Why Twitter's firehose of user data won't be its revenue salvation

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The share price of Twitter stock closed last Friday at $59, more than double its opening price when the company went public last month, and about 25 times the value of the company’s 2014 projected earnings, according to Bloomberg

Analysts and investors are bullish on Twitter’s prospects. They’re feeling the “tailwinds.” Seeing the “upside.” 

Investors are getting excited because they believe Twitter is cozying up to the advertising community. According to conventional wisdom, Twitter is taking a more liberal approach to how it shares user data with advertisers—and opening new opportunities in targeted advertising—based on the granular information that can be mined from individual tweets. The business proposition sounds great on paper, but Twitter’s tight control over user data, its fledgling advertising platform, and its limited reach may put a damper on the company’s earnings potential. 

Updated mobile apps

Despite their short length, our tweets say a lot about ourselves and our preferences to advertisers.

Warming up to advertisers

The market’s optimism seems to stem from Twitter’s December 5 announcement of a program called Tailored Audiences, which allows advertisers to place ads based on your personal product preferences in your mobile Twitter feed. In a nutshell, advertisers can look at your Web browsing habits and then work with Twitter to match their own browser-based data with the data Twitter is already collecting about you. So, for example, if you spent last week running Web searches for tennis shoes, you might very well see a Nike ad show up in your Android’s Twitter stream.

Sounds like a positive step in Twitter’s quest for profitability, right? Indeed, like Google and Facebook, Twitter will depend on advertising for profitability. And as Twitter’s stock price has risen, the investment community has lauded the company’s new welcoming attitude toward advertising.

“We’re seeing that there’s a lot they can do with targeting and retargeting for advertisers,” Susquehanna Financial Group analyst Brian Nowak told Bloomberg last week. 

To similar effect is this analysis from research firm Zacks.com: “We believe that these new mobile products will boost customer engagement and drive user base, which will fetch more advertising revenues, going forward.” 

And here’s a guy who draws an explicit connection between Twitter’s overtures and traditional targeted advertising approaches: “Twitter is actually becoming more of a Web platform,” Topeka Capital analyst Victor Anthony told CNBC. “You see a strong ecosystem developing around Twitter with users, advertisers, and platform partners.”  

Warmth has its limits

In the past, Twitter has been very protective of the user data it has collected, and has sharply restricted how it can be used. The Tailored Audiences program is saying all the right things to signal a new way of thinking on the subject; but according to Web advertising executives who work closely with Twitter, the company is far from the advertising bonanza investors may be envisioning, and Twitter is likely to impose some hard limits on advertisers in the future.

“It’s just not targetable data,” said one of the executives, speaking on condition of anonymity. “Twitter is turning all their data inward so that it’s used only for their own advertising.”

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Twitter’s new Tailored Audiences initiative allows advertisers to direct targeted ads at us on Twitter based on our browsing history.

Today, Twitter provides advertisers with a rigid, conservative system of aiming ads (that is, promoted tweets) within Twitter streams at broadly defined groups of users. The new Tailored Audiences product is a way of using slightly different data to target ads—but again, only on the Twitter mobile app. 

What advertisers really want is the ability to use Twitter’s user data for ad targeting in the greater media environment, outside the realm of narrow mobile Twitter feeds.

And therein lies Twitter’s core monetization dilemma: If it has to build serious revenue on the back of its own advertising platform, the road to success could be rough, indeed. Twitter doesn’t have the broad demographic user appeal of Facebook. Nor does it have an institutional history in ad sales and development.

It clearly does have the capital and the motivation to figure out advertising, but its advertising infrastructure is immature relative to Google’s and Facebook’s. (I reached out to Twitter for comment, but received no response from the company by press time.)

Controlling the data ecosystem

The interactive advertising execs I spoke with believe Twitter’s new Tailored Audiences program is a positive step for both Twitter and advertisers. But they also say that most of Twitter’s potential value to advertisers remains unrealized, and is likely to remain so unless the company becomes more flexible in the way it lets advertisers use tweet data.  

Twitter has a well-deserved reputation for being cautious and inflexible in its dealings with advertisers. “Twitter saw long ago that an ecosystem would emerge around the data, and they are being very thoughtful about who gets access to the data and how they use it,” says Patrick Morrissey, marketing VP at social data broker DataSift.

That approach has been a positive one for users who recoil at excessive advertising, but now the stakes have changed. 

Twitter has begun to focus on placing ads on mobile devices that are triggered by location.

Will Twitter ever be mainstream?

Today advertiser see Facebook as a far more valuable partner than Twitter, my interactive ad agency sources say. Twitter’s problem, they say, is its limited reach. Unquestionably Twitter is a popular service, but it has only a fourth of the unique monthly visitors that Facebook does. What’s more, despite its popularity among the tech- and media-savvy, Twitter is not nearly as mainstream as Facebook.

Twitter knows this, and is constantly tweaking its product to make it more accessible and valuable to everyday users. Users now find it easier to locate relevant people to follow, and easier to keep up with Twitter conversations. But compared to Facebook’s grandma-simple user interface and chummy friendliness, Twitter in many ways still feels like a resort designed for the technological and cultural elite.

Advertisers want mainstream. They want volume—so they can advertise more mass-produced, commercial products to precisely the type of people who buy those particular goods. Twitter is still a young company, and whether it can gain Facebook-size audiences remains to be seen.

In light of that fact, and considering Twitter’s insular approach to data and advertising, investors should be cautiously optimistic about the company. And we consumers, I suppose, should be glad that the things we say on Twitter aren’t (yet) coming back to haunt us in the form of banner ads flashing up at us from our phone, tablets, and laptops.

Top photo credit: Anthony Quintano (Flickr)

This story, "Why Twitter's firehose of user data won't be its revenue salvation" was originally published by TechHive.

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