Twitter’s value problem is destroying its performance

Twitter is one of the best known social media services, but it is suffering from its inability to provide sufficient value to consumers, advertisers, and investors.

The firm has 316 million users, a respectable figure—but 80% smaller than Facebook. Its share price has dropped below the level set when it became a publicly traded company in 2013. The company has lost about $30 billion in market value in the past two years and is now valued at $15 billion. It continues to experience negative operating and profit margins and negative return on assets, despite about $2 billion in revenue.

Twitter is suffering from two fundamental business problems. First, the lack of an effective value proposition that makes it attractive to larger numbers of users. Second, lack of vision and direction. The latter led to the departure of its CEO in June 2015 and he has still not been replaced.

A significant value problem for Twitter has been that it is primarily configured for short, one-way communication. It is a great way for the Kardashians to share their latest selfies with fans and media and for journalists and media outlets to promote their latest material. Unfortunately, that configuration it is not as well suited for conversation as the configurations of other social media services.  The 140 character limitation also reduces its value to many potential users.

Twitter also lacks distinction for doing something superlative and creating a niche for itself.  It does not lead a clear niche such as that of LinkedIn, which is the primary networking social media among professionals, or the photo and video sharing niche orientations of Pinterest and Instagram—whose growth rates have trounced Twitter’s growth in recent years.

The company has been working to improve the effectiveness of advertising placement and it is changing it advertising platform so it can reach apps other than Twitter on mobile platforms and is hoping that will improve its attractiveness to advertisers.

The challenges facing Twitter reveal the fundamental needs of all companies to get their business models right. They have to have a value proposition and value configuration that works for customers. They have to be able identify the customer wants and needs they are fulfilling, find ways to surpass the value customers expect, and make the company’s products and services unique in providing that value. Only when Twitter effectively addresses those issues can it hope to improve on its poor performance.


Digital Investments creating strong cross-platform opportunities for NBCUniversal

NBCUniversal’s investments this month in Vox Media and BuzzFeed firmly place the audiovisual giant in a strong position to benefit from cross-platform advertising and content distribution. The company this month invested $200 million in each of the two leading digital firms that operate portfolios of sites and are strong players in social media distribution.

The move will make it possible for them to jointly offer advertising packages for major events such as the Olympics and provide new avenues to promote the broadcast and cable programs and motion pictures from NBCUniversal. NBCUniversal is a subsidiary of cable/internet giant Comcast, which itself owns about 14% of Vox Media.

The investments reveal the increasing importance of digital and social media as channels to consumers and that legacy media companies are gaining better understanding how they can be used to advantage. It also indicates that legacy companies like NBCUniversal do not have the capabilities and skills to directly compete effectively with the rising companies in the digital market and are seeking ways to cooperate for joint benefit.


Internet content and consumer digital surplus

It is increasingly being argued that the Internet provides “digital surplus” to consumers and that this surplus is a means of understanding the value of the Internet to users and society. Measuring the surplus presents a host of challenges, however.

First, the Internet does not produce content. Private enterprises, public entities, and individuals create content with different motives and compensation demands. These are offered under varying business strategies that determine how and how often the content is available on the internet.

Secondly, Internet gateways—ISPs, search engines, and aggregators—have a significant influence on consumers’ content choices. Consumers use relatively few gateway services, but they access content from multiple providers. The nature and sources of that content are highly influenced by the gateways, their preferred content providers, and the algorithms they employ in filtering content.

Determining whether consumers obtain value for money in terms of price, service, and quality from their expenditures for the Internet and its content is complex because it involves two separate transactions: 1) access to internet through the Internet Service Providers (ISPs), and 2) access to content.

The term “consumer digital surplus” derives from the concept of consumer surplus that economists use as a measure of satisfaction of consumer demand. It is based on a determination whether the value received—measured by consumer willingness to pay at given prices—is higher than the market price for the service or product and thus indicating the extent to which consumers are getting a better deal (consumer surplus) than they would have accepted.

There are significant challenges in applying the concept of consumer surplus to digital consumption.

The first challenge is determining what people are willing to pay. There are some accepted methods of calculating it, but it is far easier to measure willingness to pay for access than for content.

The second challenge is that most people now pay for multiple Internet access points rather than a single access point. In Europe, for example, 65% of Europeans have internet access in their home, 52% have internet access via mobile phones, and about 20% of smartphone users also own tablets. Calculating surplus must thus account for use and demand across the platforms. The methods and metrics for doing so remain crude and highly imperfect.

The third challenge is that Internet access through ISPs is often bundled with other services including telephone and television cable services.  This masks the actual price for Internet access and makes determining the surplus related to Internet service and content complicated.

A fourth challenge is that there is a huge oversupply of content creating an imperfect market. Although large amounts of content are used by consumers, there is huge under-use of content because of the scale of content available. There are about 1.2 billion websites on the internet providing at least a trillion Web pages, for example. The overprovision challenge also applies to paid content services and iTunes, for example, offers about 37 million songs, but its average customer has acquired fewer than 100 songs. What is not consumed or consumed infrequently must been seen as having lower value to individual consumers and accounted for accordingly in any determination of surplus.

A final challenge is that much digital content consumption does not involve direct purchase. Most is provided free in exchange for attention or engagement that is desired by others for promotional or advertising purposes. Calculating surplus on consumption without a price is complex. Even when payments are made for content—something done by less than 2 in 10 consumers—most paid content is obtained through a subscription. This creates challenges of accounting for sunk costs and diminishing marginal utility of access to additional content before consumer surplus can be established.

We do know that consumers are receiving value from Internet content and that some types of content are more valuable than others.

There is greater willingness to pay for video entertainment than news and information. However, free video remains highly attractive, evidenced by the 1 billion unique visitors that access YouTube monthly. Nevertheless, paid video content is becoming the norm for professionally produced entertainment. Netflix, for example, had $5.5 billion in revenue from 35 million subscribers in 2014.

Video is more attractive to consumers overall than other types of content and today about 90% of all internet traffic and about 55% of all mobile traffic is video.

Like other communication platforms before it, the Internet has great potential for many types of communication, but is clearly becoming a video entertainment-dominated system that is in direct competition with other video entertainment platforms. Nevertheless, it remains is a platform in which multiple consumer preferences can be pursued and in which the consumer surplus for different content at different times varies significantly. The means for fully understanding that variance and measuring it remain elusive.