Twitter Files For IPO
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Three of the largest, most influential and defining technology companies of our lifetime (Google, Facebook, Twitter) make money pretty much solely through advertising. Is there no other way companies can use this data to generate revenue other than to sell ads? I don't have anything against ads, but I'm just trying to understand how (if at all) this could change in the near future. What is the future of advertising? Will it continue to remain relevant 10 or 20 years down the line in its current form, allowing so many massive companies to be built on its back?
the same as the future of capitalism. advertising will exist as long as people sell shit.
There isn't any obvious reason it would drop over time, I think the bigger question is how will advertising evolve over time.
For a known brand ads serve as a means to say "we are here, we are alive, we do well". That's why Coca-Cola or McDonald's keep running ads, despite the fact that everyone in the world is aware of them. This is not unlike wearing an expensive necktie on public, or having a gold watch 100 years ago; it's the same sort of signaling a peacock uses his tail for.
If you stop putting your ads before public's eyes, sales start to slump. Maybe this is not so for a brand with a small cult following, but such brands are few.
So advertising is not going to go away, as much as luxury items market is not going to go away. It may shrink a bit when times are hard, it may migrate to different media (from paper to TV to computer screen), but not disappear.
lol, a couple weeks ago i got into real deep thought about this and realized the same thing. The question i asked was what spurred this, companies relevant from the eighties and nineties like apple, amazon, microsoft all sell something. Then i realized that it may have been the huge success of google and adwords that spurred this. Since every entrepreneur would use this excuse about how google just focused on product and thought about revenue later, yet implicitly these entrepreneurs already know that they will focus on ad revenue. All the companies making headlines today are or will be ad focused, snapchat, tumblr, vine, frontback, instagram etc.
This has also created a situation where users expect a product for free and if you charge someone will make a clone with a slight twist and offer it for free, so developers rather offer it for free and not attempt charging. I find this phenomena mainly with social products but this is what VC's and guys like Mike Arrington find exciting. They find enterprise boring because you have to be methodical, know the business and sell! The one thing modern tech can take from wall street is the excitement in sales. I believe snapchat is worth around 800mill if this is the case then we should take TV series model for creating companies because we are in the business of making entertainment shows to last a few seasons.
I am very excited when i hear about companies like nest, jawbone, pebble, nike fit, etc!
That's so funny it hurts. If Google, Facebook and Twitter would all disappear tomorrow the world would continue to revolve and productivity in general would likely be up.
Techology companies that defined our lifetime exist (Intel, Microsoft, Apple, Sony, Samsung, etc) but are of a completely different kind. Google has the potential to become such a company, facebook and twitter not so much.
Google is really a useful tool and productivity would probably drop if it disappeared. How many technical answers did I get from Google? A lot!
I agree about Facebook and Twitter however, it wouldn't surprise me that both company get myspaced in the next 10 years.
I suspect if google disappeared I could make do with others (Bing, yahoo, DuckDuckGo, ...).
The biggest deal for me would be my @gmail.com account. So much of my online identity and profiles are connected to it.
First, 99% of advertising, at least in terms of impressions we see on web pages, fail to convert. Which tells me that this waste has to be squeezed out over time. Which tells me that a lot of people overpay for ads and perhaps ad sellers are in for a surprise, not unlike that experienced by print media.
The other thing that comes to mind is that Twitter has the attention of celebrities and influentials, and they value what Twitter offers in terms of reach. Seems to me these are the people that will sustain it. It’s a specialized form of advertising, I suppose, but perhaps less buckshot.
That is, where the money is.
I remember when popcapgames did a kickstarter to make all of their games ad-free. It was basically, "Look, we're making a great profit, but if you pay enough to cover our costs we'll take the ads off." It wasn't anywhere close to covering the costs, let alone to what the advertisers would pay.
There probably are some exceptions to this; people who have a passion or a love for some product, but for most consumer-facing products it's easier to tolerate a few ads than to shell out for everything you use.
I don't think we're given the choice very often. If there was a Facebook Premium that was no ads, no status filtering, and opted you out of the backend data-selling, would you consider it? I would.
