Oct 22, 2015 ยท 6 minutes

“TWTR's ad load is...10X higher than FB when adjusted for time spent”

“TWTR mobile eCPMs are ...a 13% premium to FB”

If you fell asleep in November 2013 – when the media was heralding Twitter’s IPO as the “anti-Facebook” in a good way – and woke up today and read those two lines from a just-issued Morgan Stanley research report, you’d smile and say “Good for Twitter! They pulled it off!”

Morgan Stanley did not mean it as a compliment. Instead, those lines form the opening argument of a damning downgrade report that gives Twitter a price target of just $24 – just above its 52-week low of $21.01, well below its 52-week high of $53.48, and decently below where it ended trading yesterday at $29.30 (Down 5%). Twitter’s market cap is below $20 billion, which some of those “anonymous sources” who always call the business press hoped would throw some chum in the water for an acquisition.

Morgan Stanley’s report neatly sums up why that’s not happening: Even at $20 billion, Twitter is an insanely expensive asset, especially since it increasingly looks like a broken one with no obvious answers.

Back to those stats about its ad business. Morgan Stanley made four main points:

      Twitter would have to grow revenue per user at 32% just to reach Wall Street’s 2017 expectations. Said the report, “We struggle to see that happening given TWTR’s already high ad load, failing user engagement, high ad unit pricing, and rising mobile ad competition. Twitter’s ad load is 10x higher than Facebook’s adjusted for time spent. The risk is that that starts to hurt click through rates and advertiser ROI. Or worse, that it further alienates users. Twitter has monetized what it has so well that it could be reaching an “ad load ceiling.” Twitter’s mobile eCPMs are 13% higher than Facebook’s, and marketers Morgan Stanley spoke with are worried about the limited reach. Meantime, competition is rising with monetization efforts fully underway at Instagram, Snapchat, and YouTube. Morgan Stanley isn’t buying Moments as Twitter’s savior. “Visibility into quarterly MAUs can admittedly be murky, but our 3Q MAU tracker reads negatively, as 3 of our 5 data points imply continued tepid growth,” it read. “...It is too early to say


    is a success, and we question whether it may be too late to meaningfully change TWTR consumer perception and behavior.”

These four realities tell a wider story of what went wrong at Twitter and it doesn’t just stretch back the last few years of Twitter’s life as a public company, but all the way back to its beginnings.  

Twitter was obviously a genius idea and the thinking behind it-- Dorsey’s inspiration of automated transportation and courier networks within major cities-- was the stuff Valley legends are made of. (Although in the hands of Travis Kalanick with a much more literal translation that inspiration has become far more valuable…. on paper at least.)

But Dorsey was an inexperienced CEO, and his product genius was complicated by Twitter opening up its API early on and by an inability to scale. Fail Whales everywhere.

At Square, too, a genius idea: Enabling the world to take payments off their phone. Genius design. Genius UI. Transformational. Forced PayPal, Intuit and others to fly into full on copy-cat mode. But a consumer-facing app didn’t work, and Square is on the back foot, losing money from a high-profile Starbucks deal and trying to go public to further its new mission of small business software before the window slams shut.

Say what you will about Dick Costolo. Maybe he wasn’t a product genius. But as the third CEO in four years he was tasked with bringing stability, a business model, and an exit to Twitter – all of which he did so well that now Morgan Stanley is concerned that Twitter’s business growth has outstripped the product, users, and engagement. In a strange Silicon Valley twist, an Internet company is struggling in eyeballs but monetizing too well.

The answer to that remember was Dorsey. When Costolo was named CEO Dorsey returned to be the product guy at Twitter, the first time he believed he could split his roles. So he doesn’t get off easy when people criticize Twitter’s inability to innovate in the Costolo era.

Anyone still bullish on Twitter is relying on Jack Dorsey to show chops he never has, as the CEO of a public or private company, whether running one business or two. Genius initial idea guy. Great sense of design. Inspiring leader, at times. But, so far, not someone who iterates, scales, or is able to turn things around once they are troubled. If Morgan Stanley – and the general sense in the tech world – is correct, Moments isn’t saving the company, the hiring of New York Times editor-at-large Marcus Mabry notwithstanding.

Enter plan B: Developers. Yesterday at an event called Twitter Flight, Dorsey took the stage and addressed developers with an apology and an ask. “Somewhere along the line our relationship with developers got a little complicated,” Dorsey said in his keynote. “We want to apologize for confusion, reset the relationship and make sure we are listening, learning.” He said later, “We need the help of everyone in the room.” The rest of the announcements were very developer or Twitter power-user focused.

Like with Moments, this isn’t a bad move. But – let’s be clear – Twitter has always had an up and down relationship with developers – and a lot of that occurred under Dorsey’s watch. Remember, that infamous “four quadrant” post was sent the last time Dorsey was splitting time at both companies.

One of the amazing things about entrepreneurship is how it can humble you and how you can learn from it. Dorsey may have the chops to be the functional product visionary that he failed to be twice already, and that Twitter has never really had. But it’ll take more than a keynote, an apology and the launch of a product long in development. Twitter is in a hole that is getting deeper, if Morgan Stanley’s stats about an accelerating decline in average time spent per mobile user – some 33% year over year – are accurate. As platforms like Snapchat and Instagram run hard at monetization, even Twitter’s monetization efforts-- the one thing that has gone well-- will come under serious fire, at least when it comes to showing growth. And yet, the stock isn’t falling fast enough for it to be an acquisition target.

But don’t pity Dorsey too much: He lobbied so hard for this job that the board went back on its promise to hire a full time CEO. He’s the one who – purposefully or not – tanked the stock on his first earnings call. And he’s made an art of throwing his predecessor under the bus at every turn. There’s a reason even his fans in the Twitter management team will tell you “Jack looks out for Jack.”

I’ve said it before: The guy whose life sucks is Adam Bain, Twitter’s president of global revenue and partnerships. And as Morgan Stanley’s report makes clear: He’s the one who’s arguably done the best job since Twitter went public. He’s done such a good job that Twitter is charging too much for too many ads, given its size.

How fortunes have changed since Twitter’s early days, when everyone asked how it could ever make money. It makes plenty relative to what it is today. And that’s why it just got a big honking downgrade.