In a tweet that could represent US$110 million for every one of its 135 characters, Twitter last week announced that it would be following fellow social network providers Facebook and LinkedIn in becoming a publicly listed company. Taking advantage of a change in federal regulations, Twitter has been able to keep its initial filing secret, leaving commentators the task of guessing details of company earnings, where it is going to file, what it is planning to do with the money it raises, and even which stock exchange it will list on. Here is what we think we know so far:
Where it will list
Consensus around the Twitter float appears to be that it will try to avoid the mistakes made by Facebook when it listed in 2012. Facebook did not sustain its initial share price valuation of $38 for very long after it went public and early investors bailed before the share price plummeted, dropping as low as $18 three months later. It took over a year for its share price to go back over the offer price.
Facebook’s poor IPO was exacerbated by problems on the NASDAQ exchange, which caused a delay in executing orders. Twitter is instead thought to be listing on the New York Stock Exchange and avoiding using the same lead broker as Facebook, opting for Goldman Sachs as opposed to Morgan Stanley. The choice of the NYSE instead of the NASDAQ may also reflect the fact that, like LinkedIn, Twitter has much more appeal amongst business users than Facebook does.
How much will it be for?
When it comes to valuation of the float, estimates have put Twitter’s possible market capitalisation at between $10 and $15 billion. This is based on an estimate of possible earnings of around $500 - $600 million. This of course has raised the question of how Twitter makes money and how much more money it can be expected to make. In this regard, Twitter can thank Facebook for convincing investors that it can crack the problem of making money out of mobile. Twitter’s service has always been heavily used on mobile platforms and so the question of whether it can succeed on this platform is moot.
How will Twitter grow revenue after the IPO?
Most of the money Twitter makes is through advertising, offering users and companies the ability to buy promoted tweets, promoted trends, verified accounts and other services that get them followers and attention. Post IPO we can expect more of the same, although Twitter’s recent purchase of advertising sales platform MoPub will allow them to offer real-time bidding for advertising on Twitter.
Some users had reported receiving promoted tweets through push notifications, which if true, would have signalled a marked escalation in Twitter’s aggressiveness in advertising. However, Twitter CEO Dick Costolo later confirmed that Twitter didn’t send ads this way and it must have been the result of a software bug. Here Twitter has to be cautious, as an increase in advertising could end up detracting from the service they offer, and potentially cost Twitter users and popularity.
The IPO will give Twitter access to money it can use to fuel growth through acquisitions, but which direction it will take in doing this is not clear. All of the social networks are vying to become the main medium for sharing anything between people: observations, thoughts, activities and emotions. In addition to providing direct news, Twitter has effectively become a back-channel for live TV to integrate audience reactions and opinions into any event. Through its #music service, it provides a real-time feed of what music everyone is listening to, discovering or forgetting. This then helps the discovery and promotion of new music, something artists and music companies would certainly pay for. It is easy to see how this could be extended to film and other forms of entertainment.
Twitter also makes money from selling access to its data through its programming interface and this will continue to be an important part of its value. Twitter data can reveal enormous amounts of valuable information to any organisation that wants to tap into a real-time view of the public’s and more specifically, their customers’ actions, thoughts and views. For example, researchers at the University of Rochester are tracking influenza through Twitter.
Who benefits from the IPO?
In many ways, an IPO is a way for investors, owners and key employees to realise a financial bonus from their investments and efforts. The beneficiaries here will be the founders Jack Dorsey, Biz Stone and Evan Williams and a range of investors including current CEO Dick Costolo, Marc Andreesen and Amazon’s Jeff Bezos. Of course, the public can also now benefit by buying shares in Twitter and hope that they follow the example of social network LinkedIn whose share price has climbed from $35 at its IPO to its current value of $250.
It is hard to believe that new companies can continue to grow revenue through what is globally a finite advertising spend. Advertising may continue to shift from analogue media to digital, favouring companies like Google, Facebook and Twitter, but ultimately this will be an increasingly hard market to show aggressive growth in.
For Twitter, the challenge will be to provide services that add monetary value, but are not seen as detracting from the experience of its users.