Why Twitter's Problems Aren't Going Away (TWTR, FB)

On a May 16, 2016 post on the free publishing site Medium, Twitter Inc. (TWTR) co-founder Biz Stone announced his triumphant return to the social media company he helped build. His explanation for returning made no mention of the flailing state of the stock and company. He wrote: 

A few months ago, I sold the company I most recently founded. The deal did not require me to work at the company we sold to, but I’m the type of person who has to keep working... My top focus will be to guide the company culture, that energy, that feeling.

Is this a Hail Mary pass? Hard to be sure. But Stone has his work cut out for him, and it may not just be company culture that is the problem. And given the continued ascendance of social media, Twitter's struggles are a mystery.

Close to 70% of all Americans use social media, according to the Pew Research Center. That number rises to 86% for the 18-29 age group. Snap Inc. (SNAP) shares just started trading on the NYSE, and it's irrefutable that social media has changed the lives of multiple generations. 

So why is Twitter Inc. floundering? With the presidential election and Donald Trump tweeting multiple times a day, some expected a surge in Twitter's user count or a "Trump bump," but it took until the first quarter on 2017 for it to materialize. Regardless, the company's revenue fell last quarter for the first time since its IPO, with advertising revenue plunging 11%. Much of the commentariat has rued the fact that such a big feature of the American cultural landscape is failing when it comes to the bottom line. 

Twitter's Growing Pains

Twitter has a major user growth problem, a measure of an Internet business advertisers pay close attention to. Its monthly active users (MAUs) increased 20% year-over-year in Q4 2014, 6% in Q4 2015 and only 4% in Q4 2016. Its user growth bounced back to 6% in Q1 2017, a jump Twitter attributed to more interest in political news and technical changes on the site. However, as an analyst at Wedbush Securities said, "One quarter isn’t a trend, so let’s see if it’s sustainable." Research firm eMarketer estimates Twitter's worldwide base will grow by 3.4% in 2017. (See also: Weibo on Track to Surpass Twitter In Users.)

Twitter's Strength Is Also Facebook's Strength

"The best and fastest place to see what’s happening in the world and what people are talking about." That's how Twitter described itself in its last letter to shareholders. "To be alerted to breaking news" is also the number one reason people use Twitter, according to a study by the American Press Institute. But can this draw more users? 

A Pew study says that more than 40% of American adults get their news on Facebook (FB) but only 9% get their news from Twitter. A closer look at the numbers reveals that a higher proportion of Facebook users read the news on that site than Twitter users. The study said, "Users of Twitter, Reddit, and LinkedIn tend to seek out news on those platforms, while users of Facebook, Instagram, and YouTube are more likely to stumble upon news there. Sixty-three percent of Instagram users and 62% of Facebook users said they tend to find news on the platforms while they’re doing other things there."

Graphiq

Twitter users are those looking for news, Facebook brings news to the people otherwise engaged on their platform who are not interested in the latest information per se.This suggests that by building news into a larger universe of social networking, Facebook has managed to eat Twitter's lunch. Facebook also tends to show users only news that reinforce their beliefs, which improves their user experience, as opposed to the acerbic repartee on Twitter that exposes users to uncomfortable tweet storms. Twitter will have to redefine its main function if it wants to pull some of these people away from Facebook. (See also: Why Twitter's Problems Aren't Going Away.)

The Social in Social Media Is Missing

So we know Twitter is full of news junkies, but it's also a relatively passive platform with low reciprocity and low interactivity for most users. 

"While Twitter offers opportunities to connect socially, that is not its strength compared to other apps. Thus Twitter is used for what it does best – scanning the environment for information. The opportunity is there to connect to discuss, but Twitter is more about connecting with people over some topic, event, entertainment property, etc. than connecting for purely social reasons," said Dr. Pamela Rutledge of the Media Psychology Research Center.

A 2015 Pew report that analyzed a representative sample consisting of 176 users' profiles said that only 23% of the accounts followed were non-public figures. Tweets from what are presumably friends and family accounts made up a tiny 8% of those on the users' feeds. Seventy-three percent of users looking for news follow individual journalists, writers or commentators, 62% follow news organizations and 58% follow friends, according to API.

Source: American Press Institute

People aren't relying on Twitter for social networking the way they do with other platforms. By way of comparison, 64% of Snapchat users don't follow celebrities, according to a study by Newscred.

Why is this? Twitter's bullying problem could be a prime suspect. The British newspaper The Guardian ran an article about why some people struggle with Twitter. A few users said it was intimidating and one compared it to "throwing a pebble into a really unfriendly canyon."

"Twitter is suffering because people don’t want to be attacked," said Rutledge. She believes the company should innovate more positive, community-building uses for its platform. She said, "The sense of social connection is not as strong as other media. The exception to this is groups who use Twitter to co-experience events, like the fans of Empire, or celebrities and their fan relationships, although Instagram and Snapchat are making big inroads here. Snapchat has the same sense of intimacy and authenticity as Twitter, but more visual content, a sense of fun, and less noise."

You Can Follow Trump Tweets Without an Account

Twitter defines monthly active users as Twitter users who logged in or were otherwise authenticated and accessed Twitter through their website, mobile website, desktop or mobile applications, SMS or registered third-party applications or websites. 

This of course doesn't include non-users visiting the website to read President's Trump feed themselves or following a feud between celebrities. Even Twitter Moments, a digest of trending news, is visible to non-users. The data for non-users visiting the website doesn't exist, but one can assume it is substantial considering how many news stories now reference tweets. It could be time Twitter installed a login barrier or at least started reporting on total visitors to the website rather than just registered users' activity.

Inadequate Information for Advertisers

If your ad business struggles during a presidential election, you don’t have an ad business.
— Downtown Josh Brown (@ReformedBroker) February 9, 2017

U.S. digital ad spending surpassed TV ad spending for the first time last year. It now makes up 37% of total ad spending. “Digital advertising is not only pulling dollars from traditional media, but it’s also creating new advertising opportunities at the local and national level,” said eMarketer forecasting analyst Martín Utreras.

However, social marketers admit that ROI is difficult to estimate. In this scenario, the company that offers you the best ad targeting, useful metrics and the biggest audience is king. Facebook dominates the social ad spending market and this is despite it miscalculating data in the past. 

In its latest earnings press release, Twitter admitted that aside from user growth problems, escalating competition for digital advertising spending and efforts to re-evaluate its revenue product feature portfolio will impact revenue growth. The company is looking to encourage advertisers to buy more expensive video ads in conjunction with its livestreaming TV push. Ad engagement grew 151% year over year in the last quarter thanks to video ad impressions.

But is there more it could do to attract and please advertisers? 

"They (Twitter) simply do not have the data points to compete with other social media platforms," said Kim Garst, the founder and CEO of digital media consultancy Boom Social. "In fact, none of the platforms, outside of Facebook, have mastered their ads platforms yet, in my opinion. Facebook collects so much data for their end users that they then make available to businesses in their ads platform. This gives marketers a tremendous opportunity to drill down to exactly who they want to show their ads to. Twitter doesn't have this capability, at this time."

Ritholtz Wealth CEO Josh Brown on CNBC's "Halftime Report" said the size of the audience is as important as "efficacy," or the ad actually doing what it's meant to do. Brown also noted that Twitter doesn't have the same amount of data about its users that other websites like Facebook do.

We'll know soon if Twitter is right about video ads and if it tries to address these issues. Its investors hope it doesn't run out of time.