After its first day of trading, Twitter (NYSE: TWTR ) was off to an explosive start: Its market value grew to be worth more than LinkedIn. Clearly, investors have high hopes that the micro-blogging service will ultimately turn its currently unprofitable business model into an investor goldmine. Instead of guessing whether Twitter may be up for the challenge, you'll probably be better served by sticking with social-media juggernaut Facebook (NASDAQ: FB) for the long haul.
Proving its worth
There will always be a high degree of overlap between the two, but Facebook is more about personal connections and Twitter is more about public "broadcasted" conversations and emphasises real-time trends in the world. Where Twitter can really set itself apart from Facebook is with real-time trending.
From a marketing standpoint, Twitter has valuable insights into what people are thinking at any given moment. If enough people are thinking the same thing, it can create an effective marketing opportunity for advertisers. For example, if enough Twitter users were complaining about the infamous lululemon athletica sheer-pants fiasco, wouldn't it be a great marketing opportunity for say, Gap Athleta?
There's no doubt that Facebook has been encroaching in this area with the introduction of hashtags and trending topics. However, Twitter pioneered the concept of real-time trending, meaning it probably has built up a stronger brand association around the idea and could potentially have better marketing insights here.
The rules of engagement
"Advertisers follow audience." — Spencer Rascoff, CEO of Zillow.
Not only is Facebook's captive audience insanely bigger than Twitter's, but its level of engagement also blows Twitter out of the water. In the U.S., an incredible one out of every eight minutes spent on a desktop, and one out of every five minutes spent on a mobile device, is spent using Facebook's services. Facebook's time share is so big that it beats out nine of its toughest competitors combined, including Twitter. While this is impressive in its own right, it isn't the most effective way to measure user engagement on an apples-to-apples basis between the two platforms.
Instead, look at the ratio of daily active users, or DAUs, to the number of monthly active users, or MAUs. Tracked over a period of time, an investor can see whether a social network is effectively turning occasional users into daily users, which ultimately creates more revenue-generating opportunities down the road. Unfortunately, Twitter's public filings haven't disclosed historical DAU metrics, so investors won't have a sense of how this is trending until next quarter's earnings announcement.
Source: SEC filings and author's calculation.
Because of different reporting metrics, the only other way to compare Facebook to Twitter on an apples-to-apples basis is to look at average revenue per user, or ARPU. Because Facebook's user engagement is much higher than Twitter's, it's not surprising that its advertising ARPU is also much higher. However, what I did find surprising is how ineffective Twitter is at monetizing its users relative to its engagement level. With 30% less daily user engagement than Facebook, Twitter earned 56% less money per user than Facebook did on its ad business last quarter. Perhaps this could explain the value of Facebook's market-leading time share, or that advertisers simply have less demographic data to work with on Twitter, which could lead to less effective (and less expensive) ad targeting.
Source: SEC filings and author's calculation.
Overcoming challenges
Even though 77% of Twitter's MAUs live outside the U.S., only 26% its revenue came from international markets last quarter. The big issue here is that Twitter predominately relies on a human advertising sales force in international markets, which is inherently difficult to scale for growth. Helping matters along, the company recently launched an automated ad buying platform in the U.S., which it intends on rolling out internationally in the future. However, it's currently unknown when it will become available across its advertising network. Until then, Twitter's international advertising revenue will probably remain constrained.
While Facebook doesn't have to deal with the issue of ad scalability, it has to deal with the potentially pressing issue of teenager engagement. Last quarter, CFO David Ebersman panicked investors when he acknowledged that daily usage among younger teens in the U.S. experienced a sequential decline. Judging by the US$18 billion market value loss, investors have subscribed to the old adage that shifts in teenage usage can ultimately determine the fate of a business. Although I think the level of concern is currently unwarranted, Instagram does indeed help Facebook mitigate some teenage fallout.
Big shoes to fill
Because Twitter has never been a profitable business, raising up to US$2.1 billion during its IPO debut bought the company substantially more time to figure out its business model and become profitable. At this time, investors still don't know whether Twitter will ever become a viable business. The hope is that the company will find a way to an effective way to automate its sales force, become scalable, keep a lid on costs, and prove its worth to marketers and investors alike.
Facebook, on the other hand, has already proved to the world that its runs a highly scalable, adaptable, and therefore highly profitable business worthy of your long-term investment. Best of all, there is still plenty of growth potential to be realised — potentially far more revenue-generating opportunities than what Twitter could ever realise.
Twitter's stellar IPO debut has seriously raised the bar of investor expectations. Let's hope its future business proves to be as robust as the stock price suggests. If it doesn't, you're probably better off sticking with the more proven Facebook.
