Twitter’s business model ‘is not broken’

Twitter’s operating model still has a “bright long-term future” says a strategy expert, despite the micro-blogging site posting full-year net losses of $645 million this week.

Twitter’s stock took a tumble after it reported disappointing 2013 results off the back of a $511 million net loss in the fourth quarter.

But the company – which has yet to register a profit – hailed its 116 per cent year-on-year revenue increase in Q4 as its “strongest financial quarter to date”.

Investors in Twitter – which floated last November – were concerned at ballooning costs, but the company’s heavy spend on R&D was a good move that would eventually pay off, said Sotirios Paroutis, an associate professor of strategic management at Warwick Business School.

“Most of Twitter’s R&D spending goes towards personnel-related expenses, and in the long term they have a number of products still to be fully utilised,” explained Paroutis. “There is Twitter Amplify, which allows advertisers to send out a promoted tweet to coincide with ads on TV, and in December it introduced its Tailored Audiences, where a company can send a tweet to people who have been searching for terms on the internet related to its product.

“It will take time for advertisers to learn how to utilise fully these new tools, but once they do, Twitter will be in a much better position,” he continued. “Already their advertising revenue per 1,000 timeline views has increased to $1.49 in Q4, up 76 per cent from last year, showing that this is an area they are starting to improve on.”

Paroutis added that Twitter’s 24 per cent drop in share price following its results was partly because the company had become over-valued, but was also affected by Facebook’s “extraordinary” quarterly performance, revealed just days earlier.

“The losses do not mean Twitter’s business model does not work,” said Paroutis. “Facebook reported very good results, so the market is comparing Twitter to that. Facebook was profitable for three years before it entered the market, while Twitter was in a different situation.

“In some respects Twitter had to prove its business model worked and going to IPO helped put its business case forward, but now it is facing the scrutiny of the investors and the market,” he explained. “Once it has sorted out its R&D and acquisitions costs the firm will be in a better position.”

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