THIS AUTUMN MARKS the start of an experiment that is critical to the future of Twitter, the social messaging platform launched in 2006 by entrepreneurs Evan Williams, Jack Dorsey, Noah Glass and Biz Stone. It is the beginning of a new sporting season which Twitter’s owners hope will help address the challenges of expanding its user base and accelerating revenue growth in that difficult second decade for a digital start-up.
Twitter has been one of the great success stories in social media, but over the last two years its rate of growth has slowed to the point where it is close to plateauing. Meanwhile, established social media rivals like Facebook continue their inexorable rise, while new kids on the block like Snapchat are enjoying explosive growth.
Analysts’ reaction to Twitter’s second quarter 2016 results ranged from caution to outright gloom (see below – bottom of article). Revenues of $602m (€547m) were below market expectations and its 313 million monthly active user figure was only three per cent up year on year and just one per cent up on the first quarter of 2016. The company’s share price dropped 10 per cent in the hours after the results were announced.
Workable business model
Live streaming of major events, including sport, is the answer that Twitter has come up with and perhaps this is not surprising. The company’s chief financial officer since July 2014, Anthony Noto, spent three years, from 2007 to 2010, in the same role at American football’s NFL.
— Twitter (@twitter) September 9, 2016
Twitter had already dabbled in sport before Noto’s arrival. In September 2013 it struck a deal with the NFL to carry in-game clips and postmatch highlights from the league’s Thursday Night Football games. The deal was a straight revenue share, with Morgan Stanley estimating gross advertising revenues of $20m around the content in 2015.
This summer the platform went on a spending spree for a combination of non-exclusive live rights, including NFL games, and exclusive programming around live matches (see below). This time the deals included upfront guarantees for some of the rights-holders.
Twitter’s chief operating officer, Adam Bain, outlined the concept on the Q2 earnings call with analysts by saying: “Live sports, live premium content is a way to communicate something that’s very familiar to people, something we know they want based on their interest in Twitter and to deliver that in an instant, not just with that live video, but all of the great conversation and tweets that are attached to it, and expose those that haven’t used Twitter to that great content and those that are – a complete solution.”
There are lots of reasons why, in theory, it ought to work. As Gareth Capon, founder of Grabyo, the video-sharing platform, points out: “Twitter is still the place for breaking news. If a terror threat emerges or something major happens in sport, Twitter is still the place people go first, because it is real-time, conversational and an open platform. Sport fits very well in that context. It is predominantly watched live and it’s talked about a lot. As such, live streaming makes sense conceptually. You are joining the content and the conversations in one place.”
He says that where user growth is slowing, a platform needs assets which enable it to “attract a new audience or drive greater revenue” from the existing user base. “Clearly, TV advertising is one of those areas where the numbers are good, it is well established and there are proper markets around it,” he says.
The initial reports around the NFL deal suggested a workable business model, according to Capon. “The early noises about what they are doing around the NFL look promising,” he says. “Twitter could generate $30-$50m of advertising on a $10m rights deal. If you can do that across a number of properties, without driving too much inflation in rights acquisition costs, it starts to make sense.”
Twitter paid between $10m and $13m to live stream 10 Thursday Night Football games. According to US media sources, it was seeking $50m in gross advertising revenue from three packages: Platinum, at $8m, for up to four advertisers, including two 30-second spots per game and category exclusivity; Gold, at $5m, for up to six advertisers, with one 30-second spot per game; and Silver, $2m, with customised content yet to be identified. Morgan Stanley said that Twitter would have to discount those prices by at least 30 per cent to sell out the inventory and would roll the existing in-match clip inventory into the packages, but still expected incremental revenues of over $13m on the deal.
First and second screen
Other industry operators also see potential in the venture. Michael Litman, the chief executive of Burst Insights, which measures the impact of short videos on social media platforms, said that Twitter’s trialling of live streams at Wimbledon this summer pointed to the future value.
“It was a very interesting point to what the future could look like for major events, becoming a real-time TV channel with social commentary baked in,” he said. “This is second-screen action in its purest form, coming together on one single screen. Twitter overnight killed any second-screen complementary apps by being the first and the second screen.”
