As Twitter noted, its current userbase (in terms of monthly active users) is around 230 million, compared to total Internet users of 2.4 billion, representing an opportunity to grow user penetration. Plus, the number of Internet users is expected to grow to 3.5 billion in 2017. For reference, Facebook currently has 1.2 billion monthly active users, reaching ~50% of all Internet users. Smartphone use is expected to grow to 3.7 billion in 2017. Twitter’s short format is well-optimized for smartphone use, and the company could be positioned to capture a large share of the smartphone user market.
Twitter states that its timeline views per mobile active user during 3Q13 totaled 685, compared to 635 during 3Q12. This means growth of 8%, signaling an increase in user engagement. Potentially, user engagement could grow as users become more comfortable with the Twitter platform and increasingly turn to it as a source of real-time information tailored to individual interests.
Ad frequency or “ad load”
Twitter’s primary source of revenue comes from advertisements. Twitter has just started to “monetize” its platform over the past few years—that is, learning how to make money from the platform. As the company is relatively new, there remains a great deal of room for it to learn how to optimize its revenue and advertising potential.
One way Twitter can increase its revenue is by increasing its “ad load.” This means increasing the frequency of ads that users see so that advertisers have more ad “inventory” to buy. There’s an optimal point for Twitter to increase the frequency of ads, as too many advertisements can drive users to use Twitter less frequently. Note that the company doesn’t disclose ad load.
Better ad targeting
Potentially, Twitter could improve its ability to target ads based on a user’s interests and demographics. Currently, advertisers can target on Twitter based on gender, location, device (mobile versus PC), and interests (for example, a Twitter user following many famous chefs is likely interested in food), search, and followers. However, Twitter’s targeting capabilities lag those of Facebook, which allows even more precise demographic targeting (such as age and relationship status). Better targeting could entice advertisers to pay more for ads.
New ad formats
Twitter recently launched “Twitter Cards” and “Twitter Amplify,” which are richer formats for advertising that can include embedded pictures and video clips. The new richer formats could entice users to engage more with the advertisements, and it could entice advertisers to pay more for them.
Twitter believes that as it grows, its margins will improve significantly.
Potential for more media partnerships
Twitter already has partnerships with the NFL and Comcast, and it believes it can add more such partnerships given that user engagement on Twitter to discuss popular TV shows and sporting events has already been demonstrated. To learn more about Twitter’s potential upside, see Why do Twitter and its social media peers attract investors?
© 2013 Market Realist, Inc.