Twitter, MS Office, Economic Surplus, and subs

Notes on Twitter's plan to diversify ad's revenue with subs

This week twitter reported abysmal results and then CNN had a post that Twitter’s is considering a subscription model. I’ve never been a Twitter user but know the power users (Musk, Trump, Dorsey himself) and I really think that a subscription model might sound appealing but is hard.

More interestingly I also think Twitter is comparable to MSFT when it comes to pricing/consumer surplus. First let's get started with the article/context:

Twitter (TWTR) is actively exploring additional ways to make money from its users, including by considering a subscription model, CEO Jack Dorsey said Thursday. The move comes as Twitter suffers a sharp decline in its core advertising business.

"You will likely see some tests this year" of various approaches, Dorsey told analysts on an investor call held to discuss the company's second quarter earnings results. Dorsey said he has "a really high bar for when we would ask consumers to pay for aspects of Twitter," but confirmed that the company is seeking to diversify its sources of revenue in what are "very, very early phases of exploring."

Earlier this month, rumors flared about a paid Twitter option after the company posted a job opening focused on building a subscription platform codenamed "Gryphon." Twitter's stock surged at the time, signaling investor appetite for the company to find new revenue streams.

Shares of Twitter rose 4% in early trading Thursday following the earnings results.

Like its rival social networks, Twitter has focused on offering a free service and making money by allowing brands to target ads to its millions of users.

"We want to make sure any new line of revenue is complementary to our advertising business," Dorsey said. "We do think there is a world where subscription is complementary, where commerce is complementary, where helping people manage paywalls ... we think is complementary."

Twitter's growth plans are under close scrutiny as many advertisers pull back due to the pandemic. On Thursday, Twitter reported second-quarter ad revenues of $562 million, a 23% decrease compared to the same quarter a year ago.

The company has also been hit by advertisers participating in an ad boycott of social media, linked to the nationwide racial justice protests. But Twitter executives declined to say how much of an impact the boycott has had on Twitter's business.

Why I think a subscription business might work for Twitter goes back to MS Office. The question to ask was quite simple “How much are you willing to pay for MS Office?”

Remember this was back in the day when Google Sheets/Google Presentations were not very popular and didn’t have a lot of features (and collaboration was not even a well known problem). The answer actually depends on WHAT you’d use it for ..

Imagine you told a student that you need to pay $5k for a boxed version of MS Office. The student would balk. Companies would end up having limited copies of the software on computers and you’d need to book a slot and furiously type the document that you needed (txt edits first! Go notepad!) Given that the price was way lower ($100-200) and free in China (uh well not technically but because of piracy) this wasn’t a problem. Now imagine that you go to the office of a consulting firm and tell them that MS Office would cost them $5k for the boxed version. They would not hesitate for a single second. Ask an excel addict and they’d be ok to pay the $5k. This is consumer surplus or economic surplus. At any specific price the product either generates consumer surplus or producer surplus:

Consumer Surplus or economic surplus is the difference between the price that consumers pay and the price that they are willing to pay. On a supply and demand curve, it is the area between the equilibrium price and the demand curve

From wiki:

Twitter is exactly like that. There are the prolific posters and readers and there are occasional users who get less value from Twitter. Twitter is exactly like MS Office with one huge difference, MSFT was not that concerned about piracy for two reasons:

• Better the user pirate and use MS Office rather than a competitor product or worse build a new product and

• This was the windows world. The more users of MS office that “pirate” and learn the software the more likely they’d continue to use it and in the future actually buy a licensed version of the product.

Twitter is different here obviously. Firstly how likely is a casual user to become serious and pay for Twitter and secondly, Twitter is not a necessary “tool” for work.. For most people that is.

As a side node, I am not sure Facebook can swing a paid sub. Twitter is used for serious business purposes similar to LNKD. Facebook not so much. Commerce, their next foray, also can’t be a gated product. 

Twitter being able to swing a pricing business has a lot of considerations:

Subs all the way?

I am quite skeptical as to what a partly ad based business would look like assuming what Dorsey said above (We want to make sure any new line of revenue is complementary to our advertising business) 

Twitter reported their Q2/20 results recently and they have 186M DAU’s. Topline revenue was $68M (down from $841M) with US v/s INTL being 50% each. This essentially means Twitter’s best outcome for a full year will be ~$3-4B. Let that settle in.

Twitter makes money in two ways today. Ad’s are approximately 85-90% of the revenue and data licensing (the Twitter firehose) accounts for about 10-15% of the revenue. So Twitter will need to earn about $2.7B from a combination of ad’s and the new “subscription” model

Subscription models are hard. Just ask LinkedIn. Furthermore, extracting money from a consumer v/s an enterprise is going to be very hard. What is the user paying for? Will that make sense? How does the experience differ? Is it fair to have a different experience for a “paid” v/s “free” user? How does that limit toxicity? Secondly, just because a user “pays” it doesn’t automatically reduce or remove toxicity. That being said, here are some options to augment revenue:

Charge by post

One option is to charge by the number of times a user posts. Modeling this is beyond the scope of the post but this is likely untenable as a monetization option

Charge by # of followers

This model can work (and is used in a lot of B2B pricing situations where you pay as you use more - Mailchimp as an example, you pay only if you send more email). This could work for Youtube where influencers/content creators are paid by the number of views (or show ads based on the # of views). Unlikely 

Charge by user type

Charge content creators for posting and limit the number of comments a user can make on a daily basis. 

Charge by private message (direct message)

This is the same as LinkedIn Inmail. This again is hard to accomplish. How many paid inMail’s have you sent in the past year? 

Monthly charge?

Sure but you’ll chase away the ad dollars if you don’t have the eyeballs. Not a very feasible option

Type of user charge?

Charge businesses, politicians, business people who can corral their followers in their own public town square? 

For all these options, there is also the question of how much do you charge which I haven’t considered at all. I don’t want to go down this rabbit hole.

Follower count folly

Assume a subs business, how does it impact followers? Would the prolific tweeters leave in favor of another platform where they have more followers not incumbent on paying?

This is why Dorsey said that "a really high bar for when we would ask consumers to pay for aspects of Twitter” and he is right. This change is hard, complicated, has to straddle two competing needs - not killing the ad’s business while building a subs business. Twitter sure has its hands full and I am curious as to the outcome/tests that Twitter plans. Maybe I’ll be a paid subscriber someday. Ok I heard you laugh out loud. 

I’d love to hear from you if you are a regular Twitter user on if you’d be willing to pay for Twitter? How would that look for you? What options did I miss?

Thank you for reading, stay safe, be well!