April was a painful month, especially for equities who had the worst April since 1970. We are well into the first week of May and still seeing the shaking in the markets. On the other hand, we are battling inflation which has reached a staggering 8.5% as of March 2022. One of the big factors affecting inflation is jobs and the job market is not ready to cool down. This means, that Fed will raise rates more frequently with a target to reach 2.75% to 3% by the end of the year. The bad news ain’t over, oil is back in the $100/barrel territory. All of this is a big pill for shareholders to swallow who are selling any company that is doing OK on the earnings report. Big tech businesses are losing steam, Amazon has lost 27%, Google is down 14%, and Tesla 8%. Talking of Tesla, Elon musk bought Twitter for $44B. Let’s dive in and understand what this means for the social networking platform. I will also discuss Twitter’s problems and potential solutions available to Elon to bring back the struggling social network site on its foot with the user and ad revenue growth.
I hope I am not too late to take up this topic and write on it as Twitter was on the edit button which led Mr. Musk to buy it. If we were to believe the tweets, this edit button cost them the ownership and on the flip side, $44B to Elon Musk. Let us explore what is the story behind Twitter’s sale and why it’s important? I will also explore and help the readers understand why Twitter is a different social networking tool when it comes to society and what cultural impacts it has. Lastly, If you like this kind of essay, please so do like, subscribe, and follow the site for awesome essays and newsletters.
What is Twitter?
Remember that guy who, purely by chance, liveblogged the Osama raid in 2011? Be it political campaigns, social movements, natural disasters, anything! Anything major happens and it is first reported on Twitter. Fundamentally, Twitter is a social network that allows users to post text, photos, videos, and links via their Twitter handle. It is also used for consuming news, learning about events in real-time, and connecting with people. Twitter is actually much more than a social site, it’s a cultural phenomenon. Technically, Twitter is an API that lets users post, read, search and see timelines. How Twitter operates and impacts lives is different than other social media. Let me take a crack at explaining it.
Twitter is different from other social media
Both Twitter and Instagram are part of modern social media, but there is a fundamental difference in how they are used. Twitter has photos and videos but the crux of Twitter is 140-character (now 280) messages and links. Instagram or TikTok on the other hand is nothing but photos and videos.
Twitter is essentially a content distribution tool. The network mainly consists of people sharing links or live updates, it’s about what is going on in real-time. The value of Twitter comes from the content you discover on other sites. Imagine if people could not tweet links. It wouldn’t be as successful.
Why is this difference important, As a user of Twitter and Instagram, you may have friends on both? But on Twitter, you also follow news channels, analysts, breaking news, etc. The main idea behind Twitter is information distribution and mind you, Twitter does it best in the world. Instagram on other hand is all about what your friends are up to, connecting with celebrities and brands. It hooks you with stories and photos of your friends and family. This makes Instagram the best for targeted advertisements. You use Instagram in your leisure time in discovery or relaxed mode. You share your likeness about products on Instagram and Insta’s algorithm suggests a product for you to buy, which, by the way, you do not even need.
On the other hand, Twitter is more interest-based (leaned in –> attentive). You go to Twitter to learn about recent news, breaking events, political drama, business news, sports updates, etc. What you do on Twitter is with intent and not for leisure. You are attentive while using Twitter and this makes Twitter special. Twitter users have 31% more memory encoding when discovering content on Twitter. The Twitter audience is leaned in and receptive.
Now I am not saying that users of other social media services such as Facebook, YouTube, and Instagram do not consume news on these platforms. However there is a difference, the intent is different. The Pew survey study says, “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.”
Users of Twitter are looking for news, whereas Facebook brings news to the people who are otherwise engaged in learning more about social life and the well-being of their friends and family. Believe it or not, Facebook only shows the news that bolsters users already existing views. Definitely, some changes have been in the algorithm since 2016, but the game is still the same.
The intent of viewing and more receptiveness of Twitter as a platform gives Twitter an edge on its social graph. Facebook may understand who your best friend is and what you like, Twitter knows what you need. Social intervention on how you think, what are your prioritizations in life, and how you are to behave culturally makes Twitter’s social graph special. To understand why Twitter is good at this, we need to look at and evaluate its underlying architecture.
Twitter more than a social network company is a microservices company. Twitter’s architecture is divided into several microservices which talk to each other. There is a search service (to search tweets), tweet service (to post, like, or delete a tweet), user timeline service (for showing users their timeline), and social graph service (this is a special one, for connecting the user with its social connection and suggest tweets), etc.
Only the green boxes in the above snapshot are user-facing. The intent of showing this is to help readers understand that the user-facing functionality of Twitter is completely separate from its core architecture which moderates and manages the content on Twitter. Because of this underlying architecture, it becomes relatively easy for Twitter to use its backend as a service and connect with third-party apps. I will take up more on this in the solution section of the essay. Let us get back to the social graph.
Why is the social graph important for Twitter and dangerous to society?