— Wimbledon (@Wimbledon) 10 July 2016
Litman believes the platform could become much more aggressive in the sports-rights markets if the initial deals are successful. “Twitter is still the platform to go to for in-the-moment action, so their three-year deal with Sky Sports to provide live highlights around the Premier League games is a no-brainer,” he says. “Even though they may be friends now, could it be too much of a stretch to think that Twitter over time is seen on the same playing field as the broadcasters themselves? If Twitter’s pockets are deep enough, they could be the outright rights-holder themselves. I believe this could be a potentially huge renaissance period for Twitter to breathe new life into the social network and give it the kick-start it so very evidently needs.”
Even if the platform enjoys a decent return on its sports investments in the short term, it will face a number of mid-term hurdles. In the first instance, if rights-holders see that it is making substantial margins on their content, they will inevitably raise the asking price next time around. The availability of attractive rights, especially with the kind of exclusivity that would really drive take-up, will also remain a challenge. The big US leagues all have long-term deals for their linear broadcast rights with the major television networks. The digital rights for most top international sport, outside the US leagues, are currently sold on a market-by-market basis, so securing content that can be used on a global basis is not easy and having to geo-block content in multiple markets can create a negative experience for users.
For William Field, founder of the Prospero consultancy, sport alone cannot be the answer to Twitter’s problems, but is a “sensible attempt to bring in some of the new users it desperately needs at a scale of investment that, though high for a social platform, is still modest given its overall cost base.”
He argues that the nature of Twitter makes it an “interesting new window for sport”, not just for live streaming, but also for near-live and older clips, which can be editorialised by content owners in an engaging way. But he cautions that Twitter needs to think carefully about how it builds relationships with rights-holders.
“It needs to focus on genuine partnerships with rights-owners so that the user data generated can be used for mutual benefit,” he says. “This might help keep its content acquisition costs manageable and make it a ‘no-brainer’ question for sports content owners as to whether to put their footage onto Twitter.”
To call the season make or break for Twitter may be overly dramatic. The company still has a market capitalisation of $13bn and an estimated $2bn in cash. But if live streaming of sport and other major events is not the answer to the platform’s growth challenges, it is hard to see right now what is.
TWITTER Q RESULTS: WHAT THE ANALYSTS SAID….
In regard to the NFL deal, please note that all expense was contemplated in our FY’16 guidance given on our Q4’15 earnings call.
— TwitterIR (@TwitterIR) April 5, 2016
BTIG: Twitter has struggled to maintain, let alone grow, engagement in the US. Unless you tweet, reply or retweet…Twitter functions more as a news reader than a social network (an RSS reader on steroids). Twitter has gone through a steady stream of product heads, all of whom have failed to re-imagine Twitter.
Morgan Stanley: Our latest data and consistent commentary around the inability to break into the ‘mass market’ make us wary of TWTR [Twitter’s] addressable audience, and the question marks around the company’s ability to drive future user growth appear unlikely to go away in the near term.
Cowen: Twitter’s user growth is decelerating and we expect MAUs [monthly active users] to grow only modestly thru 2021. While we expect Twitter to ramp monetization over time, we expect the significant advertising ARPU [average revenue per user] gap with Facebook to persist longer term.
Wedbush: Until Twitter is focused on attracting new users, driving increased use by its existing users, and demonstrating its value proposition to people who don’t use the service, we expect it to grow very slowly. We think that its service is too complicated and difficult to use for the average internet user despite multiple changes.
TWITTER’S SPORTS-RIGHTS DEALS
WIMBLEDON: The 2016 Championships in June became Twitter’s first ever live streaming of a sporting event. The deal was agreed as a test run ahead of the NFL coverage. It did not include match coverage.
NFL: One-season deal, 2016-17, to live-stream 10 Thursday Night Football games.
US COLLEGE SPORT: Live streaming of over 150 events (excluding football) during the 2016-17 academic year. Partnership with Campus Insiders and the ACC Digital Network to live-stream over 300 events (including football) from the West Coast Conference, the Mountain West Conference and the Patriot League.
NBA: From the 2016-2017 season, the NBA will produce two new programmes exclusively for Twitter, including a weekly pre-game show.
MLB and NHL: Live streaming of one out-of-market game from each league every week from the 2016-17 season.
PREMIER LEAGUE: Through a deal with Sky Sports, Twitter will show goals and highlights in real time in the UK and Ireland from the 2016-17 season.
ESPORTS: Live streaming of two semi-finals from the Eleague’s Counter Strike: Global Offensive tournament in Atlanta.