How Twitter’s Business Model Is Just Like Broadcast TV — Only Worse

More dependent on ads than even the old media giants.

In its IPO filing, Twitter describes itself as a “global platform for public self-expression and conversation in real time.” Casually, it is referred to as a microblogging service or an internet social-messaging network. Given its business model of promoted tweets, some have said it is an advertising agency in disguise.

But none of those descriptions is entirely accurate. What Twitter really is, from a business-model perspective, is a broadcast television network. Same goes for Facebook. It’s a shame YouTube has dibs on the “Broadcast Yourself” tagline because it actually lends itself better to one of these two social networks.

Think about it: Nearly all of Twitter’s business relies on selling advertising around content supplied by others. That’s exactly how a broadcast television network functions, airing shows created and produced by outside studios and selling commercial time around them.

And that’s the main problem Twitter will confront when it sets out to pitch itself to investors on its IPO roadshow in three weeks: The company generates all but 15% of its money from the single revenue stream of advertising. According to its S-1, 85% of Twitter’s $317 million in revenue last year came from advertising. Through the first six months of this year that figure stood at 87%.

Those figures — which mirror how Facebook chiefly derives its revenue — make Twitter more reliant on advertising than CBS, the most ad dependent old media company. About 72% of CBS’ revenue came from advertising in 2007, when the company was at the height of its dependence. Since then, that number has fallen precipitously, coming in at 57% in this year’s second quarter.

Yet CBS’ stock price has been trading at all-time highs over the last year, touching $56.29 in mid-afternoon trading Friday. Why? Well, because it has been able to develop new revenue streams that have helped decrease its dependence on advertising while also increasing its bottom line. International expansion, retransmission fees (which are fees television distributors pay to air CBS’ signal), and selling streaming rights to its shows have all helped CBS post record results recently — for this year’s second quarter the company earned $476 million on revenue of $3.7 billion.

Investors love multiple revenue streams precisely because if one collapses there are others left to support the business. To further the television analogy, the reason LinkedIn has outperformed Facebook as a public company is because its business is more like a cable network to Facebook’s broadcast. LinkedIn derives revenue from three streams — advertising, subscriptions, and recruiting tools — while the overwhelming majority of Facebook’s revenue, 88% to be exact, comes from the lone stream of advertising. Small wonder then that since going public, LinkedIn shares have gained about 163% and now trade at around $244, while Facebook’s stock has only gained about 28% and now trades at around $50.

Table of U.S. Total Media Ad Spending. emarketer.com / Via emarketer.com

Twitter, like Facebook, needs advertising to survive. The “risk factors” section of its IPO filing is lousy with warnings about how the loss of advertising could harm or adversely impact its business.

There is good news for Twitter in that advertising dollars are increasingly moving away from traditional media and toward digital media, particularly social networks and mobile. According to an August report from eMarketer, digital media will gain the biggest share of U.S. advertising dollars over the next five years, growing from roughly 25% this year to 31.1% by 2017. Digital media is expected to collect $42.3 billion in advertising dollars this year, rising to $61.4 billion by 2017, according to eMarketer’s estimates.

Mobile advertising is growing faster than digital as a whole. While eMarketer projects only $8.5 billion in mobile advertising dollars this year, by 2017 that figure is expected to swell to $31.1 billion. That trend line is great for Twitter since about 75% of its users accessing the service on a mobile device.

Overall, television still reigns as the advertising dollar champion, estimated to generate $66.4 billion this year and rising to $75.3 billion by 2017. Not coincidentally, among digital formats, video advertising ranks as the fastest-growing segment. According to eMarketer, digital video advertising is projected to grow 42% over last year, though the raw number of $4.1 billion is still very small. By 2017, year-over-year growth will slow to just 13% but the raw number will more than double to $9.2 billion.

When looked at through that lens, it makes sense that Twitter is trying to position itself as the second screen to television. (The word “television” appears 42 times in Twitter’s IPO filing.) If people are engaging with Twitter while they are watching TV, then it naturally follows that brands that are spending ad dollars on television will divert at least some money to Twitter in an attempt to follow eyeballs as they move from screen to screen. It also explains why Twitter is buying up social analytics companies like Bluefin Labs and Trendrr. Since Twitter is seemingly handcuffed from diversifying into new revenue streams, what it is trying to do is amplify its value to brands from an advertising perspective.

Indeed, under Twitter’s Amplify program, the company has struck deals with television networks like A+E and The Weather Channel to promote shows by tweeting clips and sports leagues such as the NFL to tweet out game highlights. The deals call for the company and the content owner to share ad revenue.

And while Twitter isn’t likely to start producing its own content, it will certainly look to strike more deals along these lines. In fact, according to a report in AllThingsD, Twitter’s redesign for Apple’s iOS 7 is aimed at making it a “more visual experience,” with photos and videos just showing up in users’ streams.

Implicit in these corporate maneuvers is the notion that video programming will be a big part of Twitter’s future, with ads sold around it — kind of like a broadcast television network.

Check out more articles on BuzzFeed.com!

Facebook Conversations
          
    More News
    Now Buzzing