Twitter has acquired dozens of companies since its inception and contrary to popular belief, these are not exclusively talent deals. The acquisitions of Crashlytics (Jan 2013), an app crash testing tool, MoPub (Sep 2013), a mobile ad exchange, and TapCommerce, (Jun 2014), a mobile app retargeting tool, have reportedly each cost the company over $100M and have added core mobile products that it is leveraging today.

So what’s the purpose behind all of these acquisitions and how are they linked? Twitter answered that question on October 22 at its Flight Conference when it announced Fabric, a modular mobile software developer kit (SDK), which leverages parts of each of these acquisitions, as well as capabilities it built in-house.

What is an SDK? It’s a set of software development tools that allow third party developers to build applications for a particular company or software package. Its primary purpose is to simplify otherwise time-consuming development tasks for developers and hopefully provide value to the company offering the SDK (in this case Twitter).

Fabric SDK has three modules, described briefly below.

Twitter Kit

Twitter Kit has three main features. “Sign-in with Twitter” simplifies the authentication process for new users. “Native tweet embed” makes it easy for developers to integrate tweets into their apps. “Digits” allows new users to sign up for apps with just a phone number.

Crashlytics Kit

Crashlytics Kit also has three main features: Crashlytics, Answers, and Beta. Crashlytics allows app developers to see what part of the code caused a crash and which users were affected, in order to quickly stabilize the app. Answers provides analytics on app usage. Beta allows developers to do beta testing and get user feedback.

MoPub Kit

MoPub Kit integrates with MoPub, a mobile ad exchange, to place ads into 3rd party apps so developers can monetize their traffic.

For a more information on Fabric, check out Twitter’s press release.

So why has Twitter invested hundreds of millions of dollars to launch an SDK – especially when two of the three modules don’t seem to relate to the core product (tweets)? Fabric allows Twitter to deepen its relationships with app developers, which can help create additional network effects and attract new users to its core product.

Being a platform business is the Holy Grail for technology companies. If executed well, you can create network effects, barriers to entry, and significant scale leading to enormous returns. Just look at Apple and Google – their aggregate market cap exceeds $1 trillion! This is in large part because of the iOS and Android platforms that allow them to profit from the explosion of mobile devices and the related ecosystem.

Companies like Twitter and Facebook don’t have the ability to develop a mobile OS, which is pretty clearly a two-horse race now. So how do they avoid being relegated to just another app sitting on your home screen, or worse yet tucked away in some folder?

They need to leverage their assets – the real-time communications layer and the social layer, respectively – to build or expand platforms they do have. Facebook has done this through acquisitions such as Parse, a mobile back-end-as-a-service provider of development tools, which is the basis for some of its SDK offerings. Twitter is hoping that Fabric will allow it to become an indispensible resource to developers as well.

How can Fabric create network effects for Twitter? Below are two examples:

  1. Offering developers an easy sign-in process (Sign-in with Twitter or Digits), which will drive higher app usage (by removing sign-up friction), which will drive more developers to use the SDK. Part of the Twitter Kit is tweet embed, so the hope is that developers will also integrate this feature into their apps thereby expanding Twitter’s distribution and hopefully accelerating new Twitter user sign-ups.
  2. Offering developers a tool to monetize their app traffic (MoPub). As more developers use the MoPub Kit, more advertisers will want to buy ad inventory, which will drive more developers to use MoPub. Twitter clearly benefits from this, as it will earn a share of the advertising revenue.

Ultimately developer relationships come down to proving your value. Can your SDK help developers grow and monetize their user base? If Twitter can do that, developers will happily use Fabric SDK and Twitter will benefit from the additional distribution and monetization.

References

https://blog.twitter.com/2014/introducing-fabric

 


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The Pitch

The expansion of social media has had a massive impact on the world of sports. Instead of relying on national news websites to obtain information regarding sports teams and athletes, people are now able to login to their respective Facebook and Twitter accounts to get updates ranging from real-time game progress, to an athlete’s favorite movie. Social media has created a transparent system that allows fans to enjoy amplified engagement in the sports world; athletes to freely engage with their loyal fan-base; and athletic organizations to capitalize on essentially free marketing to reach a broader audience. But does all this have long-term potential?

