Summary
Twitter has come closest to optimizing the marketing power of the Internet than any company I have seen in a long time. Twitter has become a massive advertising engine for products, services, politicians, movie stars, television stars, and celebrities who famous for being famous. Now that is a way of creating a brand.
Analysis
I don’t normally comment on Internet based initiatives so let me get this out of the way. I am not a user of Facebook or MySpace. I simply see no reason for me to use it. There is a PJ Louis on Facebook and MySpace but it ain’t me. I think Twitter’s valuation is too high based on its revenue. Even though I am not a user of Facebook and MySpace I am a user of a social collaboration service. My own website is sitting on top of a social collaboration engine. I am going to avoid mentioning this other company’s name because it is not appropriate. However, I am a user of the web.
In March 2009 I had written one piece about Twitter and proclaimed it a success because of its very basic nature. See Twitter – A Gimmick or the Real McCoy? Is There Room For Something Else?
Success, yes, but making money, now that is a whole other matter. For now let’s talk about the company’s success.
Yes, my comments about Twitter are made without even looking at the company’s financials and without any knowledge of the company’s inner workings.
The reality is the company has taken SMS (texting) to that next level; Twitter is simple to use. Yes, simplicity off use is a key to success for any product or service. The company has been around since about 2006. The 3 years it has taken to capture significant attention and market share is typical of any startup venture. The reality is that Twitter is the new flavor of the day and the new darling of Wall Street. Even though it is not trading yet on the street, the brokers are circling.
Twitter is like a real time conversation; call it texting plus. Twitter enables users to send and read other Twitter users’ updates. It is like a conversation with many people. It is an ideal for people who want to be heard and in a way seen. Think celebrities, activists, politicians, and those plain old but very critical average people who get their 15 minutes of fame. Heck, even product and service companies use it.
Is Twitter significant? The answer is yes. Early critics of Twitter have called it nothing more than a fad. However, I disagreed back then and I still do. People called MySpace and Facebook fads when they were first launched and now look at them. There are still questions about how you value MySpace and Facebook but those questions and concerns have had almost no impact on their valuation. Fortunately for Facebook and MySpace their valuation has been unaffected by the questions of their revenue streams.
Why did I think Twitter was going to stick? I had said back in March of 2009, that the demographic is the key. In my personal opinion, the older generation the industry speaks of is the same generation that began using the cell phone in the 1980s and 1990s. The older generation is the 50 and older group. The older generation is the one that first used text messaging in the 1990s but decided that talking was easier in the 1990s. The older generation is the same generation that made the Internet popular and web surfing popular. The older generation does text now. The next younger generation, between 34 and 49 is the generation of adult texters who want to take advantage of the new technology, don’t mind living their life online but want to find an easy way of doing it. These are the same people trying use the Internet and texting world to their business and personal advantage. In other words, it is all in the timing. Twitter could not have come at a better time.
Twitter is simple to use by all people.
Twitter is a real time conversation device – a bit loud and maybe a bit intrusive because you can get blasted with so many Tweets. The service’s real time nature is what separates Twitter from the pack.
Now despite all of the hype this company has gotten, Twitter is like MySpace and Facebook; it is not generating the kind of revenue commensurate with its valuation. The problem with all social networks now is that revenue is not as high as it should be. You can call it typical for an Internet company; however, I do not accept that as a given. To some extent you can make the argument that based on the revenue all Internet companies, including Twitter, are over valued.
I would say given the current economic environment (we are still in a deep recession) Twitter’s valuation is almost entirely strategic in nature, hence, it is appropriate for a privately held company. Strategic valuations are about the perceived future. Right now, Twitter has enormous potential. However that potential only exists if management has a clue about what to do next.
Does this mean the valuation is high? Well that all depends on two things:
1) Is the valuation based on the old 1997-1999 Internet models, which had a very large part in the 2001 collapse? If the investors of Twitter are looking to create the same kind of meaningless value that was created in the late 1990s in the telecom/Internet sector than we could be looking at another meltdown.
2) Is the management clueless about its strategic and tactical plans? I ask this because if the company’s management is clueless about what it is supposed to be doing to drive up revenues than we are looking at another telecom/Internet meltdown. If management has a clue than there is a chance the company can actually be run with substantial revenues.
The question I have for Twitter now is: How do you drive up the revenues? The company’s ability to target advertise is an asset. Target advertising is a service that I whole heartedly support. I believe the company needs to more effectively use this capability. I do believe the company like other social networks needs to go beyond social networking as it is today and move into the realm of social collaboration but that is for another posting. For now, Twitter has just raised the stakes.
Come on Twitter I just threw you a bone. What is your plan?
P.J. Louis consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
