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It’s fast, global, engaged and influential – so why isn’t Twitter flying?

How many tech companies are saddled with the problem of enjoying global fame but struggling with lacklustre performance? Not Facebook, which revealed in its results that it has nearly 1.5 billion users logging in each month around the world. Twitter, however, is an example where participation is lagging behind reputation.

The company built around text-message-length “tweets” announced in its own quarterly results last week that it has 304 million monthly active users (MAUs), who logged in at least once a month in the past quarter. That figure was up only 0.7% from the previous quarter, while the figure for MAUs in the US stayed stubbornly at 65 million.

Yet it is Twitter that is so often cited in news stories, TV coverage and even TV adverts, as established media businesses scramble to generate engagement with a tech-savvy mass of viewers, readers and listeners. Twitter is seen as the easy way to do that: anyone can join, anyone can contact anyone else who’s on it, and it’s free. You can “like” a company on Facebook, and write comments on its page, yet it’s Twitter that is generally treated as the immediate, switched-on source.

So why is Twitter struggling financially? Last week the two companies’ results showed their widely divergent fortunes. Facebook’s second-quarter revenue hit $4bn (£2.6bn), up 39% year-on-year, with operating income of $1.3bn, down 8%. Twitter, by contrast, had revenues of $502m – up 61% from last year – but an operating loss of $131m. Facebook is gigantic, growing fast and profitable. Twitter is smaller, growing faster, but loss-making.

What the results also showed is that most of Facebook’s growth is coming from mobile users and adverts. That is precisely the space that Twitter – born in 2006 with the idea of taking the “status message” from the desktop to the mobile phone – should be dominating.

Just as concerning is the performance of privately held Snapchat, popular with teens for its rapidly self-deleting photos and messages. It does not publish user numbers, but analysts estimate that it has more daily users than Twitter. It is also courting advertisers with increasing success – beginning with publishers on its “Discover” channel, which shows feeds from news organisations.

The Snapchat logo
Social messaging service Snapchat, which is privately owned, is thought by some experts to have more users than Twitter. Photograph: Lionel Bonaventure/AFP/Getty Images

For Rick Summer, an analyst at investment research firm Morningstar, the outlook for Twitter is not good; user growth trends, he says, “are not encouraging”. He adds: “Advertisers have many alternative outlets to reach a larger user base on a targeted and near-to-real-time basis, including Facebook, Instagram and Pinterest. We are concerned that Twitter may not represent a mass-market social media platform.”

He has cut his forecast for the shares’ longer term value from $36 to $27, compared with Twitter’s valuation of $45.10 in 2013 when it began trading on the New York Stock Exchange. Summer’s forecast for total users by 2019 has also been trimmed, from 739 million to just 491 million. Even though that is a compound growth rate of 12%, it is not the rocketing rise that people expect from internet companies.

Part of the problem, as Summer says, is that there are so many competing social networks. But some also perceive a loss of focus, which might be ascribed to the changes going on inside the boardroom. In June, Twitter’s chief executive Dick Costolo, appointed in October 2010 after the forced resignation of co-founder Evan Williams, stepped aside amid mounting pressure from Wall Street, investors and the rest of the board.

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Meanwhile, in the past year around 450 people have left the company, according to a study by the Financial Times. That constitutes about 12% of the firm, and includes senior figures. The loss of existing staff is always a worry in a San Francisco tech company: rivals will offer signing bonuses and options on stock that are likely to grow in value, rather than enduring Twitter’s stock-market rollercoaster.

Jack Dorsey, another Twitter co-founder, took over as “interim CEO”, a job that resonates in Silicon Valley because it is the title that Steve Jobs held for a while after he returned to a wounded Apple in 1996. There he ejected the incumbent, shook the company back into shape and eventually took on the title of full CEO.

Investors, and 38-year-old Dorsey, would like a repeat. Like Jobs, Dorsey was Twitter’s founding chief executive, but was forced out by Williams in 2008. He returned as executive chairman in 2011, appointed by Costolo, and then took back the reins, so he is not taking over from a standing start. But the board has yet to give him the full-time role.

Jack Dorsey
Jack Dorsey: founder and now saviour? Photograph: Mike Blake/Reuters

Thus Dorsey’s appearance on the results conference call last week was in effect an audition for the job. “We need to do three things. One, we need to ensure a more disciplined execution. Two, we need to simplify our services to deliver Twitter’s value faster. And three, we need to better communicate our value,” he said briskly.

He also acknowledged that mismatch between fame and usage. “People all over the world know of the power of Twitter, but it’s not clear why they should harness it themselves. An answer to ‘why Twitter?’ must be articulated clearly and felt everywhere throughout the service.”

Wall Street liked his attitude, including an undertone of impatience which Costolo lacked. Although it is not obvious to people who are already signed up, joining Twitter is a confusing experience. The blank screen demands you create a username – with your first and second choice probably taken already – and then suggests people for you to “follow”. And then the questions flood in. What does “following” mean? Do you have to be a “friend” like on Facebook?How do you find people? What is the right number of people to follow? What is the right number to be followed by? Why are some people so rude? Fixing that first-time experience is crucial, because there are reckoned to be more than 600 million abandoned Twitter accounts.

Jan Dawson, who runs the tech research firm Jackdaw, thinks Dorsey has done a good job so far. “I think what [Wall Street analysts] are reacting to is the true state of Twitter, versus the overly rosy version Dick Costolo had been trying to sell the Street for the past few quarters.” But he notes that user growth still lags, and that “engagement” – how often people who have created an account use it – remains far lower than Facebook’s.

But Twitter’s advertising revenue is growing strongly, as shown by the 61% rise in quarterly revenue, and Dawson expects another good performance in the next quarter. Nonetheless, Summer thinks a deeper problem remains, underlined by Twitter surveys that show 95% awareness of the company among the public, but an adoption rate of just 30%. “The more likely conclusion is that users (correctly) perceive that Twitter provides little value to them.”

According to Dorsey last week, using Twitter should be “as easy as looking out of your window”. He added: “You should expect Twitter to show you what’s most meaningful in the world, to live it first, before anyone else and straight from the source. And you should expect Twitter to keep you informed and updated throughout your day.”

But as Anthony Noto, the chief financial officer, admitted on the earnings call: “The number one reason users don’t use Twitter is because they don’t understand why to use Twitter. They don’t understand the value.” if only resolving that problem was as straightforward as a 140-character tweet.

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