It keeps track of which users are following which users and merges the tweets of channels or users you follow into your timeline. Update and refresh this timeline based on new tweets available. This service makes Twitter one of the most powerful companies on the face of the earth when it comes to user preferences. As I said above, Facebook or Instagram may know who are your friends and where you go, or what you eat. Twitter knows what users are interested in based on your news selections, topics of interest and who you follow, etc.
Twitter has 330M users worldwide compared to Meta’s 3.64B. However, Twitter users are most powerful and influential when it coming a specific topic. 69% of Twitter users are liberals so the influence of a certain population over all the users of social services is dangerous. Twitter knows what you are following and it makes you an easy target for advertisers to influence your behavior.
The biggest cultural impact of Twitter is how news and media sources quote Twitter as part of their news. You and I may not get our news from Twitter but the news agencies quote Twitter. This influential behavior is enormous. You would hardly find any media outlet quoting any other social media platform as the source of their news. But a lot (including WSJ, Time, and Forbes) quote tweets and build news based on these tweets. No doubt, there is a lot of noise on Musk’s free speech agenda on Twitter.
Understanding Twitter’s core problems
Problem 1 – Stagnated user growth
British newspaper The Guardian ran an article on why some people struggle to use Twitter. The outcome was that users find Twitter intimidating and one compared it to throwing a pebble into a really unfriendly canyon. People don’t want to be attacked. Twitter lacks community building for its users.
Another incident happened recently, highlighting a similar issue. According to a recent article published in WSJ, which btw quotes a PEW survey, finds Twitter is disproportionately tilted towards liberals, who account for 69% of highly prolific tweeters. WSJ further says, that content moderation overwhelmingly and almost completely reflects the priorities of the left. A clear example of this: is a ruling last week banning ads that don’t affirm the “consensus” of the U.N.’s Intergovernmental Panel on Climate Change.
To this extent Musk is right and I agree with him, where he views free speech as permitted by law vs what is allowable by social networks. He continues to say, he is against censorship that goes far and beyond the law, if people want to control free speech they will ask the government to pass a law that controls it. They’re going beyond the law is contrary to the will of the people.
These examples highlight that a sense of social is missing from Twitter. This is a huge problem for a social media company. Meta has close to 3.6B monthly active users. Snap has over 530M monthly active users. Guardian article shows that the core problem lies in a biased platform. Twitter needs to solve this inherent issue and accept people from all political backgrounds to really make it a neutral platform.
Problem 2 – Advertisements
Let’s be honest, no one outside of Facebook/meta has been able to master the art of social advertising. Every company (except meta) in social space is struggling for ad space. Digital ad spending is pulling dollars from traditional media and creating new opportunities at the local and national levels. Digital ads go to companies that offer you the best-targeted advertisement options. Instagram and Facebook, collect so many data points on their users, that they know more than you about your preferences. Twitter even though understands what you need with the social graph data, has not been able to monetize it. Twitter has admitted that aside from user growth problems, stagnant ad revenue is a big problem.
Problem 3 – Polarization
Twitter as I have stated and we all know has a lot of division on its platform. I have also related problem 1 – user growth to polarization. Events that took place in 2020 have aggravated the problem of polarization on Twitter. Tweets being public and accessible to all on the platform aggravates the problem. Polarization combined with censorship furthers this problem. So this balancing act needs to prioritize and Mr. Musk has been pretty open about Twitter “free speech” issue. He is the man that can certainly work to solve this.
Due to these problems, Twitter has reported profits in only 14 out of its 33 quarterly sessions since it went public. Before Mr. Musk intervened, Twitter was valued at $30B. This valuation was for its social graph and the data Twitter possesses. The attention that Twitter brings to users while they are on the app. So what should Twitter do?
What should Twitter do?
To start with Mr. Musk has already tweeted he wants to charge organizations and government agencies a fee to use Twitter. This may surely be one option as twitter definitely needs more revenues source. Currently, Twitter makes 90% of its $5B in revenue via advertisements and the other 10% comes from making its data available to third-party services. Here are some of my suggestions on what Twitter should do to come out of the bubble it has been stuck into for years.
Solution 1 – Divide Twitter into services and social media company
The best option has been suggested by stratechary’s Ben Thompson. To unlock Twitter’s full potential, third-party developers should be able to build their own user experiences, algorithms, and designs. Ben Thompson’s recent essay, Back to the Future of Twitter, separates Twitter into two entities: Twitter Service, which would manage the data and social graph, and Twitter User Interface (UI). I believe if third parties were to build applications on Twitter Service, competition would help solve some of Twitter’s complicated and seemingly intractable content moderation problems.
Opening its platform to third-party developers also would enable new business models that might improve Twitter’s effort to satisfy more users. Charging platform fees on third-party generated UI revenue should be one of the ways forward. A “marketplace of interfaces” would allow one user to enjoy Twitter without sports or memes, and another to screen tweets the way they like. Third-party app developers could monetize through ad networks or subscription models.
