Here's The Underlying Problem That Will Move Twitter's Stock On Tuesday's Earnings Call
Last quarter, CEO Dick Costolo revealed that user growth was stagnant and user engagement - how frequently people use the service - was actually declining. Although the company's financial results were robust, the stock tanked 17% immediately on the news.
Twitter shares began the year at $69. It now sits at a humbling $40 and change, having lost 42% of its value.
So when Costolo reveals his new numbers, all eyes will be on those user metrics, and the stock is likely to react on them and not the financials.
Twitter's problem is that the company does not appear to be in control of its fate. In an interview with the Wall Street Journal, COO Ali Rowghani admitted that despite the fact that it has about quarter of a billion users - who skew heavily toward pr people and media types - most people don't really know what Twitter is for:
... Mr. Rowghani said the company could do a better job of explaining what users can get out of Twitter. "The challenge with that is it's somewhat abstract to explain and we've never actually systematically as a company made an effort to explain it, and instead what's happened is the world has kind of defined what Twitter is for us," he said.
In other words, a communications platform heavily favored by people in the communications industry has somehow failed to communicate to people what the heck it is for.
Worse, Twitter has suffered through a string of disastrous headlines and negative PR. NBCUniversal head of research Alan Wurtzel derided Twitter as useless for TV ratings even though the company has touted itself as a social media enhancement to TV. "I am saying the emperor wears no clothes," he told The Financial Times. "It is what it is. These are the numbers."
Before that, Priceline CEO Darren Huston told Bloomberg that Twitter was useless for advertisers, too. "We haven't found anything there," he said, even though he has a $1.8 billion online ad budget.
And there is a huge question mark about the vast number of people - 741 million at the last count - who try Twitter and then abandon it.
In the short-term, Wall Street will want to know whether Twitter has made itself easier to use in the last few months. Twitter is notoriously confusing, even for experienced users. It can sometimes take three or four clicks to unravel a conversation into a readable format, or to get through to the "card" on which a photo sits. Any user-experience improvements will likely translate into better engagement.
But even if you assume that Rowghani and Costolo have this licked, there's a deeper, underlying issue that Twitter will have to face: Whether it has the power to "force" people to use it. Truly powerful social media companies manage to generate a sort of benevolent coercion. For instance, you probably use LinkedIn because you know employers look through it for future recruits. Only an idiot would try to get a new job these days without a LinkedIn account. And Facebook keeps growing because eventually even people who say they don't want to be on Facebook miss seeing all the photos their friends and family are posting there. (That's one reason the average age of Facebook users keeps getting older, and why teens are increasingly irrelevant on Facebook: your grandparents want to be on there to see all their friends' baby photos.)
It is not at all clear that Twitter has this power over ordinary users. Sure, there is a certain level of power in a few professions. Woe betide the journalist who isn't on Twitter. But there doesn't yet seem to be a need for ordinary people - and especially the older generations that social media need to reach the true level of "scale" that advertisers want to see - to join (or stay on) Twitter.