Cantillon: Twitter’s first flight may not be smooth

Excitement over the upcoming Twitter flotation is such that some investors mistook the worthless stock of former electronics retailer Tweeter for the social media firm this week, sending its shares up more than 1,000 per cent.

The real home of the 140 character message is valued at an estimated $10 billion, but the little blue bird revealed in papers filed with US regulators the firm that it made a loss of $69 million in the first six months of this year on revenues of $254 million. Many analysts are confident, however, that revenues are set to increase significantly as more advertising comes on stream.

About 85 per cent of Twitter’s revenue comes from advertising on the site. Its other revenue stream comes from selling its public data, known as “firehose”, which companies can use to analyse consumer trends and sentiment towards brands.

The tricky issue for Twitter is in how it increases its ad revenue while avoiding disruption to the user experience. Rivals can also undermine the business model by disabling integration with the social media site. In its filings the firm identifies this risk, giving the example of how after Facebook bought Instagram, its photo integration was disabled with Twitter. Instagram photos are no longer viewable within Tweets and users are redirected to Instagram to view photos through a link within a Tweet.

The other issue is scale. From egg to IPO, Twitter has recorded remarkable growth over just seven years. It has 218 million monthly active users. Yet Facebook had 800 million at the time of its IPO last year, and now tops 1 billion users. The Facebook comparison is relevant, for despite its remarkable growth and panegyric projections from some analysts at the time, the social media giant stumbled during its early days on the stock market. Even with all the hype surrounding this IPO, there is no guarantee that Twitter’s first flight on the markets will be free of turbulence.