Can Twitter’s Subscription Service Help Drive Advertising Revenues?

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TWTR: Twitter logo
TWTR
Twitter

Twitter’s (NYSE:TWTR) Q2 2017 results were rather disappointing, as the company reported a 14% year on year decline in U.S. advertising revenues.  The company is now looking at ways to better attract advertisers and drive revenues. A few weeks back, Twitter started testing a subscription-based advertising program which would automate the promotion of tweets. At $99 a month, subscribers can run an automated Promoted Tweet campaign without having to create separate ad campaigns. The heavy lifting around this exercise will be taken care of by software which will programatically choose tweets to be promoted. This program is currently under beta testing available to advertisers only on invitation. While Twitter has not divulged more details about this program, initial reviews do not seem especially promising. Fears that the platform can be misused by advertisers and users could potentially impact its usage. User growth and engagement is key for Twitter to grow advertising revenues, and while this subscription-based model could attract some advertisers looking for automated promotion, it seems unlikely to be the catalyst Twitter needs to monetize its platform

According to our estimates, U.S. advertising accounts for more than 35% of the company’s valuation, and is a key value driver for Twitter. However, we expect Twitter’s average revenue per U.S. user to decline over the next two years and then increase gradually, reaching $18 by the end of our forecast period.

To put this number in perspective, Facebook’s average revenue per user (U.S. and Canada) in 2017 is likely to be $71 and we expect this number to reach $120 by the end of our forecast period. Twitter’s figure is around 20% that of Facebook, primarily due to its stagnating user base and relatively low engagement levels.

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While Facebook has more than 2 billion users globally and more than 200 million users in U.S. and Canada, we expect Twitter’s U.S. average monthly active users to stagnate at around 70 million over our forecast period.

While advertisers are shifting marketing dollars to social media, they are looking at a large target audience for their campaigns to generate a higher return on their marketing advertising. Twitter’s automated promotion of tweets at a subscription cost makes it easier for advertisers to market on its platform, but does not solve the fundamental issue of a narrow user base and lower engagement levels of existing users. Further, automating promotions comes with concerns of misuse of the platform. While this service might find favor among advertisers who are already marketing on Twitter, it is unlikely to boost revenues meaningfully.

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