The Swing

Fans are able to fully interact with the sports world through social media platforms by expressing their opinions directly to an athletic organization, or athlete, as the game happens in real time. Studies show that a majority of sports fans are on social networks while watching games, so they can weigh-in on the action. So if a fan likes or dislikes a certain play, he has the option to immediately inform the athlete or organization directly. This transparent interaction allows the fan to feel more connected to the athlete, the game, and the sport in general.

After a game, an athlete will be able to login to his Facebook or Twitter account to respond to fans, fostering a more “meaningful” athlete-fan relationship. Although some athletes might do this out of the “kindness of their hearts”, it seems more logical to assume that they do this for good PR. Whatever the incentive is, social media provides a channel for fans and athletes to share a deeper connection. In some cases, this could pay off for athletes: Tim Tebow gained popularity with the “Tebowing” meme; Jeremy Lin rode the “Linsanity” waive as long as he could; and Nick Swisher even earned a spot in an MLB All-Star Game due to support from his loyal fan base.

The Drive

Even entire athletic administrations are now capitalizing on an avenue of free marketing by using social media platforms to disseminate athletic progress. Fans simply follow the organization’s respective Twitter account to receive real-time information on individual athletes, and the team as a whole. The popularity of social media has encroached so deeply into the sports world that we are now seeing professional lacrosse players sporting their Twitter usernames on the backs of their jerseys, instead of their last names. Mississippi State even decided to repaint their football end zone to #HAILSTATE. Given that social media platforms create an avenue for free marketing, good PR, and facilitate deep connections between fans, organizations, and athletes, it might seem as if social media hit a homerun in the sports world – what more could you ask for?

The Catch

Although it might seem that the impact of social media on sports seems to only yield positive externalities, it does have vital downfalls that could cause the system to collapse. If used ignorantly, social media could be detrimental to some athletes. Social media platforms give athletes the ability to disseminate uncensored information directly to the public by allowing them to express any opinion, at any given point in time, on any subject – as an athlete myself, it is not hard to imagine that other athletes might say dumb sh*t from time to time. In fact, it actually happens a lot, to the point where athletic administrations incur costs so they can monitor their athletes’ social media use to ensure that athletes do not post anything that could potentially tarnish the athlete’s, or entire organization’s, reputation. Larry Johnson (running back for the Kansas City Chiefs) was released from his NFL contract after publically insulting his coach on Twitter after a game. Rashard Mendenhall (running back for the Pittsburgh Steelers) controversially tweeted about Osama Bin Laden’s death and 9/11, and consequently lost an endorsement deal from Champion. Chad Johnson (wide receiver for the Cincinnati Bengals) was fined $25,000 for merely using Twitter during a preseason game. The negativity even extends to potential college recruits losing scholarship opportunities due to inappropriate content they post on social media.

It might seem that the only downfall of social media’s impact on the sports world lies within the athletes’ ability to express their uncensored thoughts. Sure, athletic organizations are able to pay thousands of dollars to a company that could provide some censorship, but does that really solve the problem? There has been a recent drop-off in athletes using Twitter because of the negative light associated with posting something controversial – “if something has the potential to end your career, you might as well not use it at all”. It is starting to seem that the deeply driven, homerun-like baseball of social media could turn into a routine fly-out. Given the many benefits of social media on the sports world, it is hard to imagine that athletic engagement with social networks will stop completely. This then begs the question: how do you allow athletes to share a deep connection with fans on social networks, while fully restricting them from saying anything controversial? I believe solving this problem will add enough juice to turn social media’s fly-out into a homerun, and ultimately show long-term potential.

References:

http://www.dailydot.com/opinion/morgan-2013-rise-of-sports-fan/

http://www.kttape.com/game-change-social-media-in-the-sports-world-infographic/

http://cdn.ientry.com/sites/webpronews/article_pics/sportssocialkttape5.png

 


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During the latest round of the long and seemingly never-ending conflict between Israel and Palestine, and after following closely the news, links, tweets, posts, etc. that one could find mainly in Facebook and Twitter, my old concern about the role that Social Media is playing beyond its social-fun aspect, in terms of affecting the way we inform ourselves, crawled back inevitably to my mind.