>I remember when popcapgames did a kickstarter to make all of their games ad-free
I don't! That's awesome! But I didn't hear about it at all. See, that's an example of being given a choice, but not even knowing about it. (Pop Cap was probably not very serious about it - if they were, they would have pushed an ad)
When actually making more goods doesn't make you more money (at least commodity goods, there is a growing market for the absurd luxury goods targeting those that own dividend stocks and have multiple houses and personal chefs) your alternative is to use psychological manipulation to drive the limited dollars towards your goods, even if it means the per-unit cost is higher. You make the gambit - persuade someone to buy, or don't sell at all because your product isn't really that competitve anymore when you are spending upwards of 30% of your budget on ads.
Look no further than the evolution of the video game industry - since it is so new, it also shows this effect strongly, where the biggest titles like the CoD games can see 80% of their budget spent on advertising (cursory google search to get these numbers on the latest title, Black Ops 2, turned up nothing citeable). If you spend $28 million making a game, and $120 - 200 million on ads, your economic model must be fucked.
So because you compete for scarce dollars, customers aren't coming to you, you need to manipulate customers into spending money they don't have. Hence why advertising is so huge, even with 1% click-through rates. All that concentrated wealth getting reinvested has limited alternative options of where to go, so you just try to pry more money out of people through bombardment.
I highly doubt your 80% figure is anywhere near the mark. Even movies don't spend that much in promotion in %. You shouldn't bring out numbers if you cannot back them up, because that just makes the rest of your post less credible as well.
> The Witcher 3 to be most expensive Polish game; $15M dev. budget + $25M ad. budget
So over 60% of the budget is marketing.
Huh? Do most rich people have their money under their mattresses?
Rich people try to maximize their returns as much as anyone else, which typically means a mix of stocks (that's capital for businesses to grow) and bonds (capital for cities, states and nations as well as businesses).
In regards to the island purchase in Hawaii, it sounds like he is putting funds into improving the infrastructure on the island. (I don't want to get into an argument on whether that is a good or bad thing. Just pointing out that money is being put into the economy by him doing so.)
I'm not saying nobody should have yachts, just that the argument that the yacht builders were paid only addresses part of the economic effect of concentrated wealth.
Looking for a convenient link, the Wikipedia page is rather nifty. Seems people have fallen for 'Trickle Down Effect' many times, although it was called the 'horse and sparrow theory':
Apple has a hundred billion dollars sitting around not doing very much.
Landlords in The Bay Area are capturing extra money available to FaceLinkGoogTwitIPO Heads and pocketing it themselves.
Most rich people aren't investing in startups. Most rich people are probably corrupt doing borderline, if not flat out, illegal things, and are only interested in hoarding more wealth for themselves.
Couldn't be further from the truth. Apple runs one of the world's largest hedge funds: http://www.zerohedge.com/news/2012-09-30/presenting-worlds-b...
Not even going to bother with your other statements.
This means you favor 1. non risky ventures and 2. likely growth centers. If in an entire economy you only have this one way wealth ciphon effect, that means that money can be caught in an independent economic loop (especially after legislative manipulation makes some markets no-risk, like mortgages in the early 2000s, or military contracts, or telecom monopolies) of the majority of the population.
The wealthy aren't buying your small town trinkets from the general store, or even hiring anyone living in most rural areas. They interact with a small subset of society directly, and in most cases the money they exchange won't end up at your mom and pop shop, it is much more likely to end up back at walmart peppering the rich guys pocket again.
It is more about recogition of the game of economics we are all enveloped in. Most wealthy people actively engage and play the game to make a profit. Most people are ignorant to their participation and don't understand that every purchase they make is a power transfer from themselves to someone else. On topic, advertising helps manipulate that exchange in the marketers favor because most ads attempt to illicit an emotional response drive to purchase.
No way. The rise of advertising to pay for internet stuff stems from a) the inherent network effects present in the most successful internet software, and b) the historically difficult problem of ubiquitous, safe, secure online payments.
Network effects: if you offer a paid and a free version of a product, more people will take free.
Online payments: if payments were really easy then people would pay for more things. Currently, solving this problem requires captive audiences (App Store, iTunes, in-app purchases, Facebook). But YouTube, for example, only hurts itself the more closed it becomes.
The rise of the advertising industry actually happened in the 1950s and 60s, when the American middle class was at its peak.
