Magoosh GRE

A comparative evaluation of Twitter’s current revenue model

| March 31, 2015

1. Introduction

1.1 Background

The social network is a medium which can be considered to have taken off quickly by any estimation. The first vague concepts are traced back only to 1997 (Boyd & Ellison, 2007), yet only 14 years later there is a situation where companies are valued in the tens of billions, with Facebook set to achieve $3.8 billion in advertising revenue this year (Rao, 2011). The quick emergence and growth of the medium has, provided the wider corporate sphere with a lot of new marketing options which marketers must plan for and essentially capitalize on as much as possible. A particularly poignant problem that has impeded the likes of Twitter is the difficulty of efficiently turning high numbers of social network users into high turnover (Fredericksen, 2011).

In this context Twitter has been seen as something of a slow starter, with 175 million users in 2010 but only $45 million revenue to show for it. Diagnoses of the problem include slow advertising rollout, inefficient user identification and cheaply licensing the API which could be a core revenue generator if properly handled (Fredericksen, 2011). Twitter is not the only social network provider suffering with these problems however it does seem to be the worst affected of the large companies.

Twitter has proved a huge source of innovation in the arena of social networking, adding a lot of value and proving very popular as the user figures show. Given this contribution financial success would be feasible, just and useful to the wider market. Fortunately the company seems to be at the start of a turnaround, with Fredericksen estimating that 2011 profits are set to more than double those of 2010. There are still tangible issues with the business model and Twitter’s advertising strategies meaning that Twitter is nowhere near hitting its potential. Consider that the $139 million predicted turnover for this year equates to less than a dollar per customer.

If Twitter can find a way to identify and combat its weaknesses and benefit from its numerous strengths then it could become a central contender in the social networking arena rather than the damp squib that it has been considered as in the past. Further to this a clear, comparative evaluation of Twitter’s business strategy will serve to further the theoretical knowledge that lies behind social networking success, meaning that the successes but not the failures of Twitter can be repeated and built on in the future. The proposed case study will provide an evaluation of Twitter’s cash-flow problems and a solid outline of good and bad practice for social networking companies

1.2 Investigation Objectives
The proposed research will consist ofThe proposed research will consist of a comparative evaluation of Twitter’s current revenue model against other, already existing revenue models whose success is proven. With particular consideration given to advertising, revenue streams and expenditure. The proposed research will consist of a comparative evaluation of Twitter’s current revenue model against other, already existing revenue models whose success is proven. With particular consideration given to advertising, revenue streams and expenditure. The study aims to investigate the following issues:

• How do Twitter users interact with Twitter advertising and how would they interact with other revenue strategies?
• How effective is Twitter’s advertising strategy at gaining revenue from users and providing value to advertisers?
• How does Twitter’s revenue strategy compare to other potential social network revenue models which are available to it?

2. Literature review

Because of the recent success and proliferation of social networking platforms there has been a huge range of popular and academic literature relating to the phenomenon: Social and psychological effects analyses come together with media use studies and financial assessments in a field which has little theoretical organisation, consensus or base theory. Because of this and the success of social networks the most popular and visible literature in the area of consideration are the news stories of a media awestruck at the success and the sensation of how “Facebook float could value company $100bn” (Arthur, Guardian, 29/11/2011). As well as the sensationalist stories there are more analytical ones, asking questions like “Can Twitter’s Self-Serve Ad Product Meet Rosy Expectations To Drive Revenues To $400M By 2013?” (Rao, Techcrunch.com 28/09/2011). This piece is essentially a media summary of a predictive finance and revenue analysis of Twitter carried out by Clark Fredericksen (2011). In it Frederickson predicts a positive turnaround for Twitter after a weak start where advertising revenue was poor, beyond this he justifies his prediction based on the efficacy and high engagement rates of Twitter’s popular new advertising products.

It is apparent that behind the sensational headlines there lies solid, analytical research and evaluation of business practices and models which is of interest to the social network industry as well as the wider media. This is something that this research aims to add to. Mapping out the strengths and weaknesses of social network provider financing models is central to making them more successful

In a free-service context, where money comes to the provider indirectly through marketing, the link between demand and potential revenue is not simple (War 2008). Finding tangible value and sources of revenue in social networking is an important step on the road to making the hugely used media into the business tools that they could feasibly be. Finding this value and revenue has been notoriously problematic with e-businesses as a whole.

The issue of value is often identified as a problem of pricing (Docters et al. 2011) , digital media providers including social network providers often use archaic, pre-digital ‘real world’ pricing structures in a market where they just didn’t suit the context. The result being that the provider and the user / marketer could both see the value of the service, but only the user and marketer could realise it. This is a problem which Twitter, a service with 175 million users but only 45 million revenue in 2010 (Fredericksen, 2011), can realistically be considered to suffer from.

