Image: Lynn Goldsmith / Corbis
CEO Dick Costolo must convince investors that Twitter can get
wildly profitable—and stay that way
It’s Emmys night at the Nokia Theatre in Los Angeles, and as showtime approaches, a mosh pit of blue-chip television stars jostles backstage. Conan O’Brien and Robin Williams, Alyson Hannigan and Jim Parsons, Jon Hamm and Sarah Silverman—all squeezing past a few score of other celebrities in the narrow corridor between the producers’ station and the green room. “This can’t be fire safe,” grumbles Hamm, the Mad Men heartthrob, as he shoulders through the throng.
Maybe not, but a team from Twitter faces a more immediate problem. They spent months negotiating with CBS and Emmy executives for access that resulted in a “Twitter Mirror” set up just outside the green room entrance, steps from the stage. A tricked-out looking glass with an iPad embedded in its surface, it lets honorees and presenters coming offstage snap and broadcast casual self-portraits—“selfies”—to the 246,000 followers of the @CBS and @PrimetimeEmmys accounts.
It’s supposed to, anyway. With 15 minutes left before start time, a full house of iPhone-toting actors and producers has overloaded the Wi-Fi network. Andrew Adashek, the boyish 36-year-old ex-TV producer who manages Twitter’s television partnerships, speed-walks through the crowd, trying to find a solution.
Just as it’s looking hopeless, one of Adashek’s lieutenants scrounges a portable wireless hot spot. Bingo. Moments later, the Deschanel sisters—New Girl star Zooey and Bones star Emily—wander through, fresh from the red carpet. “Hey, let’s take a picture in the Twitter mirror!” Zooey says.
To its 200 million-plus active users, Twitter is many things: A social network, a short-form messaging service, a newswire, a tool for self-expression. But the company itself seems far more keen to position itself among its users—and, even better, potential users—as a TV companion, an indispensable tool to keep up with, discuss and even influence the outcomes of shows and live events like sporting contests and political debates. This “second-screen experience” turns TV into a participatory activity, allowing Twitter users to broadcast wisecracks, critiques and theories in real time; the networks, in turn, share the behind-the-scenes worlds of writers’ rooms and dressing rooms, 140 characters at a time.
“As we’ve grown, it’s become more and more clear to us that the characteristics that make up Twitter—public, real-time and conversational—make it a perfect complement to television,” says CEO Dick Costolo. “TV has always been social and conversation-driven. It’s just that in the past, the reach of that conversation was limited by the number of people in a room or who you could talk to on the phone or the next day at the watercooler. Broadcasters have come to understand that Twitter is a force multiplier for the media they’ve created.”
And a force multiplier is exactly what Twitter itself needs. While its recent S-1 filing contains the rapid revenue growth analysts were expecting, it appears to be nearing a wall. The average price of an ad has been plummeting, down 46 percent in the most recent quarter. To offset that, Twitter needs more eyeballs, but in the US, where it makes the vast majority of its money, user acquisition has stalled out, with only a 2 percent gain in the last quarter. Americans now make up just one-fourth of Twitter’s participants.
As revenues threaten to plateau, red ink pools. Numerous reports that Twitter was already profitable proved to be off base. Wildly. Net losses, driven by heavy capital expenditures and R&D costs, totalled nearly $70 million in the first half of the year. Facebook, by contrast, was clocking annual profits of $1 billion when it went public in 2012. For money-losing Twitter to sell itself to the public at a $10 billion-plus valuation, as it intends, it needs to sell a new business model. TV is Twitter’s panacea.
The first screen is a more-than-willing partner in pushing the second-screen experience. Yes, Americans still watch unholy amounts of TV programming—about five hours a day per person, according to Nielsen—but as the what, when and how changes rapidly, the model is coming apart at the seams.
In many ways television shouldn’t even be called television anymore. “Video” would be more apt. More than a third of “TV” viewers watch programming each day on laptops, smartphones and tablets, according to Frank N Magid Associates. And live TV? Not in an age of “on demand.”
It’s taken as a given by all parties that viewers ought to be able to access their favourite TV shows however they prefer. But that makes ratings hard to measure and has prompted a turf war (digital streaming rights were a bone of contention in this summer’s standoff between Time Warner Cable and CBS, which resulted in the network being blacked out in millions of homes for weeks). More ominously, the digital video recorder empowers those watching on their own schedule to skip the commercials.
