Walt Laws-MacDonald | Show Me The Money!
#Hashtag #Twitter #IPO
Published: Monday, October 21, 2013
Updated: Monday, October 21, 2013 02:10
Twitter, the 140-character social media site founded just seven years ago, filed for an initial public offering (IPO) last month. The company made the announcement with a tweet — no hashtag though — and has gradually released more information about its inner workings in the past few weeks.
If you have any questions about how an IPO works, feel free to look up my columns on the Facebook IPO. As an added bonus, you’d get to read what an overly-excited, slightly younger me sounds like!
To simplify, Twitter is offering interest in the company — in the form of publicly traded shares — for money, which it can use to advance both the Twitter brand and business. The company hopes to raise $1 billion from the offering, or about 10 percent of its $10 billion valuation — the other 90 percent remain in the hands of earlier, private investors. As soon as shares start trading, those investors will also be able to sell their shares.
The obvious comparison to make — as I have already done — is to the Facebook IPO, in May of 2012. Facebook raised over $18 billion, but had a valuation of nearly $100 billion. Mistakes made by investors and the exchange (the New York-based NASDAQ) plagued the IPO — mistakes Twitter is taking very obvious steps to avoid. Though their financial statements remain confidential, Twitter chose to list on the New York Stock Exchange, the NASDAQ’s primary competitor.
To the average Jumbo, Facebook and Twitter serve similar purposes. Both are social media sites that boast millions of users, and both have seen dramatic growth in the past few years. But on the business side — because everything is a business! — Twitter and Facebook have had very different experiences.
While Facebook began as a site for “friends” to share photos and experiences, Twitter was — and still is — a way for people to spread information quickly and succinctly. Twitter users range from Pope Francis (@pontifex) to god himself (@KanyeWest), and each has millions of followers — though Kanye holds a sizable lead in this category.
Brands and companies leapt at the ability to spread information to millions of people — the hashtag has been used on everything from ad campaigns, to TV news crawls, to sporting events, to #WhatWould2ChainzSay.
But Twitter failed to capitalize on — or monetize — its huge user-base and influence until much more recently. The company has never turned a profit, even though it makes 89 percent of its revenue from advertising. Analysts say that Twitter’s rapidly changing nature has made it difficult for the company to nail down advertising demographics. “Promoted tweets” — which appear in a user’s timeline whether or not they follow the promoter — feel forced into the interface, and have proven only marginally effective.
Advertisers say that Twitter needs even more users for its ads to make an impact on consumers. Just 22 percent of Americans use Twitter; 73 percent check Facebook at least once a month.
Despite the issues the business of Twitter has faced, its IPO comes with the usual amount of hype. Shares of Tweeter Home Entertainment — a bankrupt consumer electronics group listed as TWTR — skyrocketed 1500 percent in one day as investors mistook the company for the still-unlisted Twitter.
From a technical standpoint, Twitter should avoid all the snafus that the Facebook IPO experienced. But Twitter has not proven itself as an advertising giant in the way that Facebook had. A website cannot live on banner ads alone.
I’ll leave you with one of my favorite tweets — @WaltLawsMacD if you were wondering: I salute you, bearded guy watching Cars 2 in Tisch. Does it relate to the column? No. Welcome to Twitter.
Walt Laws-MacDonald is a junior majoring in quantitative economics. He can be reached at Walt.Laws_MacDonald@tufts.edu.