Peter Curwen has long grappled with the issue of realising potential in new media, first in relation to online mobile services (2000) and more recently with respect to social network providers (2011). In the latter case he uses huge market valuations, such as the one presented in The Independent above, as evidence that the current apparent success of social networking sites is merely a repetition of the dot.com bubble around the turn of the century. Whether true or false such characterisations create real issues for social network businesses, investors and as such for theorists considering the businesses’ revenues.

Such in depth assessments and predictions about social networks mask the fact that the theory behind them as functional marketplaces and as business interests is still something of a frontier. As with most frontiers there is a good deal of literature mapping it out in a basic, functional sense. Considering the functionalities, uses and demands which turn the medium into a potential market and reveal potential sources of revenue. Richter and Koch’s 2008 paper is a prime example of this, listing six fundamental functionalities of social network services for which there is strong demand and summarising each. This paper looks at business functionality as well as private and provides a good outline of demands which must be met by social network services where value can be gained.

For anyone looking to layout a successful business model, or evaluate a business model the natural progression from here is to look to operationalise such functional use information into an effective business strategy. Chapman (2008) uses quantitative public surveys and private marketer interviews to build up a picture of social network use patterns from a marketing point of view and laying out guidelines for effective marketing on websites. Though these guidelines are aimed at marketers and not social network providers per se, such use information can be used to ensure that providers are getting the best value from their users

From these loose guidelines advantageous financial practices begin to emerge, this can be moulded into a rounded social networking business strategy (Weinberg 2009). There is a great deal of literature in this genre, advising those who are used to old style pre-social marketing how to build a strategy around the hugely effective new platform. Though certain aspects of this genre are useful, as above, it covers different topics and objectives to this investigation. A well as this there is a lot of repetition, as there is only one right way. The Social Media Bible by Lon Safko (2010) should be noted as a concise and definitive go-to-text in this genre. If the proposed research was looking to model a social media marketing company, rather than a social media provider then this would be a central text. Even despite its differing focus there is much user and wider context information which is highly useful, particularly to the first critical objective of this investigation.

While guides to effective social network marketing carry much useful information in some cases they are not centrally topical. The proposed research intends to consider the model of a business which makes its money from providing a social network platform, rather than from marketing through social networks. There is relatively little advice aimed at those who wish to start and make money from creating a social network. However: David Silver (2009) presents a set of strategies that work and raise money. Outlining how they work, and allowing readers to choose from them in order to build up a successful start-up social network. The different aspects of the business plan are laid out separate from creating revenue to gaining an retaining customers to up-scaling. All in all it is a good resource for constructing a business plan but also a good base reference for deconstructing and analysing an already laid out business plan.

The lack of similar guidance literature belies the value and ease of starting online communities (Silver 2009). Going back to Smart Start Ups: How Entrepreneurs and Corporations Can Profit by Starting Online Communities (2007) Silver has a lot to say about how an effective business model looks and how it is constructed, his work is good source material from a theoretical point of view but it is also aimed at a similar audience to the proposed research; those who wish to create a business model and learn from others in the know, whether that be a practical example like Twitter or a theoretical guide like Silver.

Customer demands and uses are something which these start-ups and those who are already successful must consider, business strategies and models must cater to requirements and uses in order to maximise revenue (Heller-Baird and Parasnis 2011). Whilst the public are of obvious importance to social network sites it is businesses who provide the important financial link in the chain, investing in marketing, recruitment and relationship building on the networks (Richter et al. 2011). The interaction between business users and social networks, is considered by Richter et al who create a typology of use similar to Richter and Koch’s earlier (2007) investigation but with the specified aim of clarifying the field for social media enterprise. Important business models and business user profiles are considered in achieving this end.

As emphasized above there is a range of literature providing relevant information for a deconstructive case study of a social network business model including guides to constructing an effective business model, breakdowns of certain areas of business strategy and inductive derivations of strategy from theory. However case studies of social network business models are few, including some already mentioned. Silver uses case studies to reinforce the efficacy of his 18 Strategies (2009) and Fredericksen’s (2011) predictive financial breakdown of Twitter skims the surface, presenting its financial context and prospects and delving into a few of strategies which lie behind the predictions. Whilst Fredericksen delves deeper than most into the workings behind the numbers he is still primarily interested in the numbers. An actual critical investigation of how an already successful social network company operates is something which would be of great value both to those interested in the case study itself and those interested in replicating the success. Silver’s Strategies is an example of this but importantly his case studies are of outside companies using social networking to promote themselves effectively.