Advertising today is just moving to the Internet, and by dollar amount that means it is falling. Advertising on the Internet is way cheaper than on TV or even in print.
Do you have a reference for that? I would be extremely surprised if aggregate advertising budgets were falling down. It might be cheaper on the Internet but my gut guess is that more companies are advertising or are advertising in more places.
The difficulty is that valuing that impression accurately and linking it to outcomes is hard, while linking clicks to outcomes is much easier. So people (especially in tech) tend to believe that impressions are meaningless, which is clearly not the case.
Unfortunately your comment is not applicable to this scenario, as someone who has worked in marketing at Procter&Gamble i can tell that it is about the shift in attention from tv and radio to the internet. Search was the first big disruption and it's measurability was par to none. This caused a shakeup in brand management and companies now had to focus on the zero moment of truth, a step up from the first moment of truth and the internet owns the zero moment of truth for products. Startups/Entrpreneurs and VC's enticed by the windfall profits of google and yahoo started pushing for ideas that could attract more eyeballs and as a result the younger generation have grown into the facebook era and have not been trained in other forms of business.
So what we have is a vicious cycle where entrepreneurs create attention grabbing startups, where the measure of success is x amount of users and then sell this advertising demand to google,yahoo, etc since they have the ad inventory to make use of that demand. This is why yahoo bought tumblr. This is also why most(not all) VC's don't really care about actual businesses that generate revenue by selling goods or services, it's too hard and it is too hard to get aquired. Basically you reduce their probability of a win, since two of their three exits are taking off the table, being exit to bigger ad comapny or aqui-hire leaving creating a profitable business on the table.
The bottom line is this, you are the spaghetti that the VC throws to the ceiling to see what sticks, thier appearance at tech conferences and startup competitions are to align you with their vision of what they want you to build. You have the illusion of choice, they say wearables or food tech and startups lineup to be the spaghetti.
This is a winners take all game, where VC's are chasing black swans like facebook, instagram, tumblr and the more of you that lineup to be spaghetti, the better their chances unless the "price" of spaghetti goes up. Pls read this book or the comments at least to understand the effects of this, http://www.amazon.com/The-Winner-Take-All-Society-Much-More/... .
At this point we are all trampling over each other to be the one that takes all and this has tipped the balance in the VC's favor until we have a shakeout, the hype dies down and entrepreneurs move on to other industries like banking. I would argue that this is the time to get into finance mabe use all the data science tools and start a Hedge Fund because those guys that left the HF industry before 2008 for tech probably had it easier. Bottom line, ask yourselve how many photo startups have been started vs sold for a $billion dollars, instagram will be the only one "winner takes all".
If not then pls watch this guy from startup school 2008, it is the highest probability for you to succeed in this overcrowded goldrush. https://www.youtube.com/watch?v=Y2UXPfz_Kgk
VC's don't generally see an aqui-hire as an 'exit', rather as a soft landing to ward off impending failure or as an early abort where it might still have worked.
Aqui-hire's are sometimes good for founders, rarely good for VC's unless the business was about to go bust and they recoup their original investment. That's definitely not a win.
It might be a BIT easier without all the noise, but starting a successful hedge fund at a young age is no walk in the park either. Think about how many John Arnolds, Chase Goldmans, Ken Griffins etc. are there comparing to all the traders out on the street try to make it big. The markets are equally as out of your control as the market where your product wants to serve.
I respectfully disagree and argue for the opposite. It is the increase in disposable income that creates a bigger market opportunity, which in turn drives more competition from sellers that want a piece of the market. Because consumers already have too many choices and little attention span, they need advertising to get in the door in the first place.
While word of mouth is the holy grail of advertising, many underestimate how long it takes to generate this type of growth engine in a sustainable way, even for the best products.
As for the video game industry, a product's typically life cycle is 1 to 2 years, and the entire market changes every 5 to 10 years (e.g. think about how fast the transition went from arcades to home consoles to online/social to mobile phones). The majority of profits come from the first few months' of a game's release; so aggressive advertising is almost essential to success.
As a species we're driving the costs out of creating things so everything becomes a commodity, and the value isn't in the making, it is in finding the one which meets your requirement in a sea of things that are all very similar, hence the value is in the finding, aka advertising (and to a lesser extent information distribution).