Twitter third-party apps would enable users to enjoy the Twitter they want to enjoy. Third-party apps will control and monitor the content based on their policies and take away the burden from Twitter to administer tweets. If you look at the history of Twitter that was the case. When twitter started, its architecture exposed various functions via APIs which were used by third parties to build services. One of these services was TWITTERRIFIC. It was launched in 2006, primarily for geeks to broadcast status updates and it could only be used in a browser. Iconfactory, the creator of Twitterrific, was under the assumption that Twitter would be more successful on the desktop and so created a client for Mac. On the Mac, Twitterrific informed and influence the brand and features of Twitter itself. They were the ones that came up with the “bird” symbol and the word tweet.
Twitter thought this reliance on third-party apps will be a problem as they would not be able to control the content and user interface. Each app would have its own interface and that would create a different UI every time you switch third-party apps. The Twitter board supported the decision to regulate third-party apps to build on the platform to focus on a standardized ad-based revenue model. Back in the day, the easiest way to make money was via advertisements and the way to run a successful ad servicer is through a simple user interface. Thus twitter brought Tweetie which had built the mobile version of Twitter for iPhones. It was acquired by Twitter in 2010. It was rebranded as Twitter for iPhone. Loren Brichter founder of Tweetie joined Twitter and helped launched Twitter for iPads.
The reason it’s important to write about history is to present a case to go back to history with a twist. What Ben Thompson had suggested via Twitter services is to open Twitter to third-party apps that will utilize Twitter’s social graph to build their own client experience and pay Twitter for getting access to data. Twitter can still control the user interface by building microservices that connect with third parties via Twitter APIs. They can standardize the content POST-APIs and how they publish data on the Twitter platform. Currently, Twitter is sharing data and that accounts for 10% of the revenue, but this revenue is just from sharing data. Offering services using this data would result in higher revenues and third-party customers would be able to make money off the platform of which they will return some percentage back to Twitter. Opening up its algorithm to app developers would enable all involved parties to monetize Twitter’s social graph data to its full potential. Now if you are thinking, what if a rival Twitter comes up and becomes a competitor. I would argue that without social graph data and user needs data that Twitter stores and the network effect it brings, the chances of a rival Twitter are meek.
Option 2 – Charging for Twitter
The option of paid social media has been floated from time to time, only to be shut down later. This discussion is not invalid. In the case of Twitter, let us keep in mind, that Twitter is the place where news is made, shaped, and fought over. There is very little chance other platforms will take over. There is no doubt that inherent problems related to an overly leftist population and company policies curb open views. Even then, Twitter has close to 330M MAU. It is interesting to see how people use Twitter, see the chart below which shows how people spend time on Twitter.
Based on the data supported by the chart above, why not charge for the service. How much would be the next question? Let us break down Twitter per-user revenue from ads and see where we land. Twitter makes approximately $14/DAU from advertisements. If Twitter charges for the service, it will surely reduce the monthly active users. It’s hard to guess how many users will fall off if Twitter starts charging. But there will always be super addicted users that will continue to use the service. According to the American press institute, 70% of Twitter users use Twitter several times a day. If 80% of super addicted users stick with the paid Model, that will bring down MAU to 190M DAU. To reach the current level of advertising revenue that will be missed, Twitter should charge $2/user/month. This would translate to ~4.5B in subscription revenue. Bringing it at par with ad revenue.
Then there is certainly a mixed bag approach, where you allow users to choose between an ad-free world vs a subscription model. Twitter has started moving in the direction of a paid Twitter. Twitter blue is targeting users that would want a fast loading and ad-free reading. It will cost $2.99 to get ad-free articles. Other features such as custom themes, pinned conversations, undo tweets, etc. may look cool but I do not think this will prompt the user to get to the paid subscription model. Musk himself believes that Twitter blue pricing at $2.99 is high. He has stated that $2/month and charged upfront for a year, should be the process for Twitter blue. $2/user makes sense when you have economies of scale. If only 50M users show up for Twitter blue, it may backfire as Twitter will lose more without advertisement revenue for paid users, and the subscription volume won’t be sufficient to make up for lost revenue.
Another option is to charge entities to use Twitter as a service. Elon tweeted “Twitter will always be free for casual users, but maybe a slight cost for commercial/government users”. This could be a powerful way to start exercising paid social media. Governments that have gotten so used to putting news and updates on Twitter, would not hesitate to pay to stay connected to their voters. Same with commercial services, who put every minor update in addition to paying for advertisements will buy this service to stay connected to the users.
Whichever direction twitter decides to move ahead, they have to move with intent. I feel that intent is still missing and that is evident from the response of board members to Elon Musks’ takeover bid. Board is allowing existing shareholders to buy more Twitter shares at a discount thus diluting Musk and their big shareholder stake. I feel that is not the right move considering how this will impact the existing shareholders.
There is so much noise around this deal, that the Twitter board also understands they need to be careful about what they propose and how they propose options. Shareholders are behind Mr. Musk who according to the sources has secured the funding required to acquire Twitter. It’s time for Twitter to embrace the change and go back to its roots to resolve the moderation issues that lie at its core. Twitter services should be the path forward which will make third-party developers a free hand to build and moderate the audience and reduce the burden from Twitter. Twitter needs more free speech-type content that represents all sections of society. Considering how important social media and specifically Twitter is in deciding the cultural and political landscape of any country today, it is imperative that all voices are heard irrespective of the background.