You Do You: Twitter acts like a lazy incumbent, while Facebook stays paranoid
Oh, Wall Street.
Yesterday, Facebook announced a blow out third quarter. Facebook’s profits of $1.09 per share before certain costs was up from 57 cents a year ago, and easily beat analysts’ estimates of 97 cents per share. Revenues increased 56% from a year ago to north of $7 billion, also beating expectations.
Not only is Facebook crushing it, but it is crushing it in the growth markets everyone is chasing: Mobile, video, and messaging. And it is doing it at the expense of others. Together with Google, the two giants represented all of the online ad growth in the world. Take out those two, and the ad market actually shrunk.
And Facebook is still adding new users. In fact, it added as many new users in a year as Twitter has….period. One billion people now use Facebook exclusively on mobile. It’s three-quarters of the way to hitting two billion users overall. That’s more than half the people who have access to the Web worldwide. So much for the law of large numbers.
As usual, journalists were losing their minds trying to live-Tweet the conference call and come up with new ways to describe an awesome Facebook quarter.
And then, Facebook’s CFO David Wehner said that 2017 would be an “aggressive investment” year and investors sent Facebook shares down some 8% in after hours trading. He also said “We expect to see ad revenue growth rates come down meaningfully,” because of the increasing limit to the number of ads it can put in front of users. Today, it’s down another 6%.
That’s life as a public company. For all the people who keep wondering why Wall Street doesn’t see more value in Twitter: Take a look at what happened to Facebook last night. Even when you are Facebook, you signal a potential slowing of outrageous growth in the coming year and the stock goes down. At these multiples, growth is all that matters.
But don’t think that it wasn’t 100% intentional. For one thing, it’s not the first time Facebook has tried to reset expectations with investors.
Facebook-- as opposed to the entire unicorn industry sans potentially Snapchat-- has learned Wall Street, is not afraid of the Wall Street game, and has excelled under the pressure. The worry when Facebook went public was that mobile revenues were too weak. Just to keep making the point: Yesterday Facebook announced mobile revenues made up 84% of ad revenues up from 78% a year ago. That’s some $22 billion in mobile ad revenues this year.
And say what you want about Wall Street’s unrealistic expectations: They were right. Look at this chart and imagine if Facebook hadn’t gotten serious about mobile.
The world doesn’t need another article comparing Facebook to Twitter, but here you go. The obvious contrast is that Facebook is just a way larger platform. Twitter execs have told me multiple times over the years that their biggest mistake was trying to build the company in the Facebook era-- a comp that almost no one could live up to. A comp that, perhaps, set that initial sky-high valuation that Twitter has struggled to live up to ever since. A valuation that now has Twitter in a state where it can’t sell because it’s too expensive; and yet if it declines enough that the stock price falls precipitously, it may still not be able to sell because it will look that much more broken.
But it isn’t just a difference in scale that landed the two companies in these situations. There are some fundamental differences between the way the companies are run, that were there in the earliest days and have only become more pronounced now.
How to lower expectations effectively. Note how Facebook does it: It’s going to be an investment year. Our ad load is high. Wall Street may get sulky, but Facebook telegraphs that it is in control of slowing its growth, making a conscious decision to plan for the future. And it sets an expectation well before the bad news may hit.
Let’s look at how Jack Dorsey sought to reset expectations just after he took over as CEO. From Kevin Kelleher’s piece at the time:
Twitter's new CEO began talking. Clad in a gray hoodie and streaming the investor call over Periscope, Jack Dorsey began delivering the kind of straight talk that can assuage the concerns held by board members and venture investors of a private company.
Citing nascent initiatives like Instant Timeline, Dorsey said they "have not yet had meaningful impact on growing our audience or participation. This is unacceptable and we’re not happy about it." He then slammed Twitter managers (inadvisable on a day when two of them jumped ship): “We haven’t done a great job at aligning the entire company around our total audience strategy. We’re in the process of implementing a stronger discipline of direct ownership and accountability.”
It was such an example of what-you-don’t-do in a shareholder conference call that it was widely viewed as Dorsey intentionally tanking the stock in order to set investors up for the great Dorsey comeback regime. Only problem? He didn’t really have a solution for the company in mind. Moments launched and fizzled. Other small iterations have followed. In a year with the Olympics, an election and an NFL deal, Twitter still hasn’t grown. This is why investors have lost impatience with his leadership.
Facebook resets expectations knowing it still has several major mobile properties it hasn’t started to fully monetize. Dorsey seems to have done it out of ego and hope. When you tank the stock, best to do it with a plan.
How you do acquisitions. Facebook has made acquisitions look easy. In the 15 years I’ve reported on Silicon Valley I’ve seen the promises of a deal come true a handful of times. PayPal, YouTube. Not many more. But Facebook has a clear track record since Instagram of “overpaying” for strong growing assets that could one day pose a threat to Facebook, and giving them total autonomy while at the same time leveraging Facebook’s cash resources and monetization engine when the time is right.
The key to the strategy has been going for huge assets. The key has been being aggressive, paying whatever price needed to be paid to get them. And the key is being willing for these assets to “cannibalize” the core product. Teens don’t use Facebook anymore? Fine, they use Instagram.
Twitter has had a nearly opposite strategy. Today, Twitter is in such a state of weakness as a buyer, it’s not fair to compare the two. But let’s look back to everyone’s pre-IPO days, when it was clear Facebook was bigger, but Facebook certainly wasn’t what it is now.
