Elon’s dilemma

When he purchased Twitter via a consortium of investors, Elon Musk acquired a company that primarily makes money by selling brand advertising. Brand advertising revenue is akin to a participation trophy for a social media platform: the opportunity presented by servicing direct response advertising spend is considerably greater. Brand advertisers purchase scale, but direct response advertisers purchase outcomes (like purchases), and those outcomes can only be delivered through targeting and measurement tools. Direct reponse advertising tools rely on some form of feedback loop from advertisers that allows the platform to understand when an ad interaction leads to a purchase, as I describe in this piece. Twitter’s global ARPU (which I calculate as revenue divided by its mDAU metric, or monetizable DAU) was $4.96 in Q2 of 2022, the last quarter for which it reported results. Meta’s global ARPU was $9.82 in the same quarter, or nearly double.

Relative to Meta, Twitter monetizes fairly poorly. But relative to other brand-centric advertising platforms, Twitter actually monetizes rather well: in Q2 2022, Snap delivered ARPU of $3.20 and Pinterest delivered ARPU of $1.54. Note that Twitter’s DAU in Q2, at 237.8MM (mDAU), was considerably lower than Snap’s at 347MM. Pinterest doesn’t report DAU, but its MAU for Q2 2022 was 433MM.

Given that ARPU is normalized for audience size, one explanation for the step change in ARPU from the three brand-centric platforms to Meta is that Meta’s platform offers more targeting and measurement tools to advertisers, which unlocks better unit economics for direct response advertisers and attracts more of them to the platform. While Meta often touts the size of its advertiser base — more than 10 million companies advertise with Meta, the majority of which are SMBs — Twitter revealed at an analyst event in 2020 that 85% of its ad revenue is contributed from brands.

Note that, while Twitter’s ad revenue is dominated by brand spend, the company has expended effort on delivering more tools to entice direct response ad spend to the platform. A relatively recent blog post published by Twitter’s ads team outlines the progress it has made in delivering targeting and measurement features to advertisers through a Twitter Pixel, a Conversions API, and in-app events targeting functionality. This is all necessary infrastructure in supporting direct response advertising spend, but it’s also mostly table stakes at this point, and some of it (such as the Twitter pixel) has been rendered obsolete by Apple’s App Tracking Transparency (ATT) privacy policy. It’s also worth noting that Meta, then Facebook, introduced its conversions pixel in 2013.

This context helps to frame the dilemma in which Elon Musk and his lieutenants at Twitter find themselves:

  • Twitter’s efforts at building the tools to support scaled direct response advertising spend are critical to growing the company’s ARPU and overall advertising revenue. Twitter’s suite of tools for this purpose lag significantly behind the largest direct response digital advertising channels, such as Meta and Google;
  • Twitter’s advertising revenue is currently overly reliant on brand spend, which is fickle and sensitive to brand safety optics. A number of large advertising agencies have already paused spend on Twitter.

Twitter must simultaneously cater to brand advertisers while it materializes a much stronger and more productive direct response advertising platform in order to execute a pivot. Musk’s freewheeling style of communicating on Twitter may jeopordize the former, and the significant round of layoffs rumored to be undertaken this coming Friday may jeopordize the latter.

Musk’s proposed $8 per month subscription product potentially makes against this backdrop: if “verification” is made available to the entirety of Twitter’s mDAU and not just currently-verified users, then the subscription product can be used to address any expected short-term decreases in brand advertising revenue as the company makes progress against its direct response tools. If Twitter were to lose 10% of its advertising revenue, it needs only to convert roughly 2% of its mDAU to subscribers in order to recover that revenue with a verification product.

Photo by Akshar Dave? on Unsplash