Dick Costolo Is Now Out Of Excuses At Twitter - And That's A Good Thing

Twitter stock took a nice little jump yesterday on the news that CEO Dick Costolo ousted his COO, Ali Rowghani. Along with him went and North American media head Chloe Sladden, one of Rowghani's college buddies.

Investors probably see the re-org as a sign that Costolo is moving quickly to fix Twitter's core problem: Lack of user growth.

It will also help Costolo re-establish his control over the media narrative around Twitter, which had gotten away from him recently, especially in the form of this Wall Street Journal story which suggested that Rowghani had more control over Twitter than Costolo did, and that Costolo was a "reactive" manager who couldn't make up his mind about things.

Previously, Twitter's product development teams reported up through Rowghani, who before that was Twitter's CFO and has a largely financial, not technical background. Rowghani was even presenting Twitter's user-growth strategy to its board of directors, rather than Costolo. That is now at an end.

Now Twitter's engineers and product developers report directly to Costolo through new vp/consumer product Daniel Graf, who came from Google a month ago.

The intent here is that cutting a layer of management will speed decisions. And it will be exciting to see what Graf comes up with.

The downside: Costolo is now essentially out of excuses: He has got the team he wants, and they're organized in the way he wants. If Twitter continues to fail, the blame rests solely with him.

We hear that Twitter actually has some interesting things in the works that will kick in over the next few months. More on that later. But first, the grim context ...

The scale of the problem Costolo is trying to fix is staggering

Twitter crossed a hugely significant threshold recently: It finally signed up more than 1 billion users. One billion! That is not trivial. Costolo has long dreamed of reaching every person on the planet. Facebook has about 1.3 billion users right now, so by that measure Twitter is in Facebook's league.

But you probably didn't hear about Twitter's good news because 75% of those users abandoned the app after signing in, according to data from Twopcharts, which has a record of accurately tracking twitter user data. Twitter only has 255 monthly active users (meaning people who logged into the service once a month), according to its Q1 earnings disclosure. Here's the data:

In other words, most people who try Twitter don't like it very much.

Twitter's growth as a business is robust and healthy. There is an argument to be made that Twitter is most useful to people in business, media and other specialists who need a lot of live, constant news about their field of interest. But that type of tool is not useful to most ordinary people. Twitter can continue to pile on the revenue without growing users much.

But Wall Street isn't listening to that argument. It equates user growth with future earnings growth, and now Costolo has to get monthly active users growing again.

We heard yesterday that, "Twitter's user engagement problems are worse than people realize."

That dovetails with something we heard today. Inside Twitter, the user issue is sometimes referred to as the "growth problem." None of this is news, of course. But the overall picture emerging is that inside Twitter, Costolo's staff are engaged in some complicated, intense product work to make the Twitter experience easier and smoother for new or lapsed users.

The Instagram threat

One source told us previously that, "Twitter has a lot more competition than it did two years ago," and that this is impacting user engagement on Twitter. That could be a reference to Instagram, among other apps, which will likely pass Twitter in MAUs soon. It has more than 200 million MAUs at the last count.

Instagram could hurt Twitter with the flick of a switch, simply by allowing people to link out. At that point, Instagram would be basically just like Twitter, except with more users and better pictures. Instagram probably won't do that. Our sources at Instagram tell us that forbidding links out is one of the ways Instagram maintains its "cool" environment.

This is good news for Twitter, which is rolling out various news tools to make photos on Twitter easier and more shareable. Tweets with photos or video get much higher engagement that those that are just text.

The World Cup bump

Costolo is likely to run into some serendipitous good news over the next month or so simply because the World Cup is taking place. Twitter is particularly strong with sports users generally, and we're told that soccer fans specifically over-index as Twitter users. (I can confirm this as a soccer fan myself: Twitter is unusually entertaining when you're watching soccer on TV.) So engagement on Twitter will likely go up a little simply because the vast number of global soccer fans are temporarily going to be using the service more than previously. Goldman Sachs also noted that Twitter's monthly uniques are still rising:

That trend is likely to continue as Twitter is mentioned repeatedly on sports shows the world over. (Americans often forget, the size of the global World Cup audience makes the Super Bowl, with 100 million-plus viewers, look like a church picnic.)

Prepare to hear from Wall Street in about 6 months

This is Twitter's great advantage and its softest weak spot: Twitter gets a ton of free advertising on TV shows and in other media whenever personalities and brands ask their fans to follow them on Twitter. The problem is that Twitter now has to re-persuade all those people who tried it and didn't like it.

We understand that Twitter is doing a bunch of different things on those fronts. One experiment involves asking new users if they are World Cup fans. Those new users then get a completely different signup process, which populates their timeline with interesting content from teams, coaches, players and soccer media personalities. Instantly, Twitter will be useful and fun for those users.

If the experiment works, a version of it could be rolled out to all new users: As long as a user indicates at the beginning what they're interested in, Twitter can give them an instantly cool timeline. In the past, Twitter users had to build their own timelines - an often laborious, fiddly process.

Twitter is also doing some email marketing to users who have not been on the platform recently in hopes of tempting them back into the fold.

The point here is that Costolo has both internal (product) and external (marketing) levers he can pull to change the user growth pattern.

This is good news for Costolo.

But it also means that if those efforts don't work, Wall Street will be breathing down his neck again in about six months, and Costolo won't be able to point to an executive (i.e. Rowghani) who distracted his mission by selling $12.5 million in stock as the share price was going down.

Disclosure: The author owns Twitter stock.