So, Are Things Good Or Bad With Twitter?

There were two reports on Re/Code about Twitter, and they would seem to be at odds with each other. One talks about the upcoming layoffs, the other about how Wall Street is reacting positively to Twitter’s recent earnings. Coupled with this was the announcement that Vine, Twitter’s short-form video service, is shutting down, which likely result in a stock price bump. So why is bad news also good news? Well, it depends on where you sit and what you are looking at.

Impending Doom?

If you look at Twitter, and what they are experiencing right now, things do not look good. Nearly 1 in 10 people in the company are about to lose their jobs, mainly in sales and marketing. New user acquisition has basically ground to a halt. Revenue has followed the trend of user base growth, and profitability is nowhere in sight. Vine has seen less and less use, as competitors added Vine’s features, and expanded on them.

Basically, Twitter hasn’t found a way to build a profitable business on their idea. Stuff they tried in the past, like promoted tweets and advertising, haven’t helped them. Adding Vine didn’t help them. Their latest initiative is to live-tweet NFL games and game video, and they are doing something similar for the NBA. Basically, they want to get into focused commercial content and some kind of video streaming (sort of) bigger than what Vine offered.

Will that help? It’s too soon to tell, but my gut feel is that it isn’t likely to matter. Neither Twitter’s nor Vine’s platforms are built for streaming long, continuous volumes of massive data. Twitter is a platform for distributing millions of very tiny messages where the order of delivery isn’t nearly as sensitive, and real-time delivery isn’t critical. Vine was meant to distribute millions of tiny little video files, many orders of magnitude smaller than things like TV and movies.

There have been rumours of a possible sale of Twitter, but so far, those have come to nothing. The Re/code article on the layoffs indicates that part of Twitter’s goal is to streamline the operation (by cutting almost exclusively in sales and marketing) to make them a better value as a purchase. By shutting down Vine, Twitter is also cutting their operating costs (since it will likely reduce more staff and cut operations overhead, which Twitter was likely having to fund).

Bright Future?

Which brings us to the second part, where Wall Street likes Twitter’s latest quarter. Why? Because they beat some admittedly cautious estimates (one by only by a very tiny amount). They had 317 million users, not the 316 analysts were predicting (ooo boy, they beat it by 0.32%, which is noise statistically). Their revenue was $616 million, not the $605 predicted (that, at least, is a meaningful improvement).

I suspect that the layoff announcement has more to do with it. We can expect the Vine announcement’s effect to appear shortly. That Twitter is doing more to make themselves an acquisition target means more to the street, because that means short-term cash in hand.

I’m not sure that Twitter’s more strategic activities matter a whole lot, because I suspect that most analysts expect Twitter to be part of something bigger by the end of the year. That means a short-term bump in the share price, and then another block of cash because any offer will be higher than the quoted share price. The optimism is purely about a nice short-term windfall for some shareholders, not about long-term prospects. Once Twitter is bought, any future growth and activity is now to the benefit or detriment of the new owner.

How do cuts and sales and marketing, plus closing down Vine, make Twitter more appealing? The layoffs would seem counter-intuitive (because sales and marketing are key to getting new customers). The Vine shutdown may have been inevitable. But Twitter’s main appeal to any buyer is their existing user base, their technology and the team that works on it. Anyone who buys them already has a sales and marketing organization, and a buyer will simply be adding another service that they can sell. Vine was probably another cost with no upside. If Twitter didn’t make these cuts, any new owner would have anyways. This just saves them the trouble of doing that.

Of course, this is predicated on there being a buyer for Twitter in the first place (whether that buyer makes sense or not). Some less-than-informed analysts and pundits see Twitter as a natural fit for someone like Disney for video streaming (uh, wut? Twitter doesn’t have a streaming platform, so, huh?).  Others see Microsoft (with Skype and LinkedIn) or Salesforce as possible new owners (and that might make more sense). Google would finally have a social media presence that matters. Apple may be desperate enough to “try anything”, but buying a money-losing and moribund social media platform isn’t the solution to their revenue decline.

Sort-of Cognitive Dissonance

So, the fact that two Re/code stories around the same company illustrate two different schools of thought isn’t all the unusual. The layoffs and Vine shutdown are a sign the company is struggling. Cutting back in sales and marketing seems to be a foolish path to take, which might lead you to question if they really know what they’re doing. However, if it makes them a more appealing take-over target, then those who hold shares have some reason to be optimistic, because it represents an immediate gain for them (and it gets a struggling company out of their portfolio).

Welcome to a world where news for one can be good, both bad for another. From the perspective of the people about to lose their job (and the people and local economy that depends on those people and the money they make), it is definitely bad news. For investors, it may be good news because it makes Twitter a more desirable take-over target. It isn’t 1984 Orwellian Double-speak. It’s the nature of running a business.

Advertisements