Since the irruption of social media in our lives, there has been ample talk about the democratization of the information, and the empowerment of all of us as civilians. I believe that the praise is well deserved in many aspects, and it is difficult to question the positive role it has played in connecting people and allowing for a free, fast, and high volume of information flow. Getting information has never been easier, but at the same time, in my opinion, never has been harder to differentiate between real versus fake, ill-intentioned posts, news, etc.

Also the fact that anyone of us can, legitimately, post in social media, has opened a new outlet for people to misinform, or to express potentially dangerous ideas, that can affect different groups in our society. Don’t get me wrong, I value and see as a key right the freedom of speech that we have in many countries, but that doesn’t mean it is not important to analyze the potential negative effects of these new technologies.

The News/Media industry has been heavily disrupted by the strong growth of social media and technology in general. Print media is suffering, and has had to make a difficult transition towards mobile platforms. TV news outlets have maybe suffered somewhat to a lesser extent, but still have had to rethink their business models, incorporating technology like online videos, Twitter accounts, and Facebook pages. Even though News/Media companies have always been subject to editorial lines that may come from the owners or the Editor in Chief, or from the own biases that the journalists bring with them, it was easier to trace back where the information was coming from, and from whom I was getting it. This is getting harder, considering the amount of content we receive, and from so many different outlets/sources/users.

Seeing the glass half-full, the fact that social media enabled people in countries like Iran in 2009 with the elections protests1, Egypt in 2011 with the social uprising against Mubarak2, and Venezuela in the 2012 presidential elections3 to express freely, was a significant event, that had bigger implications than everyone might have expected. Even though if it was for a short period of time (in Iran4 and Egypt5 they blocked the use of Twitter and social media in general), enabled people to express their opinions and share them with the rest of the world, generating awareness of their realities. It was one of the first times I can remember seeing relevant events “live” through the eyes of the population of a country, with no filters. Especially considering the low levels of freedom of the press in these particular countries (Egypt ranks 159/180, Iran 173/180, and Venezuela 116/180 in terms of freedom of the press worldwide6), the value generated by social media is even greater.

However, the empty half of the glass shows a somewhat grimmer view. During the latest Israel-Palestine outburst I saw first hand how people from both sides where almost without even reviewing their sources, posting links to old, fake, or non-accurate pictures7, news, and videos that supported their opinions. Worst, I saw how two dear friends, one with Jewish roots and one with Palestinian roots, created a Facebook group trying to unite both communities back in Chile, only to get severe backlash from people with radical views from both sides. They received personal threats, which ultimately led to closing the group, even if this aggressiveness came from a very small group. Social media provided the perfect outlet for people to express discriminatory/racist/xenophobic views against people from Israel, Palestine, or even towards the local communities associated with both places. Comment boxes in news outlets were dominated by irrational, insulting comments. People from both communities suffered virtual and real life, physical attacks. The Arab School of Santiago, Chile suffered from graffiti’s on their walls, and Jewish families were attacked in the streets and at their homes. One is left wandering, especially comparing with previous outbursts of the conflict like in 2008 and 2012 did social media amplify the impact of this international conflict outside their borders? Did social media actually played a role of informing in an unbiased way, or did it only polarized and confronted communities that are thousands of miles away from the point of origin? What effect did social media play in the general population that is not part of these two communities in shaping their views? Is social media simply enabling people hiding behind a computer express views that they don’t dare to express publicly, sometimes hiding behind an alias? I believe the jury is still out on these questions, and I don’t have the answer either.

There are reports suggesting that social media in general, but particularly a YouTube video, played a relevant role in the deaths of the US personnel of the embassy in Libya8 in 2012. Even if the video wasn’t the main cause, the fact that it is in the discussion as a possible enabler of a tragic event, validates the idea of at least making these questions.

