from users. (For more, see also: Twitter Stock Soars After Live Streaming Deal.)
For legacy media companies, a Twitter acquisition could provide a valuable digital advertising counterpart to their operations and boost revenues. NBC, which partnered with Facebook Inc. (FB) and Snapchat for the Olympics recently, has already proclaimed that the Rio event was “its most economically successful” games in its history despite declining television ratings. (For more, see: Did NBC Strike Gold at This Year's Olympics?)
Third, Twitter can bolster integrated ad experiences spanning digital and legacy channels for major media companies. It needs television players, such as NBC, to finetune its ad strategy. And they need Twitter for its ability to transmit and transform conversations. Besides digital ads are cheaper as compared to television ads and generally involve revenue sharing agreements between multiple parties. Hence they may not substantially move the needle in Twitter’s case. An acquisition by a larger player could boost the company’s reach and help sync up its micro-targeting ad platform with television’s blanket broadcast.
Of course, an acquisition comes with its own set of problems. Twitter’s status as a bastion of free expression could be compromised if it is owned by a media company. An acquisition could also have a detrimental effect on the company’s capacity to innovate and experiment with its core product because big organizations tend to pare losses on units that fail to perform to expectations.
That said, Twitter does not have a lot of options left on the table in the face of competition from other players and stagnant user growth. An acquisition will provide the company with the necessary firepower to remain relevant and vital to social media conversation.