The most topical and complete example of a case study similar to that proposed is that of Enders et al. (2008) who comparatively analysed the Revenue models of Social Networking sites Xing and StayFriends to present their revenue streams as potential options for other social network providers. They consider the whole process from customer acquisition to gaining revenue from users in what is a very solid, but highly unique and prospective study. Though this is one solid study there is little perspective in the study area and little sense of emerging theoretical norms. The proposed study will contribute to this area of literature by providing a good point of reference and comparison in the study of a quickly emerging media market.

The social network market has produced a good number of success stories and a fair amount of popular as well as academic literature covering the outcomes of these successes and advising marketers on how to capitalize on the opportunity. However it is not only marketers who are having trouble profiting from the success; Twitter has had trouble gaining advertising money from its legion of users. Whilst there are studies of usage and revenue models of the sites there is little focused on how advertising turns these uses into profit for the social network companies at hand. In the case of Twitter and for social network companies in general such information could provide important strategic guidance on more effectively profiting from their very evident success.

3. Methodology
3.1. Research Philosophy and Approach

Understanding research philosophies that are adopted within a particular research is useful as it aids in clarifying how the research would be designed, and helps to showcase on the best approach in conducting the research.

The epistemological approach being utilised in this study is positivism, which focuses on observations and generalisations of social reality (Easterby-Smith et al, 2008). The positivist view adopts a more objective approach in observing and approaching phenomena in the real world. For instance, due to the positivist approach being adopted, the research would be conducted without the researcher being individually involved in collecting or interpreting data. They would be external to the researcher, and analysis would be based on methods that are not prone to interviewer bias. According to Easterby-Smith et al (2008), a non-positivist research is not objective; therefore qualitative results gathered could be interpreted falsely based on the reader’s point of view.

Based on recommendations by Saunders et al (2009), positivist philosophies usually adopt a deductive approach in gathering and analysing data. By adopting a deductive approach, this study would aim to answer the research question and achieve its objectives by utilising previously published theories and models, as analytical models. The deductive approach represents the most common view of the nature of the relationship between theory and research and results gotten from this approach are developed through logical reasoning (Bryman and Bell, 2007). As a result of the deductive approach, Twitter’s revenue model possibilities would be analysed using already existing social revenue models, as opposed to an inductive study in which new theories would need to be made up.
3.2. Data Collection: Questionnaire

The proposed study will first aim to gather information on how a sample of Twitter users interact with the network and the advertising and marketing functions which raise revenue for it, as well as how the sample might hypothetically interact with other revenue generating functions if they were to be used on Twitter. Quantitative data will be collected through use of a questionnaire, shown in appendix one, relating to how often the sampled individuals use Twitter and how they use it. Because the questions are all yes or no choices or simple numerical answers the questionnaire will be simple to fill out. Also the sample’s different answers can be quantified as an inductive representation of the total population of Twitter users. Though there is little sensitive information in the survey, respondents will be informed of the intended use and kept anonymous as per the data protection act for ethical reasons.

3.3. Data Collection: Sampling

Whilst sampling the local population would be convenient the results would be geographically and probably demographically biased in favour of those available to the investigator. In order to prevent this, respondents will be invited online through large scale invite-tweets sent out at random, for the sake of maintaining ethics these will be brief, polite and non-invasive one time requests. A pilot sample of forty users will initially be used to determine necessary full sample size through assessment of standard deviation and standard error.

The sample cannot be entirely random as it depends on making contact and gaining a voluntary response, yet the sample of questionnaire respondents must be as representative as possible of the full Twitter population and their usage. Boyd and Ellison (2007) point out that age governs social network use more than any other demographic factors; as such a reasonably sized stratified sample grouping respondents representatively by age could be assumed to provide usage data which is fairly representative of the whole population. This will be based on Digital Surgeons’ demographic analysis of twitter users conducted in 2010, one of the most recent to be found. The age groups into which the sample will be divided and the size of each group as a percentage of the total sample is shown in appendix 2. The volunteers required to fill the sample will be notified and sent a copy of the questionnaire. This sample will provide a solid basis for inductive conclusions regarding uses of Twitter.

3.3 Data Collection: Literature for Assessment of Questionnaire

As a basis for the comparative evaluation, current information on the functionality and revenue generation in Twitters current advertising model will be researched through a study of the extensive information released by Twitter inc. and third party assessments. Meanwhile information on the other revenue strategies will be gained through assessment of independent literature. This will be focused on gaining information regarding the audience size, revenue raised and engagement rates of the different strategies. The five revenue strategies in question are:
• Twitter’s current promoted tweet strategy
• Advertising banners
• Access fees
• Charging for premium content
• Voluntary contributions

Information on engagement rates, pricing, total and average revenue together with the user participation information from the questionnaire provides a definitive, objective basis for an inductive evaluation of Twitter’s current advertising based revenue generation strategy compared with the others presented in the survey.

