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#Epic win - now where's the money?

Johannesburg, 08 Nov 2013
The world's most popular micro-blogging site's listing yesterday caused a market frenzy - now the company will need to prove it can be profitable.
The world's most popular micro-blogging site's listing yesterday caused a market frenzy - now the company will need to prove it can be profitable.

Dollar-sign eyes across the world are on Twitter, now that the company has gone public, and it will have to show investors return on investment (ROI), without too drastically changing the platform users have come to know.

Yesterday's initial public offering (IPO) by the world's most popular micro-blogging network revealed just how seriously the company - and the people who follow it - take social media, and now Twitter needs to leverage the sentiment to turn loss into profit.

This is the general industry sentiment in the wake of Twitter's hugely successful listing - which saw stocks soar 92% on its first day of trading on the New York Stock Exchange (NYSE) yesterday. Industry observers say, with a market value now of almost $25 billion, Twitter will have to get its top creative minds together and come up with money-making means that will not put its all-important users off.

The company debuted with an initial offer of $26 a share, making it worth more than $14 billion. Yet, the share surged on opening, trading at $45.10 and climbed to $50.09, before settling to end the day at $44.90. Its lowest point on its first day was $44.

Twitter earned almost $2 billion from its debut, and will put the cash towards capital expenditure, acquisitions and growing its base, as it targets a billion subscribers - almost four times its current user base.

Ovum analyst Richard Hurst says Twitter's decision to list on the NYSE - rather than go the Facebook route and list on Nasdaq - effects the seriousness of Twitter in going to the market to raise capital. "Investors may fear a repeat of the 1999/2000 dotcom bubble, where shares were trading above value."

But Roy Topol, Investec investment manager, says - while some of the latest valuations of IT companies are worrying, the situation is nowhere near the same as the dotcom bubble, which burst on the back of a frenzy of companies listing with nothing to prove their worth.

Twitter has never turned a profit. Hurst notes the company is only expected to start posting profits in 2015. Twitter gets money from advertising - which it has, up until now, done subtly - and selling data.

Topol says it will be difficult to forecast when Twitter will be profitable. While its revenue is growing dramatically, it is pumping money into marketing, maintenance, and research and development. He says if it does turn positive in 2015, the profit will be marginal.

Keeping cool

Tech analyst Liron Segev, from TheTechieGuy.com, says it is vital that, in the process of raising capital, Twitter maintains its platform as a communication tool that millions use daily. "This platform has changed governments, changed the speed at which news travels around the world, and changed the way celebs interact with their fans. This needs to be maintained."

Twitter CEO Richard Costolo (@dickc) has a 1.4% stake in Twitter post its listing.
Twitter CEO Richard Costolo (@dickc) has a 1.4% stake in Twitter post its listing.

At the same time, he says, the company is under constant pressure to evolve, as other social networks are offering more services.

"They also need to show ROI to investors and will be under the microscope - so this will inevitably mean more adverts. Already, we can see how the pics automatically load up in the timeline, whether we like it or not.

"This is the first step; so when brands upload their pics, they will be seen as you scroll down your timeline. Can Twitter maintain its coolness? That will be the test of time."

Segev says - if Twitter sticks to basics - it has a good chance of staying "cool", but if it becomes another cluttered channel, people will seek other cleaner channels, like Instagram.

Then, Segev notes, there is the threat from instant messaging apps. "They are primarily built for mobile, so they are everywhere. If you look at BBM Channels, there is a mix between Facebook and Twitter on a mobile channel that will talk to 80 million people. Yes, it's a lower number than Twitter users and its primary usage is different, but as the information overload world becomes more extreme, choosing smaller communications groups will become more of the norm so it is more easily consumed."

Twitter's active user base is growing at between 6% and 7% a year and should double every 30 months.
Twitter's active user base is growing at between 6% and 7% a year and should double every 30 months.

Fred Roed, CEO and creative director of digital marketing company World Wide Creative, says people have faith in Twitter and will not easily abandon the platform, as long as the company uses its HR assets and focuses on innovation. "The company has some very clever people at the helm and - although Twitter has a long way to go to beat Facebook - I believe they will be able to steer growth."

MD of World Wide Worx Arthur Goldstuck says Twitter's mobile strength can also be leveraged - and it will be mobile-heavy nations like SA that drive this. According to the latest World Wide Worx research, three quarters of all Twitter users accessed the platform on their cellphones. "In SA, this is about 85%," Goldstuck says.

Long-term play

Vestact analyst Michael Treherne says Twitter is currently focused on growth, and those who put money into it now are playing a long-term game. He says there has been some South African interest, although Twitter is really more of a "foreign thing".

Twitter's stock price is not likely to come off much because of the limited shares in issue, says Treherne. He notes it will be interesting to see what the price does today.

Facebook: $16 billion (2012)
Google: $1.9 billion (2004)
Twitter: $1.7 billion (2013)
Groupon: $805 million (2011)
LinkedIn: $405.7 million (2011)
Pandora: $240.5 million (2011)
Amazon.com: $62.1 million (1997)
Yahoo: $33.8 million (1996)
AOL: $26.5 million (1992)
Source: Dealogic, Wall Street Journal via Investec

The debut is good news for other social media companies waiting in the wings, he says, as it has cleared the bad air left after the Facebook debacle. Facebook's IPO was marred by a technical glitch at the Nasdaq, which caused investors to sell at a loss.

Treherne expects Twitter to reach a billion users - about a third of the current Internet population - easily. He says there are currently 232 million active users, a figure that is growing at between 6% and 7% a year. If this rate is kept up, its base will double every two-and-a-half years.

Twitter's listing prospectus states that CEO Richard Costolo earns $14 000 a year and has a 1.4% stake in the newly listed company. In total, all 12 of its directors own 22.3% and cannot sell out of the shares for the first 180 days after listing.

The company, which employs 2 300 staff, has yet to make a profit in its seven-year history. In the nine months to September, its net loss about tripled year-on-year, coming in at $64.6 million, despite surging gains in revenue.

Twitter launched in March 2006 with a 24-character-long tweet by chairman and one of its founders, Jack Dorsey.
Twitter launched in March 2006 with a 24-character-long tweet by chairman and one of its founders, Jack Dorsey.

Advertising, by far the largest portion of its income (70%, according to Goldstuck), gained 121% in the nine-month period, to $374.9 million, while data sales grew 36%, to $47.3 million. Twitter expects online advertising to grow from $91.1 billion, in 2012, to $124.7 billion by 2017, while mobile advertising should surge to $52.2 billion, from $10 billion, in the same timeframe.

As for would-be investors, Treherne says: "If you have the stomach for a very bumpy ride, then Twitter is an option, they are a high-growth, high-margin, futuristic company who have yet to make a profit."

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