Twitter economics

October 16, 2013

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As its mid-November IPO approaches, Twitter is losing money at an accelerating pace. The company’s amended filings show that last quarter it approximately doubled revenues to $168.6 million compared to a year ago, while its net loss more than tripled to $64.6 million. Fortune’s Stephen Gandel digs into the new numbers, and how Twitter changed the way it’s booking revenue:

Twitter derives most of its revenue from advertising. Most of the deals it strikes with advertisers are not fixed upfront… Twitter says that in most instances it only counts the revenue from a deal after the services have been delivered and the company knows how much it will get paid. But it says in some more complicated deals, it resorts to estimating what it might get paid.

Tax experts, Gandel reports, say that Twitter wouldn’t have changed its language on this topic without the SEC raising an eyebrow. Twitter is also looking to diversify its sources of revenue by mining its user data to help sell ads on other sites, the FT reports. (Twitter does not disclose how effective its own ads are). Selling ads across the web would put them in direct competition with Google’s Adsense, which dominates online ad buying. Facebook’s ad sales, in contrast, are limited to Facebook alone.

Losing money at such a growing rate, especially relative to revenue, diverges from models set by companies like Facebook, Zygna, or LinkedIn. Each of those companies, the WSJ points out, were each profitable before going public. The WSJ quotes analyst James Gellert characterizing Twitter as “more like a venture growth company”. Investors, Gellert says, are betting on Twitter’s “ability to achieve things in the future, rather than a historical demonstration of that ability”.

The company is spending aggressively, Vindu Goel and Michael de la Merced report, on research and development, along with employee stock and pay — paying, in other words, to create new products, and keep and acquire talent. Investors will hope those products will mean higher profits. “In the right hands,” David Carr writes, “Twitter can be a magical wealth-creation machine powered mostly by hot air”. — Ben Walsh

On to today’s links:

Right On
The government shutdown is ending. Here’s how – Neil Irwin
The moral of the debacle: Open-source everything – Paul Ford

The push for transparency in CEO pay has pushed compensation even higher – James Surowiecki

Long Reads
Why Americans are no longer moving, and how it’s holding the economy back – Timothy Noah

A jailhouse visit with “the Dread Pirate Roberts,” the alleged kingpin of Silk Road – San Francisco magazine

“Economists effectively put unfair economic outcomes in the same box as externalities like pollution” – Yves Smith

BofA’s Q3 in a nutshell: Fewer bad loans, but elsewhere things got mostly worse – Peter Rudegeair

S&P was minutes away from downgrading America to selective default – Newseek 
What Fitch has to say about the US debt rating (hint: it’s not good) – Fitch

JP Morgan
JP Morgan will pay $100 million to the CFTC in its last Whale settlement – Bloomberg

The gambler’s fallacy and market corrections – Carl Richards

Glenn Greenwald is heading to a media startup funded by Pierre Omidyar – Reuters
My next adventure in journalism – Pierre Omidyar

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