3.4 Analysis

Together the user survey and literature study will provide comparable data relating to the feasibility of the five revenue models in the context of Twitter. The data will be analysed to draw a direct comparison between the five revenue strategies in terms of:
• The rate of acceptance by twitter users,
• The number of twitter users who would interact with or contribute to the revenue strategy
• The revenue per user
• The revenue per engagement
• Most importantly the total revenue potential for each model

This will provide a full breakdown of the relative strengths and weaknesses of each strategy, allowing for a comparative evaluation of the strategy currently implemented by twitter in terms of how well it gains revenue from Twitter users. This will contribute to a better understanding of the wide issue with turning successful social networks into successful businesses as well as clarifying the problems Twitter has had in the past and the potential solutions.
4. Timescale
• Data collection: Pilot sample questionnaire – 02/03/2012
• Data collection: Final sample questionnaire – 06/04/2012
• Data collection: Literature study – 13/04/2012
• Analysis – 27/04/2012
• Complete draft project report – 18/05/2012
• Complete final project report – 08/06/2012

References

Arthur, C. (2011) “Facebook float could value company at $100bn” Guardian (29/11/2011) [Viewed online: 30/11/2011] available from: http://www.guardian.co.uk

Berman, S. J., Battino B. & Feldman, K. (2011) “New business models for emerging media and entertainment revenue opportunities”, Strategy & Leadership, 39(3) pp.44 – 53

Boyd, D. M., & Ellison, N. B. (2007). Social network sites: Definition, history, and scholarship. Journal of Computer-Mediated Communication, 13(1), article 11

Chapman, T. (2008). Social network marketing, engagement marketing and brands. Maidenhead: Chartered Institute of Marketing

Curwen, P. (2000), “Hey Presto! How to turn monopoly money into real money with a wave of the magic merger wand”, Info, 2(4,) pp. 379–90

Curwen, P. (2011) “Bubble trouble: is history repeating itself?”, Info, 13 (5) pp. –

Digital Surgeons (2010) Facebook versus Twitter: A Breakdown of 2010 Social Demographics [online] Digital Surgeons [viewed 27/01/2012] Available from: http://www.digitalsurgeons.com

Docters, R., Tilstone, L., Bednarczyk, S., Gieskes, M. (2011) “Pricing in the digital world”, Journal of Business Strategy, 32 (4), pp.4 – 11

Enders, A et al. (2008) ‘The long tale of social networking.: Revenue models of social networking sites’ European management Journal 26 (3) pp. 199-211

Fredericksen, C. (2011) Twitter Ad Revenues to Grow 210% to $139.5 Million in 2011 [online] Emarketing Reports [viewed 30/11/2011] Available from: http://www.emarketer.com

Heller Baird, C. & Parasnis, G. (2011) “From social media to social customer relationship management”, Strategy & Leadership, 39 (5), pp.30 – 37

Rao, L. (2011) Can Twitter’s Self-Serve Ad Product Meet Rosy Expectations To Drive Revenues To $400M By 2013?, [viewed online 14/11/2011] available from: www.techcrunch.com

Richter, D, Riemer, K. and Vom Brocke, J. (2011). “Internet Social Networking: Research State of the Art and Implications for Enterprise 2.0”. Business and information Systems Engineering, 3 (2), 89-101.

Richter, D. & Koch (2008) Functions of Social Networking Services Munich: Cooperation Systems Centre, Munich University

Safko, L. (2010) The Social Media Bible: Tactics, Tools and Strategies for Business Hoboken: John Wiley and Sons

Silver, D. (2009) The Social Network Business Plan: 18 strategies that will create great wealth, Hoboken: John Wiley and Sons

Silver, D. (2007) Smart Start Ups: How Entrepreneurs and Corporations can Profit by Starting Online Communities, Hoboken: John Wiley and Sons

Swamynathan, G., Wilson, C., Boe, B., Zhao, B. Y., & Almeroth, K.. (2008). Can Social Networks Improve e-Commerce: a Study on Social Marketplaces. Proceedings of the first workshop on Online social networks.

Warr, W. A.. (2008). Social software: fun and games, or business tools?. Journal of Information Science, 34 (4), 591 – 604.

Weinberg, T. (2009) The New Community Rules: Marketing on the Social Web Sebastopol: O’Reilly

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Appendix 2: Twitter user age composition demographics as a basis for stratified sampling.
(Source: Digital Surgeons 2010)
13 to 17 – 4%
18 to 25 – 13%
26 to 34 – 30%
35 to 44 – 27%
45 to 54 – 17%
Over 55 – 9%

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