Over all this looms the specter of so-called cord-cutting—the practice of cancelling cable or satellite service and relying entirely on the internet for your video needs. For now it’s a marginal phenomenon, representing less than 5 percent of the market, according to studies by Magid and the Convergence Consulting Group. But it’s prevalent enough that the number of pay-TV households nationwide has shrunk for the first time in the modern media era. With cord-cutting dramatically more common among under-30 consumers, the trend will accelerate.
It gets worse: Internet services like Netflix, Hulu and Amazon are producing original premium content that holds up against anything HBO or PBS is putting out. Netflix’s House of Cards, nominated for this year’s Emmy Award for best dramatic series, was a game changer. “The seal has been broken,” says Larry Tanz, CEO of Vuguru, an internet video studio. “It’s the first time the fact of what network it was on doesn’t matter to people.” If Netflix were a channel, the 87 minutes per day that the average subscriber spends streaming the service would make it one of the most-watched cable networks.
Google, Microsoft, Facebook, Yahoo and AOL all smell blood. The money here remains massive: While Americans now spend more time on the internet than they do watching television, advertisers still spend the fattest chunk of their budgets on TV—by far. Television currently captures 39 percent of all US ad spending, some $66.4 billion, according to research firm eMarketer, versus $42.3 billion for digital media.
So, Google has spent more than $100 million in the last two years seeding its YouTube with premium series and channels. Yahoo and AOL have also made big investments in video series and, like YouTube, now hold annual “newfronts” that compete with the traditional networks’ presentations to advertisers. Facebook is even more direct: Drawing on a Nielsen survey which found that more 18 to 24-year-olds access Facebook during evening primetime hours than watch ABC, CBS, NBC and Fox combined, it will soon start selling video ads—i.e., commercials—priced at up to $2.5 million per day.
Twitter’s message to the networks is different: We come in peace; let’s make money together. Lots of tweeting when a show first airs transforms TV into what it used to be: An event that others scramble to join live. Live, of course, means viewers can’t skip the commercials. And when the commercial is followed up by an ad on Twitter, the company says, the viewer proves more likely to buy what’s being advertised. “We help marketers win the moment,” says Adam Bain, Twitter’s head of revenue.
Twitter, born in 2006, has followed the classic hockey-stick trajectory. Its original creator, programmer Jack Dorsey, developed it as a way of broadcasting SMS text messages of up to 140 characters to groups via the web. At the time, Dorsey was working with Google veterans Evan Williams and Biz Stone at Odeo, a podcasting company. As the new service started to gather users, the three bought the assets of Odeo from their investors and launched Twitter as its own company. Early investors included Marc Andreessen, Ron Conway and Union Square Ventures.
It took more than two years for the service to register its first billion tweets; 11 months later the 5 billionth was sent. In 2010 Twitter flipped the revenue switch, allowing marketers to pay to have their tweets promoted in users’ streams. Before long they could also buy promotion for their accounts and placement in the site’s list of trending terms. But as the company was getting its business legs under it, it was also undergoing turmoil at the top: That October Williams stepped down as CEO, and Costolo, who as COO had spearheaded the monetisation push, replaced him.
Within a few months Williams and Stone left the company; Dorsey remains involved as executive chairman but splits time with his new startup, the mobile-payments service Square. The revenue-focussed Costolo is now the company’s driving force.
As the S-1 makes clear, his original promotion-buying model has its financial limits. The downward pressure on ad rates, along with flat US growth, in theory requires throttling more promotions into each user’s streams—undermining the experience that drew people to Twitter in the first place. Enter television. Bain, Twitter’s revenue chief, chides his new media rivals for their “wrong- headed” adversarial posturing. Adds Costolo: “Technology companies have traditionally looked at other forms of media as something to be disrupted or disintermediated.”
Watching TV with a computer, smartphone or tablet in hand is rapidly becoming mainstream behaviour; 55 percent of respondents in a study by PricewaterhouseCoopers reported doing so at least some of the time. Dozens of companies have sprung up to give these multiscreen viewers a way to talk about and delve deeper into the shows they love and discover new ones. They have names like GetGlue, Fanhattan, BuddyTV and Zee-box. But TV programmers don’t have much use for most of them. “Television, being a national medium, needs a national companion to be viable,” says JB Perrette, chief digital officer of Discovery Communications, “and there’s not many that have that.”
Enter Twitter, whose users, unlike Facebook’s, see one another’s posts in real time, which allows for spontaneous public conversations. Those conversations frequently centre on television: In one study of users in the UK a full 40 percent of tweets mentioned TV shows. In 2012, 32 million Americans tweeted about TV, according to Nielsen. When enough people are interested in talking about the same show at once, the results can be impressive.
