How efficient is Twitter's Business Model?

Spring 2013

Rumour has it that the US Federal Reserve's Quantitive Easing Strategy is costing the US economy around $85 Billion per month. This means the much touted US innovation engine needs to entice Wall Street's investors with a game changing "Facebook" story every month just to break even. Obviously, by any measure, Silicon Valley's "gamification of everything" strategy is failing to meet the challenge, but that said, this month the "list of lists" offering is Twitter. The question is how does it stack up? To find out let's run the numbers published today in the S1 Public Offering Document against a collection of familiar metrics. In this first chart I have mapped Market Cap per Employee vs. Market Cap per Unique

As you can see the advantages of having a "Supply Side Freemium" business model (e.g. a network media business model that allows people to prosume goods and services) have been factored into the market cap calculation. After all, as any prospective investor will tell you, it is self evident, that a business that benefits from its customers doing the work for free, will be significantly more profitable than a business that pays creative people to create content. The question being is this assumption correct? In this next graph I have mapped Average Revenue per Unique vs. Average Profit per Unique.

In this context it appears there is no competitive edge in having your customers do the work for you. But it is of course the wrong metric, if we are to define the value of having your customers do the work for you. The value proposition of Prosumption is to achieve more with less. To drive down costs. Measuring customer profitability or customer revenues is to misunderstand the economics of scale when it comes to profiting from adopting the "Supply Side Freemium" business model. The real performance benchmark is Average Revenue per Employee vs Average Profit per Employee. The assumption being, if your customers are busy doing the work for you, then you won't need as many employees to keep the engine room of prosperity running smoothly. Once we map these numbers we find Twitter's Business Model is significantly more inefficient than the market leaders. Indeed it falls well short of the old media model.

This of course is somewhat surprising, given the premium factored into the Market Capitalisation expectations, and it simply raises the question, what would Twitter's Market Cap look like if it was remapped to mirror the efficiency of its current revenue model? If we remap Twitter against the industry benchmark (i.e. Google) we discover Twitter, like many, if not all of the Social Media flagships, is overweight.

Not that this should come as much of a surprise. As this last chart illustrates (Average Profit per Employee vs Market Cap per Employee) the market, with its old media focus on Advertising Revenues and Traffic, is adept in misreading the value proposition of the Prosumption Driven Business Model.

In the end the real story is investors are buying into much more than a proven/unproven scalable business model, they are buying into a narrative, the network narrative, and for the moment a front row ticket comes at a premium.

And that, as they say, is the dividend you achieve when you invest your creative energies in Branding and Marketing.

As Ries and Trout once wrote. Marketing is a battle of perceptions, not facts. Arguably the same can be said about any Investment Product. Be it IPO's or Venture Capital Funds.

The profit is in the packaging.

Of course the most graphic illustration of the magnitude of challenge facing Twitter is the mapping of the Average Revenue per User vs. Average Revenue per Employee. It speaks directly to the Google advantage. The *game changing* competitive advantage that sets Google apart from the rest of the players in the digital advertising market.

Unlike social media where Gamification is primarily focused on *Follower* counts and *Likes*, metrics of no direct economic value to the platform operator, the Gamification of Google adds a significant premium to the platform provider's bottom line. Put very simply the gamification of search adds a significant premium to the price paid for search. After all, the competition of words is at the very heart of Google's business model. Gamify the words and you increase the level of activity associated with generating income for the platform.

What the big data reveals is simply this: Google's competitive edge is human nature. It leverages the natural tendency to "win at all costs" to amplify the level of activity across the network thereby increasing exponentially the value of the activity aggregated by the platform.

In this Google is no different to TV. But where as TV leased time. Google leases words. And this is a key difference. Indeed a seismic change in our concept of how we go about marketing a product or service.

You see the competitive edge that Google has is that it leases to the advertiser the rights to use a key word or phrase on a click by click so long as the advertiser is willing to pay the price to beat the competition to the right to lease that word or phrase.

Social media on the other hand (as yet or at least as far as I am aware) offers no such replication of this model within the context of leasing a relationship. Efforts to date are based around the much maligned idea of "Lease a Like" or "Rent a Referral". The idea of monetizing user preferences by elevating recommendations in timelines and search results of followers and fans. What is best understood as boting the network.

Facebook, LinkedIn or Twitter may allow you to put an ad in a users time line but it does not lease to the highest bidder the rights to a relationship with the consumer on a click by click basis. And in this context, or at least until they can resolve this challenge, social media platforms will struggle to achieve the Google premium.

This premise also explains why experienced Brand Managers are reluctant to invest heavily in either Google or Social Media. We tend to think of Google as a behemoth but the reality is Brand managers spent more money sponsoring sport last year than Google collected from its online advertising channels. Truth is Brand Managers spend perhaps as much as 10x more sponsoring the Arts than they do with Google.

The question being of course why? What do the global Brand Managers know about the value of Google and Social Media advertising the rest of world's SME aspirants do not?

The answer of course is why rent a phrase or a word when the commercial objective is to own it?

You may recall the fundamental premise of Al Ries and Jack Trout's book The 22 Immutable Laws of Marketing . Marketing is about a battle of perceptions. Branding is about Singularity. It is about owning a word, a phrase or concept in the audience’s mind that is exclusive to you and your product. Think: Just Do It or the iPhone.

Why lease from Google on a click by click basis when the objective is to own the word or phrase? The same applies to the challenge of customer relationships. Why lease when the commercial objective is to own exclusivity?

You see the true measure of success of Google and now Facebook over the past 10 to 15 years is actually a measure of just how much this new generation of aspiring marketers and entrepreneurs have forgotten about the art of marketing communications.

Put very simply Google, and now Facebook's, success is a reflection of our collective failure. It is the result of a fundamental misunderstanding of what Marketing and Branding is all about. Why lease from a 3rd party what you already own? The answer being of course you have made the mistake of letting the market place define who and what you are. You have become the question, not the answer in the prospects mind.

Google is the answer and, increasingly, if we are lazy enough to allow it to happen, so will Facebook and other forms of social media.

In a world where TV was King, or what is popular described as the era when content was king, you leased time to get your message in front of an audience. The same applied to Radio. Meanwhile with Newspapers and Magazines you leased space to get your message in front of an audience. Column inches. Today, online at least, we lease our messages, our words our phrases, our relationships. In this much the game has fundamentally changed. The only question you need to ask yourself is... are you clever enough to game the game or is it simply easier to redefine the game by playing it elsewhere?

After all you can never own what you lease... Unless of course you are happy to share.