If social media is enabling democratization and empowerment, one could think that the shift in power about informing would also shift the sense of responsibility towards the now empowered civilian population. However this is not necessarily happening. Maybe it has to do with the fact that this may be an industry still in its infancy. Is it fair to put the blame on the people that are posting only? Or should the companies providing the outlets take more responsibility? I believe both parties have to be more responsible, however as an example Facebook9, Twitter10, and YouTube11 argue they are not liable for the potential defamatory content posted in their sites. Even though we as users can report content that seems inappropriate, it means putting the burden on the user base. Considering these are successful businesses, where for example Facebook in terms of members would be the 3rd largest country in the world, shouldn’t they approach this in a proactive way? Hiding behind the argument that they are mere platforms and not publishers12 might serve them well for now, but I strongly believe they should try to analyze the ramifications and impact their networks have worldwide, and take a more proactive approach as they keep on growing in relevance and in members.  This decision might impact their business models, and imply investments in different areas, but this doesn’t mean it is something they should or can ignore forever.

Referenced sources:

  1. http://www.washingtontimes.com/news/2009/jun/16/irans-twitter-revolution/
  2. http://www.nytimes.com/2012/02/19/books/review/how-an-egyptian-revolution-began-on-facebook.html?pagewanted=all
  3. http://www.academia.edu/6028772/GRINEVALD-The_Twitter_Effect_in_the_2012_Venezuelan_Presidential_Elections
  4. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=anh.uW3gNZp
  5. http://techcrunch.com/2011/01/25/twitter-blocked-egypt/
  6. http://rsf.org/index2014/en-index2014.php
  7. http://www.bbc.com/news/blogs-trending-28198622
  8. http://www.bostonglobe.com/opinion/2012/09/12/how-could-chris-stevens-die-because-youtube-clip/Ex92OLF0qCwlXwa5nYV7fI/story.html & http://www.huffingtonpost.com/andrew-lam/social-media-middle-east-protests-_b_1881827.html
  9. https://www.facebook.com/legal/terms
  10. https://twitter.com/tos
  11. https://www.youtube.com/static?gl=CA&template=terms
  12. http://www.theguardian.com/technology/2013/jul/29/twitter-urged-responsible-online-abuse

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Investors are nice and quick to forget people. A decade after the .com bubble, and eighteen months after the now famous Facebook IPO screw-up, social networks valuations are on the rise again.

Facebook latest share price is above $50 [1], a 31% premium compared to its IPO price, LinkedIn share price has more than doubled over the last twelve months, Twitter announced on November 4 an upward revision of the listing price [2] of its already oversubscribed IPO, while Snapchat is reportedly looking to another Series round on the basis of a $3.6bn valuation [3].

Looking at implied valuation multiples, it seems we are back on the crazy track: Facebook is trading 10x its revenues, and 20x EBITDA of next year, LinkedIn is 14x its revenues, and 50x EBITDA[4]. Even if per subscriber multiples remain valid data points for businesses with strong network effects, there is still a long way (down) to go to compare those multiples to traditional and more mature industries, with mean current year EBITDA multiples in the 7-9x range.

So what is it? Analysts currently emphasize large addressable market opportunities and fast market share growth rates as being the main drivers for share price growth. They say lessons from the past have been learned, and current online ventures valuation metrics are reasonable. Leading networks have exploited to the best network effects, and display massive numbers of users: Facebook (1.15bn users), Google+ (350 million users), LinkedIn (240 million users), and Twitter (230 million users). The usual argument is that strong users and revenue growth will turn at some point into earnings and cash flow streams.

Looking at more mature online verticals, is that the direction those businesses have headed to? Euh, not really. Taking e-commerce and OTAs, Amazon operating margin is 3%, UK leading apparel e-retail Asos operating margin is 6%, Expedia is 7%, and Orbitz is 10%. Still, there is exceptions to this gloomy pattern: Priceline operating margin is 34%[5]. More to that, investment needs should not decrease anytime soon: advertising budgets are drying up most of the investment powder, even if SEO mix is more weighted towards free channels of acquisition, and initial cost of acquisition per customer is on the high. We hardly see any room for bottom line improvements, given operating leverage those businesses already have, limited control over (online) marketing expenses, and low effective corporate income tax rates.

So…back to top line growth potential.

