Twitter Needs to Monetize: Here's How

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Twitter is one of the most highly anticipated IPOs this year. Despite not being profitable yet, the company is looking for a $10.9 billion initial valuation, roughly 9.5 times its 2014 sales.

According to Bloomberg, Twitter's initial valuation is 27% cheaper than Facebook's 12.9 times sales multiple for 2014, and 29% lower than LinkedIn . However, despite being a huge force on the Internet with more than 200 million active users, Twitter isn't profitable, reporting a loss of $0.53 per share in the first half of 2013. Considering Twitter's user growth is also decelerating, how does the company plan to keep growing while at the same time monetizing its user base to justify a rich valuation? 

Source: TechCrunch

Plenty of unexplored opportunities
Twitter's valuation looks modest compared to Facebook's 2012 IPO. It seems the company is learning from Facebook's mistakes, as management is aware of the fact that Zuckerberg's social network lost more than half of its initial value within six months of its IPO, although it has rebounded nicely.

However, regardless of the initial value the company may be looking for, the most important issue for a potential investor is Twitter's future growth prospects. According to the latest filings, Twitter had 231 million monthly users in the three months through September, and revenue per user, or RPU, was roughly $0.73, half of Facebook's $1.60 average RPU. These numbers are not enough for the company to generate consistent profits and cash flow. Twitter needs to grow its user base, and also improve its monetization.

It's important to keep in mind that user growth is slowing. Twitter faces a big challenge here because its addressable population isn't as big as Facebook's or LinkedIn's. While most Internet users are interested in either having their resume online using LinkedIn, or keeping their friends close using Facebook, few are interested in sharing status updates about details of their everyday life using Twitter. Those who do are already registered Twitter users.

To fix this problem, Twitter will need to be more aggressive about user acquisition. It could try to establish partnerships with Facebook or LinkedIn to integrate its services, promote easy common registration, or cross-site promotions. In terms of monetization, the company could learn a lot from LinkedIn, which is the best monetized social network, and diversify its revenue.

However, perhaps the most important task is to promote the merits of advertising on Twitter in international markets. Although 77% of Twitter's users are international, they only generate 25% of the company's revenue.

Twitter's main source of revenue comes from promoted tweets and trends, which, according to BusinessInsider, are difficult to identify in the current iterations of the mobile app. Since 75% of Twitter's users are mobile, this issue needs to be corrected.

More importantly, the company could experiment with new monetization schemes. For example, the introduction of micropayments -- the ability to easily send money to followers or followed users -- or a virtual wallet are promising ideas that could convert a portion of tweets into attractive cash flows.

In China, the concept of a virtual wallet has been used successfully by SINA's microblogging platform, Weibo, where users can register a virtual wallet that is linked to their Weibo accounts. Members can use their Weibo Wallets to buy goods online and pay utilities. More importantly, Weibo Wallet makes it easy for users to buy articles featured as promotions or trending topics on Weibo.

Coca-Cola tested the power of Weibo Wallet earlier this year when it launched its "nickname bottle" marketing campaign. Users were offered the opportunity to have their names printed on Coca-Cola bottles, and they only needed to pay delivery fees using Weibo Wallet. In the fourth day of the promotion, 300 bottles sold in a single minute. Twitter could get some inspiration from this model and set up its own micropayments feature.

Just like LinkedIn sells data to the human resources departments of several corporations, Twitter could also start selling data to marketing departments. Finally, a "premium" user feature could also be explored. Corporations or celebrities might be interested in a rich control panel inside the Twitter account to monitor the effect of tweets and examine detailed analytics. A mix of a premium model, advertising, and data solutions is precisely what made LinkedIn the best monetized social network.

What a Fool believes
Twitter's initial valuation is modest compared to Facebook or LinkedIn. Furthermore, Twitter has plenty of unexplored opportunities to keep growing its user base and improve its monetization. However, a better understanding of Twitter's real growth prospects and competitive advantages can only be made after a couple of quarters of market observation.

Social media for the long term
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The article Twitter Needs to Monetize: Here's How originally appeared on

Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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