Twitter tried to buy Instagram too. And it offered a larger slice of the company, and Kevin Systrom had a strong relationship with Dorsey. It wasn’t crazy back then to imagine him picking Twitter. And yet, Dorsey wasn’t near aggressive enough in lobbying him or near aggressive enough in price.
Plenty of investors in all three companies have talked about how pivotal that deal was. How Facebook was losing relevance with teens, was never big with celebrities, and had initially failed at mobile by betting against apps. Instagram also tapped into Facebook’s core: Sharing photos.
Facebook got a lot from Instagram. But it’s impossible to ignore what Instagram got from Facebook. It has north of 500 million users, has begun to monetize them, and has become a sandbox for competing with Snapchat. Instagram was a sensation before the acquisition, sure, but it was a company made up of a handful of people who hadn’t yet thought about revenues. Without Facebook, Instagram could have become another stalled Twitter or Pinterest.
Compare that to what just transpired with Vine and Twitter. It’s not that Twitter didn’t have great product instincts. Vine absolutely represented where mobile video was going. As a cultural phenomenon, Vine was up there with YouTube and Instagram in terms of creating stars off its platform. It was in some ways a predecessor to Snapchat, and well ahead of Facebook Live.
And yet, Twitter fundamentally failed to use its size, resources, or any of its assets to make Vine stronger. The story of an intervention that Vine stars held to shake Twitter into saving the platform spoke volumes about the cluelessness and lack of priority Twitter put on Vine. From the write up of the meeting in Mic.Tech:
The stars had a proposal: If Vine would pay all 18 of them $1.2 million each, roll out several product changes and open up a more direct line of communication, everyone in the room would agree to produce 12 pieces of monthly original content for the app, or three vines per week.
If Vine agreed, they could theoretically generate billions of views and boost engagement on a starving app. If they said no, all the top stars on the platform would walk…
...One ask was for Vine to deal with harassment. Several viners said the community had taken a negative turn and their comments had turned into buckets of abuse.
Abuse is something that Vine's parent company, Twitter, has been heavily criticized for not addressing. Several viners said abuse played a part in their decision to leave...
...The Vine stars also begged for things like the ability to add links to Vine captions, a better recommendation page and a more functional suite of editing tools...
...They presented it to Vine, and the company seemed tentatively receptive. Representatives told the viners they would take the contract back to Twitter and loop back with them. BuzzFeed later reported on the meeting and said Twitter had at least considered payment...
..However, after an hour of discussion during that last meeting at 1600 Vine Street, it was clear the deal was not going to go through.
"At that point, we knew Vine was dead," said one viner at the meeting.
Bear in mind: It’s not like Twitter was crushing it at that point and couldn’t be bothered with tiny ol’ Vine. At this very moment, Twitter was claiming that video was core to its future. It was the classic case of a larger company acquiring a smaller company and at once making it less nimble and failing to deliver on the promise of greater resources to help grow it. Coincidentally, that’s the same thing that Twitter co-founder Evan Williams complained happened when he sold Blogger to Google. That experience was a big reason he didn’t want to sell Twitter early on.
The best acquisitions are the ones where you can’t really tell in hindsight whether the company should have stayed independent or not. PayPal, for instance, was greatly helped by being part of eBay, which was the first major use case for its product. YouTube was helped greatly by the cash and stability of Google. Both faced regulatory and legal threats that could crush or at least distract a startup. I’d argue Instagram was clearly better off for selling.
Laser focus. As the Vine story shows, Twitter is a far smaller company than Facebook, and yet it can’t move nearly as quickly. Some of that has to do with Facebook’s focus and determination. Zuckerberg famously sets an aggressive goal for himself every year, and the company approaches life with the same ruthless quest for restless self-improvement.
The reason it can goes back to the founding of both companies. Zuckerberg has always exerted outsized control over Facebook, going back to the days when he simply refused to sell it for $1 billion to Yahoo and had the control to make that decision unilaterally.
Twitter, on the other hand, has had three different CEOs-- four if you count each of Dorsey’s tenures-- and each of those CEOs has had distinct management styles and their own tribes within the company. At times members of the board wouldn’t speak or make eye contact, according to insiders. And we all have reports on what goes on at the board level, because other members leak like a sieve.
Even recently, there are reports of clashes between Williams who is a larger shareholder and wants to sell, and Dorsey who wants to stay independent. Forget shareholders and management, the co-founders of the company have rarely been on the same page throughout Twitter’s history.
There has always been so much dysfunction to untangle before anything could get done at Twitter. At PandoLand last year, Dick Costolo complained about the mess of employees’ secondary share rights set up before his time, and the impact it had on the company. “We just spent a stupid amount of time managing that craziness,” he said. And that’s just one example.
In the same interview, Dick Costolo spoke wistfully about how nice it must have been for Zuckerberg to call for a vote when he wanted to do something, raise his own hand, and say “motion carries.” No CEO of Twitter ever could. Plenty of people have trashed Costolo’s tenure at Twitter, and we’ve been big critics of Dorsey’s. But like Yahoo, the company may have been set up in such a dysfunctional way that the job could make anyone look bad.
While Twitter ran a better IPO, Facebook has been a far better public company. That’s mostly because it had the product and scale it does. But it’s also because of the decisive, early moves it’s made. Twitter has been a company of inaction most of its public life-- even Dorsey has made few substantive moves since returning. The company stubbornly refuses to deal with abuse and harassment on the site, no matter how many high profile celebrities quit. Facebook by contrast has been a company of rapid action.
Oddly enough it’s Twitter that has looked like the incumbent who didn’t need to do anything to grow, and Facebook has looked like the paranoid upstart.