Top line growth potential is usually a combination of broadband penetration, and lifetime value of acquired members/customers. As of May 2013, 7 in 10 Americans aged 18 and older access the internet at home via a high-speed broadband connection [6]. 15% of Americans don’t go online at all, they are less-educated, rural, and low-income people [7]. Not soon to be Facebook addicts or online shoppers. Numbers are similar in other Western countries, yet it is right that emerging countries broadband adoption constitutes an engine of growth. That said, most of emerging countries have local strong competitors already established (Baidu, Yandex, Renren, etc.), and converting users to Western social networks proves challenging, given significant multi-homing costs and regulatory hurdles in some countries (see China). Is there a better chance achieving true global visibility in the online world? Apple and Google rank respectively #1 and #2 in the latest Interbrands top 100 brands ranking [8], but consider Amazon is posting less than 20% of its revenues [9] in emerging countries.

Last, lifetime value per customer ultimately depends on frequency and value of purchases. With limited growth of households’ purchasing power in Western countries, and increasing fragmentation of online markets, both metrics look hard to increase.

So? It looks like you should keep focus on increasing this number of members you have.

[1] November 5 closing share price: $50.10

[2] http://www.sec.gov/Archives/edgar/data/1418091/000119312513424260/d564001ds1a.htm

[3] http://allthingsd.com/20131025/snapchat-is-mulling-another-huge-round-at-a-3-5-billion-valuation/

[4] IBES estimates, November 5, Bloomberg

[5] See latest SEC 10-Q and 10-K filings

[6] Pew Research Center Internet & American Life Project, May 2013

[7] Pew Research Center Internet & American Life Project, May 2013

[8] http://www.interbrand.com/en/best-global-brands/2013/top-100-list-view.aspx

[9] Wall Street analysts estimates


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Tech valuations and what we (think) we know about finance

‘Revenue and profits are overrated’.

This was my first though when I read about Twitter’s $11B company valuation. While most public companies struggle with quarterly earnings announcements, the tech company seemed to be ‘undervalued’ according to the market [1]– quite surprising considering that it reported net losses of $ 133M last quarter. Yet, once the company goes public, it will be more valuable than Yahoo and AOL.

So, what makes this business model so different from other tech companies? At the time of their IPO’s, both Google and Facebook recorded revenues in the billions and posted net profits – a good indicator of a ‘proven’ business model: millions of users visited the sites every day and advertisers found them to be a good way to reach their target customers. Although they had high customer acquisition costs, experienced rapid growth and spent significant amounts of money in R&D, both companies were capable of monetizing their business models, while raising switching costs and acquiring potential competitors.

Twitter’s business model

Twitter –with more than 200 million monthly active users (MAU) – is one of the most popular social media platforms in the USA. It has proven its mobilization strategies and succeeded to become a prominent player in the tech scene. Yet, its monetization strategy is not clear and the outlook is not positive. If we divide the quarterly loss by the MAU, Twitter is losing roughly $0.60 per user per quarter.

Let’s assume that this incorporates high initial R&D expenditures and customer acquisitions costs. Assuming each user’s lifetime value is higher than the acquisition cost, the company would be creating value, either by charging the user or attracting more advertisers. Is Twitter capable of doing so? Not so clear.

Twitter’s monetization strategy and how it should be valued

Charging customer for what is now a free service would discourage usage, reduce MAU and allow the appearance of new, free competitors. In the end, it would destroy its mobilization strategy and undermine its company mission (‘to give everyone the power to create and share ideas and information instantly without barriers’ [2]).

Increasing advertising will also prove difficult. Advertisers prefer Facebook — with its wider user base and international presence—as its default social media platform. Twitter has to prove that it can help advertisers convert users into clicks (and sales), and that the additional ‘cost’ of advertising for users (in terms of experience and convenience) is bearable. Also, Twitter will have to prove it has a successful model for mobile advertising, a historical tough ad medium.

Is Twitter worth $11 billion? Maybe. However, the most important question is how investors value companies that have no proven monetization strategy (or even no revenue at all) in a context of low interest rates. Are we headed into a new dot-com bubble? Time will tell. In the meantime, with a valuation of $80M per each one of the 140 characters, Twitter is the proof that revenues and profit are overrated.

[1] http://www.reuters.com/article/2013/10/25/us-twitter-ipo-idUSBRE99N1AE20131025

[2] http://www.businessweek.com/articles/2013-10-03/twitters-ipo-filing-quick-takes-on-the-s-1

 


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