How Twitter Makes Money: advertising and data Licensing

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Twitter (TWTR), the social media company founded barely 14 years ago, is now ubiquitous via its posts – called tweets – on the Internet and all forms of media. It’s best known for news-breaking tweets from politicians and celebrities, but it provides a platform for millions of users to publish their thoughts, interact, share content, and read breaking news. The platform itself is free to use for individuals and businesses alike. Once a user has created an account, they can post messages (“tweets”) of up to 280 characters and up to 2,400 times per day, which are automatically distributed to followers in a feed that is constantly refreshed. Twitter divides its revenue into two categories: the sale of advertising services, which constitutes the large majority of the company’s revenue, as well as data licensing and other services. Twitter’s major competitors include other social media companies like Facebook, Inc. (FB) and Alphabet, Inc. (GOOG).

Key Takeaways

  • Twitter is a social media company providing a platform for users to interact in real time.
  • The company generated the vast majority of its revenue through advertising services in 2018.
  • The company faces significant backlash from regulators and users regarding troll accounts, spam, and misinformation campaigns.

Twitter’s Financials

In the fiscal year 2018, Twitter generated $1.2 billion of net income, up dramatically from a net loss of $0.1 billion in 2017. This is based on $3.0 billion in revenue in 2018.

In the first three quarters of 2019, Twitter exceeded total revenue for the analogous period in 2018, generating revenue of $2.5 billion as compared with $2.1 billion a year prior. However, Q3 2019 saw a marked decrease YOY in net income over Q3 2018, with the company reporting $0.04 billion as compared with $0.8 billion a year prior. Much of this is attributable to an income tax benefit of $0.7 billion in Q3 2018.

Twitter’s Business Segments

Twitter has a single operating segment and reporting structure. However, in its financial reporting the company does separate its revenue into two categories: Advertising Services, and Data Licensing and Other.

Advertising Services

Advertising makes up about $2.6 billion, or roughly 87%, of Twitter’s revenue. The segment’s revenue rose 24.0% increase year-over-year (YOY). Twitter generates most of its advertising revenue by selling promoted products, including promoted tweets, promoted accounts, and promoted trends, to advertisers. The company creates tailored advertising opportunities by using an algorithm to make sure promoted products make it into the right users’ timelines, “Who to Follow” lists or at the top of the list of trending topics for an entire day in a particular country or globally. Advertisers also have the option of paying for in-stream video ads delivered to a targeted audience or sponsoring video content from publishing partners. While $2.5 billion of the $2.6 billion in revenue from advertising services in 2018 was generated through Twitter’s owned and operated platform, a small portion of the advertising products Twitter sells are also placed on third-party publishers’ websites, applications and other offerings.

Data Licensing and Other

About 13% of Twitter’s revenue in fiscal year 2018 was from data licensing and other sources. Twitter sells subscriptions to public data beyond its public API to companies and developers looking to “access, search and analyze historical and real-time data” on the platform. Data is sold in two levels of access – premium and enterprise. The “other sources” includes service fees Twitter collects from users of its mobile ad exchange, MoPub.

Although at $0.42 billion in revenue, data licensing represents a much smaller portion of Twitter’s total revenue for 2018 as compared with advertising services, this category grew by 27.5% YOY, somewhat faster than advertising services revenue.

Twitter’s Recent Developments

In Q3 2019, Twitter announced that its monetizable Daily Active Usage (mDAU), a critical measure of the reach of the company’s revenue-generating features, grew to 145 million, up 17% YOY. Operating income for the quarter was $44 million, a reflection of lower-than-expected revenue. These figures are especially critical for the company at a time when it is facing immense pressure to control the health of the conversations taking place on its platform. In response to these concerns, Twitter has launched author-moderated replies in the U.S. and other select regions. The company has also increased its ability to identify and remove tweets which violate its rules and policies.

Source: Investopedia

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