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Rough sailing ahead for Twitter after CEO's departure

Experts weigh in on what's next for the struggling microblogging service after CEO Dick Costolo's exit.

Twitter's soon-to-be-former CEO says he had thought about stepping down since late last year.
Twitter's soon-to-be-former CEO says he had thought about stepping down since late last year. Andrew Burton/Getty Images

Can Twitter finally give Wall Street what it wants now that its embattled CEO Dick Costolo is stepping aside after months of disappointing investors?

While tech's other heavy hitters, including Facebook -- with nearly a billion more users than Twitter -- and Google, constantly tinker to improve their products, Twitter 's momentum has stalled, some analysts believe.

"They have a lot of work to do. They've lost their way in retaining both users and marketers, and that's bad on two fronts," Nate Elliott, an analyst at Forrester, said Friday. "Twitter has been the one big social site not to innovate the user experiences."

Costolo failed to expand Twitter's appeal beyond the hipsters, geeks and news hounds who comprise much of the microblogging site since it went public in 2013. Twitter announced Thursday that chairman and co-founder Jack Dorsey will become interim CEO on July 1, as the company searches for a permanent replacement. Dorsey was Twitter's CEO from 2006 to 2008, when he was ousted.

Costolo will remain on Twitter's board of directors, and Dorsey will continue as chief of Square, the mobile-payments company he also founded. Dorsey said Thursday that, despite what Twitter has accomplished, it still has huge unmet potential. The company reported 302 million monthly active users at the end of the first quarter. That represents a growth rate of 18 percent compared with the year before. Twitter's stock, which has dropped 35 percent since October, barely moved on Friday -- indicating investors are waiting to hear how the company plans to boost sales.

Investors had been pleading for Costolo to step down as the social media giant struggles to deliver sustainable growth and sales. While Wall Street values Twitter at more than $23 billion, the company had just $1.4 billion in revenue last year, missing analysts' projections. Last week, major Twitter investor Chris Sacca said in an 8,500-word blog post that Twitter has so far

Richard Windsor, an analyst at Edison Investment Research, said Costolo bowed to pressure.

"This strongly suggests that a major problem at Twitter is that the market wants to see it move into a new direction so that user growth can resume," Windsor said. "The assumption here is that users are directly tied to revenues and in many ways that is true but focusing on user growth is the wrong way to go for Twitter."

Costolo and Dorsey reiterated Friday on CNBC what they told investors the previous day -- they don't foresee any changes in Twitter's strategies and direction.

"We're focused on our execution, we're focused on getting product out there, we're focused on getting services, and we have the right team in place to do that," Dorsey said. "And I do feel that we can accelerate a bunch of that so people get to see it faster."

Dorsey said that could be seen in products like live-streaming app Periscope. And shortly before news of Costolo's pending departure, Twitter on Thursday announced it would remove the 140-character limit on direct messages.

That change isn't innovation, said Elliott; it's simple product improvement he calls "site hygiene."

"You have Periscope, a live-video streaming service, and Vine, a 6-second video streaming service. That's two slight variations of a single idea in nine years and that's limited in nature," he said.

Even Twitter's Chinese counterpart, Weibo, has introduced more features than Twitter has, Elliott said.

"If you signed up for Twitter on the first day, then slipped into a coma, and woke up today, you'd still be able to recognize it," he said. "Even Facebook since that time has become unrecognizable. It has more misses than hits, but it keeps trying. Twitter doesn't even try.

"I think it has undue faith in its core functionality," he added. "It's a one-trick pony, it needs to find new tricks."

Windsor agrees. He said Edison estimates Twitter users could only spend up to 9 percent of their time on the site because of its limited smartphones features.

In contrast, users could potentially spend up to 61 percent of their time with Google, 71 percent with Microsoft and 73 percent with Yahoo, according to Edison. The more time a user spends on a site, the more money that site is likely to make.

Meanwhile, Saudi Arabian prince and Twitter investor Alwaleed bin Talal told Bloomberg TV Friday he has faith in the microblogging service, which needs to "get more mileage from users." He said the company is a force to be reckoned with and should not return to the private sector.

"Twitter didn't go public to be private again...I'm against that completely," said Tahal who became a Twitter investor in 2011. "I think Twitter should remain public. I think Twitter's good days are yet to come."