Twitter sells its tweet data exclusively via Gnip, DataSift, and perhaps one or two other authorized data providers (i.e. they alone have access to 100% of Twitter's data pipeline, both historical and real-time).
Using Twitter's public search API you can get a max of 1% access to their data pipeline.
It's a racket, one that is making the authorized providers (and Twitter) heaps of cash.
So, yes, advertising, but also data; those are the revenue streams that social media are creating IPO-able companies out of.
more of a push towards where it wants its ecosystem to move.
but yes, it is another rev stream.
We have a client who's willing to pay $10K/month for real-time tweet data pertaining to 20 search terms in the pharmaceutical industry, which is a small-time job for Gnip and Datasift. Check their pricing and tell me if you think Twitter is giving this data away for free. More likely they're taking a decent piece of the pie in exchange for access to the data.
Social media data is crucial for companies to stay on top of current (and past) trends -- Twitter knows this, and are profiting, presumably hugely as they have the market cornered with deep pocket clients willing to pay, repeatedly, month after month.
You are always going to see advertising where marginal costs to operate approach zero. It is by far the best way to take advantage of such situations.
The reason for the reliance on advertising for revenues is because of the shift of ad dollars to the internet from old media such as radio, print etc. Advertising seems like this massive source of revenue waiting to be tapped. It is really a temporary illusion of growth. Overall ad spending is not increasing dramatically, it's only being reallocated. Once the shift to digital is complete, digital advertising will track GDP growth (similar to offline advertising today). But complete allocation will take several decades more.
A second reason for this reliance is lack of competition. Only a few companies have the scale needed to be attractive to advertisers. Hence, all ad dollars go to these companies. The success of these companies creates a lot of me-toos. Once there are a few more companies with the scale of Google/FB fighting for the same dollars, advertising will cease to be as attractive.
Advertising makes a lot of money if the audience is big enough. Twitter's audience is huge, connected, well sorted, and interested.
They would say that wouldn't they!
People search google for "Best washing machine". Google shows them adverts for washing machines, customer buys washing machine.
Where is the intent on twitter? To gossip? I just don't see it.
If someone is about to buy something, they're likely to go to google and search. They're not likely to go to twitter. Google gets them at the crucial point before they buy something.
(disclaimer: I don't know twitter and never got into it.)
But what if no one is looking for you? What if you are trying to gain new audiences? There's still plenty of money to be made there. Maybe not Google money, but enough to build a company that's worth tens or perhaps eventually hundreds of billions of dollars. Reputable sources (http://www.forbes.com/sites/roberthof/2013/03/27/report-twit...) have Twitter's estimated revenue to be at $1 Billion next year. And the monetization is just getting started.
That's kind of the name of the game. "How can we show people ads in a new way that integrates seamlessly with their experience?"
What if Twitter found a way to do it? Facebook seems to be getting the hang of it with their newsfeed ads.
Imho Google does this pretty well with Adwords (those that you see in the search results).
You can build some amazing tools with the APIs Google and Facebook give you, but Twitter is off-limits unless you're an invited partner, of which there are only a handful (I think.)
They seem a little too content to keep it restricted.
And to at least make my missive vaguely related to your post - surely they'd get a lot of interesting ideas on how to revolutionize advertising if they allowed open experimentation.
That's why nobody advertises on television.
When I watch TV, my intent is to see what antics the Simpsons are up to this week, not to go to Best Buy and trade my cellphone in for a newer version or buy a Coke or go to a movie theater an watch a Seth Rogen movie.
Companies spent $140 billion in advertising on US TV in 2012, up 3% from 2011. TV is about brand and awareness, not direct response.
Twitter may not have direct understanding of intent, but they are pretty good at knowing interest, which is sufficiently correlated with intent to make advertisers happy.
http://www.businessinsider.com/2008/6/how-twitter-will-be-wo...
Also, just realized that Square is set to go into this direction.
Well, go on already... This is far more interesting than the original subject :)
Thanks!
That's fine for a large company in a stable market. But Twitter is a young company battling to establish market share with products they hope will last for decades or centuries. [1] If the management really can't think of anything useful to do with cash, they should step down and help hire somebody who can.
[1] Yes, centuries. The New York Times started publishing in 1851. It's reasonable to think that the World Wide Web will have a historical place similar to print periodicals. And network-effect businesses are notoriously hard to dislodge once widely adopted.
