Twitter Ad’s Scalability Problem
Friday, July 29th, 2011Twitter has announced a new way for the company to make money. (You will recall that previously they had nothing, so actually adding something should be seen as a good sign.) “Promoted tweets,” or Twitter messages that are paid for by companies, will now show up at the top of a user’s feed if that user follows the company who paid for the message. It’s a good way for companies to get their message out to followers, and it’s a relatively non-intrusive form of advertising. Presumably users will be somewhat interested in the content of the ad, given that they have elected to receive promotional material from that company in the first place. Additionally, the ad can be hidden by the user, and each “promoted tweet” will show up just once per user. So, Twitter must be on the rapid road to profitability and living up to their massive valuation, right?
No. (You knew I was going to say that, didn’t you?) Twitter’s new “promoted tweet” ad model has a serious problem: scalability. That is, their ad platform can’t get much bigger if it should become popular. Other industries supported by advertising don’t have this problem. Take, for example, magazines. If they get more ad dollars, they can put more pages in the magazine. Newspapers, they get more companies buying ads, then they also get more space for news content. Even Google can engage in an effort to role out their third-party ad system to more and more websites. There is room to grow in all these ad-supported ventures. But there’s little room for Twitter’s “promoted tweets” to grow.
The problem is that Twitter can’t show too many promotional messages each time a user logs in, or the ads would become annoying, rather than potentially useful or interesting. And Twitter can’t sell too many promotional opportunities to companies before they run out of space. And Twitter may have issues with competing companies. Let’s say a user follows Pepsi and Coca Cola, and both companies pay for their message to appear on top. Who wins out? Which company wins out first? Can one company pay more to keep the other company’s ads from appearing? These types of conflicts of interest also hurt Twitter’s scaling.
It’s reasonable to suggest that any competition and log jam problems can simply be solved by raising prices for the messages. After all, take a look at television. It’s the perfect example of an ad-supported medium that has the same kind of space problem. Television can’t cram more ads into a program without cutting the length of the program; cut the program length too much and no one wants to watch any more. And television does raise the prices on their ad space, a perfect solution for the limited space problem.
But Twitter can’t do this, at least not right now. That’s because Twitter needs to demonstrate to companies that this new ad platform will really work. They need to offer evidence that users are actually engaging with the messages and helping the company make money. Normally, this would be an easy sell; just offer a few companies cheap rates in exchange for sharing data about how successful (or not) the campaign was. But interested companies already have free advertising to all their followers on Twitter. All they are lacking is the primo spot right at the top of the user’s list of recent messages. So Twitter really needs to demonstrate a good ROI for companies, especially if they hope to solve their scale problem by raising prices.
Now, maybe Twitter will find a way to make this work! Maybe they will become the first web company since Google to successfully monetize a product given away for free. But given that each “promoted tweet” can’t hang around forever (remember, they display just once for each user) and given the problem with scaling, you’ll have to pardon me for being skeptical.