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Twitter and the price of a cup of coffee

With decelerating user growth, Twitter might want to consider paid subscriptions. If just 3 percent of users paid the price of one cup of coffee per month, the company could net more than $250 million annually.

Twitter's San Francisco headquarters.

As Twitter's IPO nears, the company is following in the footsteps of Google and Facebook as they approached their high-profile public debuts. Over the last several months, it's been mounting a vigorous and relentless effort to become a precision-engineered and profitable ad machine.

Last month, Twitter acquired MoPub for $350 million to automate the buying and selling of mobile ads. It launched scheduled tweets for marketers using its ad products so they can preplan and time their messages to exact moments. With Twitter Amplify, the company is cutting deals with the NFL, ESPN, CBS (the parent company of CNET), and Comcast to introduce video programming and ads into the tweet stream.

Amplify lets the TV content owners offer near real-time video clips from shows, such as football game replays or a summary clip from "60 Minutes," with brief ads on Twitter. In addition, Twitter is reportedly working on a system to use its data to target and sell ads on external Web sites and others' mobile apps.

Twitter's aggressive investment in advertising technology, sales, and services is showing steady growth, but it may not be enough to make Wall Street happy.

Twitter S-1

In a Securities and Exchange Commission filing this week, Twitter disclosed that third-quarter revenue was up a healthy 104 percent from the same period a year ago, contributing to a total of $422.2 million in revenue through the first nine months of 2013. Twitter advertising and licensing revenue is on track to far exceed the $500 million mark this year, up from $317 million in 2012.

However, the company is still bleeding money, unlike Google and Facebook when they went public. Twitter lost $133.8 million in the first nine months of 2013, an increase of 89 percent from a year ago, in part driven by heavy R&D spending.

Facebook's average revenue per user. Facebook

At some point the bleeding will cease. At least that's the plan. The company needs a lot more users and revenue per user to compare well with Facebook, which is of course Twitter's closest competitor. In its second quarter of this year, Facebook earned an average of $1.41 in advertising revenue per monthly active user worldwide. That's not a lot, until you consider that Facebook has more than 1 billion users.

Twitter doesn't track revenue per active monthly user. Instead, the company uses advertising revenue per timeline view to measure the value of user engagement. Timeline views per monthly active user are calculated by dividing the total timeline views for the period by the registered average monthly active users for a period. The advertising revenue metric is specifically defined as advertising revenue per 1,000 timeline views during a period.

In its third quarter, ending September 30, 2013, Twitter's global advertising revenue per timeline view was 97 cents, according to the company's amended S-1 filing. That was a 49 percent increase from the same quarter a year ago and up from 80 cents the previous quarter. Advertising revenue per timeline view from US users was $2.58, and only 36 cents in the rest of the world.

That's a nice growth curve, but probably about half of what Facebook earns on advertising per monthly active user. In addition, Twitter monthly active user growth has been decelerating, up 6.1 percent in the third quarter of 2013 compared with 6.8 percent in the second quarter and 10.2 percent in the first quarter.

Perhaps Twitter needs more than ads and licensing to reach its revenue goals, and it could make some loyal users more satisfied in the process. Not every user wants to be spammed with advertising. I would guess that there are many millions of Twitter users who would be willing and able to pay a very modest subscription fee to remove advertising noise from their news feed.

More than five years ago, I proposed that a young Twitter charge $5 per month, the price of one of Starbuck's elaborate coffee drinks, to get a reliable version of the service, which was suffering from frequent outages. The price has gone down. Given the current quarterly revenue per monthly active US users, just $3 per month, a large iced coffee, would more than quadruple the revenue per US user.


Of course, Twitter would have to deal with advertisers upset that they don't have access to all (currently 232 million) active monthly users. And convincing users to pay from their own pockets has proven to be challenging for those committed to subscription services.

But Twitter would only need a small fraction of users to go the subscription route to see serious money. If 3 percent of users were willing to give Twitter the price of one cup of coffee each month for a year, or 10 cents per day, the company could net more than $250 million. Then Twitter would have even more money to spend on perfecting its advertising model for the rest of its users.

In its S-1 filing the voice of Twitter says: "By developing a fundamentally new way for people to create, distribute and discover content, we have democratized content creation and distribution, enabling any voice to echo around the world instantly and unfiltered."

For those who have a little pocket money, Twitter can echo just as far and without what some users perceive as noisy interruptions.