So Twitter's debt has been marked as junk status, and it's lost 37% of its value so far this year. This to me is the first concrete sign that Twitter is doomed to follow in the footsteps of other wildly successful 'social media experiences' like MySpace – I imagine Twitter's demise will be in a spectacularly abrupt implosion sometime within the next three years.
The basic problem seems to be that Twitter still can't make anywhere near enough money to cover its costs. It never has, to my knowledge.
From my understanding, what Twitter has been doing recently to make money boils down to selling 'IOU notes'. The idea being that those IOU notes will eventually be worth more than they say in writing and the people buying the IOU can recoup that money plus interest. It's a way to try and make money by selling debt to new investors, betting that in the long run those investors will see a profit.
A financial regulator/institution marking those 'IOU' notes as junk means that they're pretty certain you're never going to make money on them. And so closes another funding avenue for Twitter.
How did it come to this?
The fundamental problem with Twitter seems to be a lack of a viable business plan.
Twitter began at a time where your products ability to make money didn't matter, companies like Twitter got investment money from people who thought the product or service would be able to generate income further down the road. It's a concept that to me seems gambling with few facts and much optimism, but it's what a lot of people and businesses did. What had everyone so excited was 'growth' rates. Social media experiments like Twitter could see extraordinary user growth, thousands of new users every day or hour. To investors the idea of so many eyeballs all on one thing meant the potential for huge profit 'if only they figure out how to monetise that'.
Which means investors were saying "we have no idea how to make money yet, but we'll work it out later, here, have a bunch of my money to keep you going for now"
That model can only work for so long, and it's dependent on continuing to see 'growth' that in turn continues to bait investors. The problem Twitter's got is it's never figured out how to monetise its service to a respectable enough margin to balance the sheets. So it continues to rely on those investments and its own growth.
Growth and investments are slowing down dramatically. There are only so many people interested in a service like Twitter, and so many investors who are interested, and it looks as though Twitter's reaching saturation point.
Time's rapidly running out for them to find a source of revenue that isn't ethereal magic money, but proper hard business money.
Why doesn't Twitter just...
Charge users a subscription price to cover their costs? Twitter seem to have turned from this path long ago. I can't see they ever will, and I believe their reasoning is that;
- The vast majority of Twitter users won't bother paying and would leave – super bad for those critical user growth numbers.
- Paying customers tend to ask for and receive more rights and protections than free users – that might limit their future revenue generating options.
Regardless, Twitter seem hell bent on not using the 'pay for a service you use' model.
If users don't pay the bills then all you can do is sell what you know about your users to advertisers and other people with interests in that sort of thing. So far, Twitter seems not to have had much success with adverts in timelines. Mainly because users fucking hate that, and when your service is devalued in the eyes of your users by the methods you're trying to use to give value to your investors… it's not going to work for either users or investors.
So far, every time Twitter have messed about with how their service works for its users, the majority of users have disliked it. This began with ejecting developers from making Twitter clients (Twitter owes a huge amount to these people it chucked under their corporate bus wheels); Twitter's own client was originally a third-party client – that is how much value third parties were bringing to Twitter users, and thus to Twitter. When Twitter stopped that they hurt their users in order to gain more control over them, in order to please investors.
They've also messed with user's experience via 'promoted tweets' and 'suggestions' and other experiments ostensibly 'for the benefit of the user' which almost every user has shouted about. Twitter's problem is that Twitter was a nearly perfect tool for its users from the get-go. Users like to curate their own time line, and were able to do so ever since the service began. When you start messing with that, showing other things or hiding things… users get annoyed.
Twitter are doing this stuff to try and get more user eyeballs on more stuff, to swing those growth and engagement numbers back up, to keep investors happy. It's got little to do with user benefits, which is entirely obvious because the users keep feeding back that these things are detriments.
What I hope someone's doing
Twitter's doomed, IMO. From what I've seen, it's proven unable to make enough money that isn't sourced from investors over its entire life. It's going to collapse at some point. If it survives it'll do so via a subscription service user's pay for, but in so doing it will become a vastly smaller entity. To be honest, I only see that happening as a matter of last resort for the Twitter team, and at that point it may be too little too late. So, unless Twitter manage to eject a bunch of investors and have radical change from the top, I can only see it going 'full MySpace'.
But, Twitter is incredibly useful. There's a good reason so many people use it, for so many uses. Something will need to replace it. There have been attempts in the past, these problems with Twitter's sustainability are by no means a surprise. App.net and other similar services saw this coming years ago and launched competitor services with different and more sustainable business models (the old school 'have a business model first' thing works, would you believe it?). These services haven't really taken off, and I don't think it's because they're bad.
New services aren't going to take off until Twitter's sunk. Any social service relies entirely on the people who use it for their value. It means new ones aren't valuable until people are using it. Which stops people from trying it because few people are on it.
What I think is going to happen is someone is going to run a service such as App.net, which is Twitter-like, on a small scale. Once Twitter collapses, that service is going to be hammered with new users at terrifying rates. The infrastructure to cope with that sort of tirade of users isn't something I believe can be put in place prior to the move and still be profitable, so it'll need to be carefully managed.
If it were me running such a competitor, and Twitter had just imploded, I'd stick with the 'you pay me to use the service' model for anyone who wants to post messages on the service. I'd also try to have a free tier initially limited to following and listening to other people. It'd take some working out but there's a balance between what people will pay to put messages out to other people, and the cost of supporting those free tiers. At the point of a Twitter user tsunami, the priorities are:
- Don't let your own service get taken down by too many new users.
- Don't stop a flood of new users from registering because they'll just go elsewhere if you do.
Conceivably you could have free tiers with a limited number of posts per month, say a hundred. That way you're not stopping the more casual users from being able to use the service but you are controlling how much resource they can take from your systems. You're also giving them an opportunity to like the system and a way they can give you money if they like it enough.
The trouble is balancing the people who'll pay versus those who won't and the surge in demand versus your ability to scale the infrastructure. Without the people who won't pay there's less value for the people who will, so an all-pay model isn't something I think will work well. The trick is in balancing numbers.
Those of you who may not be old enough to know; Twitter often had global outages in the early days as the volume of new users overwhelmed its ability to work. For this hypothetical new service, I think once you've got those new paying and limited-free-tier users under some control you can start re-balancing what a free tier user can do. But I do believe it's essential they're there, whilst also being essential their ability to hurt your systems is limited at first. I'd consider no-posting for them while the service got the initial flood of users, but I'd want them to be able to post fairly soon after they registered.
It's all about balance. Capture as many people as you can in a way your service can sustain. This adds value to paying customers and free customers, and keeps everyone happy.
I'm looking forward to whatever comes after Twitter. It'll be a service that understands how to make money by valuing its users and having a traditional sensible business plan mixed up with well thought out technical infrastructure. Twitter's done the hard work of creating a market of users and a model of what they want. Now it's someone else's turn to deliver those goods in a sustainable way.