Wall Street ponders whether to fly the coop on Twitter

Experts debate what's next for the struggling social network after it warns investors not to expect substantial user growth anytime soon.

Terry Collins Staff Reporter, CNET News
Terry writes about social networking giants and legal issues in Silicon Valley for CNET News. He joined CNET News from the Associated Press, where he spent the six years covering major breaking news in the San Francisco Bay Area. Before the AP, Terry worked at the Star Tribune in Minneapolis and the Kansas City Star. Terry's a native of Chicago.
Terry Collins
3 min read

Does Twitter have a viable future?

Interim CEO Jack Dorsey and Chief Financial Officer Anthony Noto took turns Tuesday delivering a brutal assessment that investors did not want to hear: The company is still failing to attract enough new users to grow.

Twitter hasn't effectively explained why people of all stripes should use it, Dorsey said. Noto was more blunt, saying the company is not expecting to see "sustained meaningful growth" for a long time.

"Simply said, the product remains too difficult to use," Noto said during Twitter's second-quarter conference call with analysts. "This is both a product issue and a marketing issue."

Investors heard the message and sent the company's stock down 14 percent Wednesday. Shares had already plunged more than 11 percent in after-hours trading Tuesday.

Noto's frank comments helped to explain Twitter's snail-like growth rate for monthly active users, or MAUs. The microblogging site said Tuesday that MAUs in the second quarter grew 3 percent, to 316 million, from the previous quarter. That puts Twitter in a tough bind as it competes for advertiser dollars against the massive user base of Facebook and Snapchat. More than 1.5 billion users are active on Facebook every month. And more than 100 million users in the coveted teen-to-young-adult age group use Snapchat to send about 700 million Snaps and view about 2 billion videos every day. Advertisers naturally want to reach the biggest audiences they possibly can and, so far, that's not on Twitter.

Twitter needs to make its service easier to understand and less intimidating, say analysts.

"My mother still doesn't understand what it means to 'hashtag' something, but she does understand what it mean to 'like' something," Ben Schachter, an analyst with the Macquarie Group, wrote in a note to investors Wednesday. "It still isn't a mass market product and it is unclear if it ever will be."

Twitter has been trying. It's taken steps to make the site more inviting and easier to use, curbing abusive and threatening messages and highlighting tweets in Google search results. Its Project Lightning, expected to kick in this fall, could help attract a more mainstream audience by highlighting photos and videos of live, trending events.

Both Dorsey and Noto told analysts Tuesday that Twitter will begin a marketing campaign as soon as the fourth quarter to help gain new users. That might be easier said than done, said analysts.

"We've long thought the product is far too difficult to use, and the fundamental design and anonymity of the platform would lead to a significant signal-to-noise ratio problem that only gets worse the longer and more active a person is on the platform," Wells Fargo analyst Peter Stabler wrote investors Wednesday. It's "no easy fix" to retain users and attract new ones, he said.

SunTrust analyst Robert Peck described himself as cautiously optimistic about Twitter's long-term chances. "However, in the short term, given recent challenges, we think investors have labeled Twitter a 'prove it' story," he wrote. "Execution on product rollouts and their ultimate effectiveness in growing MAUs /engagement will remain paramount."

Schachter agrees.

"The fact is Twitter has potential, but it is going to have to prove that it can fix its user growth and engagement problems," he said. "The new CEO will have low expectations, but will still need to show progress."

Dorsey, who became interim head of the microblogging site on July 1, did not provide an update on Twitter's CEO search. Despite that, Twitter's employees and others had some fun with the topic after reading Recode's article "Adam Bain Is Soooo Nice" about the company's CEO search. That morphed into the trending hashtag, #AdamBainIsSoNice, with tweets from around the world. One tweet posed Bain next to an animated caricature of the rapper Snoop Dogg and another said Bain is so nice he makes the Grumpy Cat smile.

Bain is considered the top internal candidate for the CEO job.

Update, 3 p.m. PT: Adds comments from analysts and information on #AdamBainIsSoNice.