In June about 3 million people tuned in to Discovery to watch acrobat Nik Wallenda’s tightrope walk across an Arizona gorge. As he crossed, the rate of activity on Twitter rocketed, peaking at 40,000 messages per second as the walk neared its conclusion. By the end the event drew an audience of 13 million viewers and generated 1 million tweets.
While it’s impossible to determine how many viewers tuned in after seeing tweets about it, Discovery’s Perrette attributes at least some of the spike to “not having to wait until tomorrow to be part of the watercooler conversation”.
Discovery is one of more than 40 networks that Twitter’s TV team, led by Fred Graver, meets with at least quarterly. He holds regular “boot camps” to teach producers and writers about the platform, coaches actors and hosts on using it to build their “personal brand”, suggests social media integrations—whether featuring viewers’ tweets on air or letting them vote by tweet—and helps remove any technological obstacles to implementing them. “It’s a little bit of a brave new world,” Graver says. “We’ve never all gone camping together before.”
The purest expression of Twitter’s let’s-profit-together philosophy: Amplify, a program used by more than 35 networks and other broadcasting partners to distribute short video-clips. Each clip is preceded by a short ad, which Twitter and the partner sell jointly.
Here’s how it works: Say Detroit Lions receiver Calvin Johnson scores a spectacular touchdown during a Thursday night game on the NFL network. The league, an Amplify partner, tweets out a clip to its 5.1 million followers with a six-second commercial for Pepsi and pays to have it promoted. The league and Twitter both make money—they’ve already booked more than $10 million in commitments—and the NFL Network gets the benefit of added viewership from users who see the tweet and opt to tune in.
Essentially, the league has turned its own promo into inventory it can monetise. Meanwhile, Twitter gets to serve its users premium video content it didn’t have to buy. “It’s a great consumer experience,” says Bain, the revenue chief. “Tweets help drive ratings, and interesting content helps drive tweets. It’s a self-propelling ecosystem.”
In February, though, Twitter moved aggressively past just promoting content, paying $67 million for Bluefin Labs, a startup that used semantic analysis to tie social media chatter to television (Bluefin co-founder Deb Roy became Twitter’s “chief media scientist”). This technology allows marketers to push ads to Twitter users who have recently watched television commercials for the same products, reinforcing the message while it’s fresh—and presumably encouraging ad buyers to carve out a chunk of their budgets for social media follow-ups.
“You might have 500,000 people watching a specific episode of Breaking Bad, but you have millions of people participating in a conversation around it,” says Bonin Bough, head of global media and consumer engagement at the packaged-goods giant Mondelez International, whose company has seen effectiveness for TV spots double when accompanied by a social media push.
Companies like Mondelez will soon be able to measure the effect. Nielsen bought another analytical startup, SocialGuide, last year, and will shortly unveil the Nielsen Twitter Television Rating. Developed in concert with Twitter, it purports to weigh the social engagement around TV content. Bain will now try to sell marketers on “a Moneyball opportunity”: Buying shows with lower traditional ratings but with more interaction—with the balance of their ad budgets coming over to Twitter. Broadcasters will presumably begin garnering higher rates for shows previously considered just beloved runts.
The post-IPO Twitter will look different—literally. For its new television era the company has been testing out different designs, include a “TV trending” box that appears in users’ timelines to highlight popular shows and a “stream” that allows users to view only TV-related discussions. Such moves will be necessary to justify a valuation akin to that of a hot internet stock, despite an S-1 that confirms domestic growth has slowed to a crawl. About 14 million people signed up last quarter—13 million of them were from overseas, where each user proves only about one-seventh as lucrative.
According to Brian Blau, a technology analyst at Gartner, Twitter’s TV strategy “is probably the best revenue story they’ve got right now”, and it could solve their audience issue, too. “If all of these shows start to advertise Twitter as part of their marketing and branding, it could drive users, because they have a lot more viewers than it has users,” he says. How much money does Blau think is at stake for a company that next year will take in $950 million, according to eMarketer’s projection? “Could it be a billion-dollar business for them? That’s hard to imagine in the near term, but the sky’s the limit.”
That seems to be the forecast for its IPO price as well, which explains why Twitter will grab every watt of borrowed star power it can get. Back at the Emmys, there’s plenty on hand. Breaking Bad’s Bryan Cranston stops by the Twitter Mirror for a quick snap. So do Claire Danes, Stephen Colbert and Kerry Washington. When someone asks Conan O’Brien to pose, he quips, “Social media? That stuff is never going to catch on.” Then, like everyone else, he steps up and mugs for his selfie.
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(This story appears in the 15 November, 2013 issue of Forbes India. To visit our Archives, click here.)