I no longer trust American companies to do right by the user the moment that their stock becomes public. When wall street is banging on the door for a quarterly result, most CEOs end up listening.
I'm not deleting my account just yet, but I'm wary from everything I've seen in the last decade.
http://developingzack.blogspot.com/2012/09/wait-what-twitter...
http://www.androidpolice.com/2013/02/26/falcon-pro-developer...
Yes, I know Twitter grew because of these developers. But think about all the good Twitter does, sponsoring the Apache Foundation, not giving into the NSA, etc. They have much higher standards than most mainstream tech corps, imo.
However, on the sponsorship of the Apache foundation, you may wish to peruse http://www.apache.org/foundation/thanks.html for the list of sponsors. You'll note that Twitter are Bronze, while Goog and FB are Platinum (along with Microsoft, oddly enough).
If the profit generating actions of such company also align with the interests of society, then good. When they aren't aligned, they will chose profit over the welbeing of people, unless laws come in to "re-align" them.
Perhaps when a company is private and small, they can be benevolent, but when it grows big (which is usually when they IPO), the share holder's expectation of a return (as well as various other market pressures to make profit or die) forces companies to behave in a sociopathic manner. Despite all good intentions of the CEO, employees, etc.
People search google for washing machines, then click on an advert, and buy a washing machine. I can see how that works, and makes google lots of money.
But a "promoted tweet", to people who are tweeting gossip, wasting time, etc? There's no intent there. They're not looking for a washing machine, they're wasting time.
Just as people searching for a washer on Google are more likely to click on a washer ad, people looking at the #Astronomer stream are more likely to buy a telescope.
That's not the perfect comparison, but Twitter definitely classifies it's users into ad related categories.
You can classify all you want, but my central point was:
If I'm about to buy a washing machine, I would go search on google. I would not go on twitter and tweet "OMGLOLPOP! Gonna buy a washing machine what does every1 (including advertisers) recommend #confused"
So Google get me at the crucial time I'm about to buy something. Twitter don't.
My brother bought a new dishwasher not long ago. He knew for months that he really needed one, and there was circa 2 years that he wanted one.
For considered purchases, there's generally a long period before a clear intention to purchase where people have some awareness of the need. During that period, they're very open to information on products. If they're at a friend's house, they might say, "Hey, how do you like that dishwasher?" And if they see an ad for a dishwasher, they're more likely to pay attention.
Google does very well once people have decided to search. Twitter will be better for getting them before the conscious decision to take action. And it will also be good for the (often long) period between first Google search and actual purchase.
Actually we've just bought a washing machine in the past week and Google's ads didn't really have anything to do with it.
Selecting a machine took about three months, a combination of searching for user reviews and information about warranty. None of the Google 'ZOMG BUY NOW' ads were in the slightest bit useful for that.
Once we decided to buy, we noticed that all the ads were for big-name stores that don't have outlets where we live; because Google is basing the results on the address of my ISP, 500 miles away...
There is another type of advertising called branding. Budweiser doesn’t spend $25 million per year advertising during the Super Bowl because they expect you to see the advertisement and immediately order a beer at the bar. Instead, Budweiser is trying to tell you a story about their brand to evoke an emotional response that will be stored deep in your amygdala such that every time you go to buy beer in the future you will reflexively choose Budweiser.
Google is better for direct response advertising; Twitter is better for branding.
PS: There is more money in brand advertising.
Twitter is one of the few outlets where brands can effectively communicate their message online. That's the theory, anyway. You can argue that Twitter is a bad medium for branding but arguing that it's a bad medium for direct response advertising is missing the point.
On the web there is far more money in direct response right now because that's the easiest to measure and we have the platforms well ingrained in all our systems.
To say that brand based advertising isn't required or has no place is contrary to everything we know about advertising. You don't see the coke logo 50 times a day for nothing.
Around 500 million users, around 750 million tweets per day. That data might not be worth everything, but it's definitely worth something.
Calculated using: http://www.quora.com/What-was-Apples-valuation-at-IPO and http://www.usinflationcalculator.com/
By contrast, when FB IPO'd it had 845M users[2], or 8.3% of the world's population. The two simply aren't comparable. AAPL made niche luxury products, and FB had something close to half the potential market engaged on a daily basis.
