Twitter’s Probably Screwed

When Twitter IPO’d in 2013, the general feeling was elation. It had incredible product-market fit, the growth story was compelling, and it was set to be the hot new thing. The next Facebook, maybe. If you were a banker selling the stock, your pitch probably sounded something like the following:

“An ad-supported content platform is the single greatest business model ever invented! There is strong incentive alignment between the service you deliver to consumers and the service you deliver to your paying customers (advertisers). You want consumers to scroll and scroll and scroll, interacting with content, indicating interests, and just spending as much time on the site as possible. This interaction feedback loop results in a content canon, firing memes that keep people clicking. Simultaneously, advertisers love it because all those clicks help make the ads really effective. Twitter is where this is going to happen.”

That is a compelling pitch! There is nothing retailers want more than a service that tricks their customers’ stupid monkey brains into buying whatever an ad slaps in front of their faces. Unfortunately, this growth story turned out to be completely false. 

It would not be an exaggeration to say that Twitter has blown it. Its stock is down ~21% from its IPO price 8 years ago. Their overall growth is abysmal in comparison to Facebook. They have less than 5% market share in digital advertising and are an afterthought for marketing teams. In 2017 they had negative user growth! While things have picked up recently with the service adding 25M monetizable daily active users last year, it has fallen far short of its potential. My favorite description of the business comes from Mark Zuckerberg, who said, “they drove a clown car that fell into a gold mine.”

However, over the last year, it feels like Twitter has finally woken up. There are dozens of new product initiatives, a fresh strategy, a new CEO, and a 2023 revenue target of $7.5B and 315M monetizable daily active users. These goals are challenging and demand perfect execution from the team. The company has a renewed focus on creator monetization tools and improving their direct response ad business. There is actually some optimism among the investor base that maybe, just maybe, this time will be different. Maybe Twitter will finally be able to turn its soft, social power into hard dollars and cents.

I am not convinced. 

Today, we will be explaining how the digital ad market works, where Twitter fits on that landscape, and why its likelihood of building a high-growth advertising business is small. 

Click, Click, Buy

Ads exist to justify your marketing team's existence. Depending on who you talk to, they are an absolute necessity, an evil necessity, or just plain useless. 

You can think of ads as being placed along a spectrum where on the left-hand side is brand ads, and on the right-hand side is performance ads. 

Brand ads are exemplified by TV commercials and magazine pages. Their efficacy is tough to measure and there is a whole cottage industry justifying doing these for the sake of buzz. Performance ads are where ads are (allegedly) more targeted and where the payout is determined by some action taken by those who see the ad. There are lots of in-betweeners with fuzzy boundaries  in the middle of these two labels. But it is helpful to think of them split this way.

Note: There is lots of legislation being proposed against ads that use “targeting” or “surveillance.” In the typical fashion of American lawmakers these laws are poorly thought out labels because technically speaking, everything is targeted! If I choose to buy an ad in a local paper, targeted. An outdoors magazine ad for my fishing lure company, targeted. There are bad actors within ad targeting, but banning the practice would essentially ban all advertising. Dumb dumb dumb.

In a large company, there will usually be two competing sides of the marketing team advocating for the two types of ads. In one corner, you’ll have some mustached white dude who wears thrifted Vans, insisting his title be that of a “creative,” arguing that his Superbowl ad of Billy Joel singing the Mcdonald’s theme song drives sales. In the other corner, you’ll have some sweaty stats nerd, ranting about how his spreadsheet conclusively proves that their multi-million budget (and enormous salary) are totally justified on a return-on-ad-spend basis. Depending on the current Chief Marketing Officer’s background, there is usually a favorite child between the two.

The relationship between these two types of advertising is, in my opinion, symbiotic. Both must exist for the long-term effectiveness of a sales motion. Brand marketing can help cultivate awareness, while performance marketing acts as the catalyst utilizing that previously accumulated goodwill. However, because performance ads are further down in the process of making sales, and therefore are easier to measure, they will usually win out if you have to choose one. 

Twitter currently sits at an 85% brand ad and 15% “direct response” ad which is their word for performance ad. This is a relatively new development! For the past 8 years, almost all of their ads were brand deals. The growth in direct response is a new thing. We will get to why in a second, but keep in mind that their business was historically reliant on brand marketing.

Regardless of the type of ad, they both rely to a certain degree on targeting and attribution.

Targeting means the ability to get your ad in front of the person who is willing to buy it. If you were to google this topic, the discussion focuses on the demographic profiling component of targeting. Facebook and their ilk will try to figure out your race, age, income levels, etc., so they can more accurately give you ads you’ll want to click. To gain this data, ad networks essentially have three choices:

1. Populate their models with in-house data: This was the original brilliance of Zuckerberg. By having users enter in all their data, even their relationship status, users self populated the demographic models.
2. Rely entirely on outside data: This is more hypothetical than real, but theoretically, an ad network could entirely rely on user demo data from other sources. It doesn’t really happen, but it could be possible. 
3. Mix in-house and out-of-house data: To help enrich their data, companies will often utilize internal data and purchase other data on their customers.

When you read all the various data modalities above, it is easy to feel like your privacy is violated. It is spooky that there are companies out there who are targeting you based on your interests. If that is the way you feel, rejoice! The dirty secret is that this stuff isn’t actually overly useful on its own. What matters is being able to pair targeting data with attribution.

The Butch Cassidy to demographic data’s Sundance Kid is user behavior. It would be your demographic profile plus a history of everything you’ve ever purchased. For many years, this was the world we lived in! Facebook would know everything about you and then you would click an ad. Once you left a Facebook property, you would go to where the advertiser linked you. Here, the advertiser would shoot you with a digital tracing dart, colloquially known as a Facebook pixel, to see where you came from and what you did. (If you were going from app to app, they would use Facebook’s SDK). The data from the pixel or the SDK would feed back into Facebook’s models, making the ads ever more accurate. This took Facebook into a trillion-dollar valuation in July of last year. The end result is that you could be followed around the internet, with websites knowing your demographic profile and what you liked to click/buy.

I know this all feels borderline invasive, and it probably is, but for small businesses, this was manna from heaven. It enabled individuals to compete with corporations. There are tens of thousands of businesses that are reliant on Facebook ads for contacting their customers. 

However, everything has changed. Pixels are slowly being depreciated with the gasping demise of cookies. And most consequentially, Apple has rolled out app transparency tracking (ATT) where users can opt out of being tracked from app to app. The impact on advertisers has been enormous.