This article was written by Jackson Richards, VP of Strategy at Direct Agents.
Twitter has always been an anomaly in the social media landscape. Despite being a significantly smaller platform (Facebook has 10x as many daily active users as Twitter, and even Snapchat has more daily active users), Twitter punches well above its weight in commanding cultural influence and relevance. There are many reasons for this, but perhaps the primary reason is because of the ability of regular users to interact (albeit often one-sidedly) with the thousands of thought leaders, celebrities, musicians, athletes, and politicians who regularly use the platform.
After months of “Will he, won’t he?”, Elon Musk’s $44 billion takeover of Twitter has finally happened. Many big changes have been made in just his first few days; About 50% of employees have been laid off (including many on content moderation teams), the blue check verification system has been revamped (several times), and content policies have been updated.
Understandably, people have strong opinions on Musk and his vision for Twitter. I have my own. I’ll leave all of that aside in order to provide my perspective on Twitter’s business outlook.
In the days immediately following Musk’s takeover, many big advertisers have suspended their Twitter advertising campaigns in fear of their brand appearing next to harmful or insufficiently-moderated content. Musk has responded by threatening to name and shame these brands for giving in to the bullying of “woke” activist groups. I’ve worked in the media and agency world for a decade and I can tell you that advertisers have a small set of primary objectives: ROI from their advertising campaigns and building and protecting their brand. Most advertisers don’t have a political agenda so much as they simply have a low tolerance for unpredictability.
Musk’s relationship with advertisers is off to a rough start. Meanwhile, much of his attention has been focused on revamping the company’s paid subscription service, Twitter Blue. But if recent history is any indication, Twitter will need to make nice with advertisers in order to scale profitably. Let’s examine why.
Looking back at the last decade of the internet, you find a truth that is hard to escape: The things we like to do online are funded by ads. Instagram, YouTube, Google search, your favorite sports website. All are free to use and funded by advertisers.
Many social media platforms and publishers have been trying hard to reduce their dependence on the sometimes unpredictable ads market by building subscription services. YouTube Premium, LinkedIn Premium, Snapchat Plus, ESPN+, and the list goes on. It’s easy to understand why, as earning monthly recurring revenue from subscribers is a more predictable model than relying on advertisers.
But here’s the rub: Advertising still accounts for the vast majority of these companies’ revenue.
Let’s take a look at YouTube. YouTube Premium is a subscription that offers compelling features for $12 a month, including no ads, the ability to download and watch videos offline, and access to YouTube Music Premium. Compared to YouTube’s 2.6 billion monthly active users, YouTube Premium has only about 20 million subscribers and accounts for about 10% of YouTube’s overall revenue. The takeaway: YouTube has built a solid subscription service and still makes 90% of its revenue from advertising.
One category that has been able to avoid dependence on advertisers has been subscription streaming, and even this era is coming to an end. Netflix, Disney Plus, and HBO Max will all have lower-priced advertising tiers available in the next few months.
Netflix has spent over $35 billion in content development over the last 2 years to strengthen their subscription offering. If you can spend more than $35 billion on content for a best-in-class subscription service and still depend on advertising to scale, that tells you that the real money is in advertising dollars.
Let’s look at what Twitter Blue has offered so far. For about $4 a month, Twitter Blue gives you the ability to upload longer 1080p videos, undo tweets immediately after sending, and a few other boring features. Now Elon Musk is asking for $8 a month for a blue check and some other yet-to-be-named features. To win and keep customers at $8 every month, these features will need to be very compelling.
Twitter made about $5 billion in revenue last year and 92% of it was from advertising. In order to significantly decrease reliance on advertising dollars, Twitter Blue would need to convince tens of millions of users to pay $8. They would need more than just Twitter power users to subscribe and would instead need to push a majority of users behind a paywall. Just ask Time Inc. and Conde Nast how hard it is to start charging people for digital content they used to get for free.
And this is coming at a time when consumers are already experiencing subscription fatigue. Netflix recently lost 1 million subscribers, and 35% of global streamers are planning on dropping a streaming subscription in the next year. While these figures are specific to streaming, the overall trend is not. In uncertain economic times, wallets get tighter.
Twitter can and should release a more compelling subscription offering for power users, but ultimately, the majority of revenue will need to come from advertisers. Historically, Twitter’s offerings in subscriptions and advertising have been sub-par. Twitter Blue hasn’t grown because the features don’t warrant the price, and brands spend significantly fewer advertising dollars on Twitter versus other platforms because their ad products have not driven performance.
Twitter’s path to profitable growth at scale is simple, but will be challenging to execute.
- Clean up the platform from bots, harmful speech, and harassment so it is fun for users and safe for advertisers
- Create better content production tools so that the best creators want to be on the platform
- Create a compelling subscription service that provides real value to power users
- Make nice with advertisers and build exciting new ad tools that actually deliver ROI
We may come to learn that Musk is more interested in leveraging Twitter to support other personal objectives outside of making his money back. As it transitions into a privately owned business, he has absolute control over the company’s direction. As a decade-long Twitter user, I sincerely hope he can turn the platform into a place that is safe, fun, and provides real value to users and brands.
Jackson Richards, VP of Strategy, Direct Agents