[1] http://www.corbinball.com/articles_technology/index.cfm?fuse...
[2] http://en.wikipedia.org/wiki/Initial_public_offering_of_Face...
Facebook owned, and owns, only a tiny slice of the advertising market, despite being so far along in developing their product. Remember, facebook's users and attention is their product. Their customer-base - companies who want to advertise is still underdeveloped.
Evaluating them is not the same as evaluating google, even though they are both in the online advertising biz...
On top of that, the work Twitter is doing with TV networks, producers, and sporting organisations is unique and has a high chance of success because it provides value to those organisations.
While some have tried, nobody else has come as close as Twitter to accessing and disrupting the $180B (annual) TV advertising market.
I wish them luck. I think they're going to nail it.
I think Twitter has a unique opportunity in advertising. I'd be interested in seeing how many businesses are on Twitter and what percentage of Twitter users follow a business. I'm assuming both of those numbers are fairly high. If so, that means that a large number of users expect to see information about businesses they follow in their feed (and thus are ok with receiving marketing/business information/etc.) That in turn means ads are not viewed by a large percentage of the user base as intrusive. I think psychologically that is very important for an advertising company.
In terms of the rumored market cap, all I have to say is there is no way Twitter is worth only 1/10 of Facebook. I'm not sure what Facebook is worth, but I'm sure the gap between those two companies is much closer than that.
I really like the Twitter platform, and while I know they messed up by restricting their API, I think their leadership generally make good decisions.
I don't think it's reasonable to expect all tech companies to gain 20% on the day of the IPO. If they do, that's an indication that existing investors are reliably leaving a ton of value on the table.
If you have bought a stock at one price, and it currently has a higher price, that means you have made a good investment, regardless of what happened in between.
Actually, the current stock price suggests that the IPO valuation was just about right and that other factors contributed to the initial tanking.
Last year around the FB IPO I thought about what stock to buy. Either FB or Tesla.
It boiled down to a company that is revolutionizing transportation with real world products VS. a company that enables people to click on virtual pixel cows without a real business model.
The choice was easy.
However, I hope people stop and think before listening to you. Yes, it's really cool that Elon hit it out of the park, but at the end of the day, that's not the way to make investment decisions. The market is a fickle place. TLSA could be worth have as much in a year and FB could be worth double. Of course, TSLA will still be worth more since its IPO price.
Let's just say that when a company like Facebook or Google, which builds large data centers, and has a billion customers, make small changes, or increases in efficiency, they have an opportunity to make a big impact too.
Where you want to rank them in your mind on an absolute scale, well, that's really up to you. It's probably meaningless, but I guess people like to believe in people/companies. It's how we're wired.
Tesla makes a tangible good for sale with a straight forward business model. You can evaluate Tesla using the same criteria that Ford was evaluated with 90 years ago, same way that Westinghouse, or GE were evaluated. They are a new technology with a potential to revolutionize a major industry, with a high risk of failure and high return on investment if they succeed. For Facebook or Twitter a savvy investor has to first theorize how to even evaluate them.
The investment potential in a facebook or a twitter is there definitely... but its much easier for an investor to evaluate a tesla compared to a facebook.
The Intelligent investor mentions that many decades ago (maybe the 50's) IPO's were for accredited investors, because they were a known way for the saavy ones to profit from the ingenuity of the common investor.
IPO's are overhyped and hence many people buy it regardless of its underlying asset, and hence drives the price up.
As i mentioned before, IPO's in general have bad performances and the gain is more for the company and early stock investors that cash out, since getting into the market immediatelly gets you lots of fund/index and "silly" money.
Disclaimer: TSLA stock owner.
One of the criticisms of SarBox is that companies go public much later in their maturity, so public investors miss out on much of the market cap growth.
Facebook's market cap as I write this is $109 billion, and 2014 revenue estimates are ~$11 billion (sorry, I don't have the source for that handy), so it trades at about 10x 2014 revenue. Using this metric would value Twitter at $10 billion.
But I expect that Twitter has more room to grow than Facebook since they haven't monetized as heavily yet. I'm guessing Twitter goes out at $15 billion to $20 billion.
Disclaimer: I own some Twitter shares, so I'm not objective.