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Pundits, start your engines. The chattering classes have been thrown into a frenzy since Twitter announced its initial public offering on Thursday through its own service, and the question that follows the obvious one – whether investors should jump in – is, what can we discern from the timing of the IPO? Three factors seem to have guided the timing of its market debut:
There's a lot of hot money sloshing around in the markets. Even with the Fed's tapering threat nipping at financiers' heels, equities remain an attractive place to be, promising better returns than many other asset classes. That's set to change if the pace of tapering picks up as we peer further into 2014, but in the meantime, a long-awaited IPO like Twitter will likely snare a hefty price in the open market. Business Insider pegged its potential market cap at $20-billion (U.S.), which is a massive premium on the estimated 2014 earnings of $1.2-billion – about 17 times. That's a nice return for Twitter's existing investors; the company is believed to have raised around $1-billion to date. If they wait until safer assets start throwing off attractive yields, interest would likely be still fervid, but relatively muted by comparison.
Twitter needs cash to stay at the top of the social media heap. With more than 200 million users but less than $1-billion in revenue (a requirement for the special program the company used in order to avoid disclosing about the IPO more fully), Twitter is nearly ubiquitous, and arguably at its most vulnerable to competitive threats. Being the big man on social media's fractious campus means that your every misstep is subject to obsessive scrutiny, as well as others trying to steal your market position. Fighting them off, or buying them, takes the kind of war chest that few private tech companies have. Twitter wisely purchased Vine in October of 2012 well before micro-videos began taking off, and recently acquired MoPub, a firm whose technology should enable them to compete in the real-time market for mobile ads. Facebook is currently challenging Google's long-held advertising supremacy in that sphere, – and Twitter is barely a player, though it needs to be. And if bigger, better-funded interlopers begin coveting the microblogging space, Twitter will need deep pockets.
When generating profits becomes the focus, the Twitter user experience will change – and it might not be popular. No one knows exactly how Twitter will be able to generate the kind of revenue needed to justify the expected market valuation, but the odds that it will be able to ramp up its earnings without big and potentially alienating changes to its service are practically nil – if it were that easy, they'd have done it already. Yet as we've seen with Facebook's privacy-policy follies from 2011 onwards, making the wrong move, especially while moving toward monetizing a free-to-use product, will at best create a firestorm of negative publicity, and at worst, cost you users and momentum. (Not making any changes at all isn't an option, either, as MySpace's cautionary tale reminds us.) The bottom line is that for a small company with a critical mass of users, not much cash and terrifyingly aggressive competitors, the choice between focusing on user experience and revenue is a painful one: Although Twitter can never ignore the latter concern, its growth depends even more on the former. When it comes to developing the business, Twitter's interests will be firmly aligned with its shareholders.
The window for Twitter to establish a dominant position in the online advertising space is closing with every day that Facebook and Google (and AOL and Yahoo, among other, smaller fish) battle it out in the trenches. In lieu of a unique, heretofore-unheard-of plan to generate heaps of cash from social media, Twitter simply has no choice but to jump into advertising with both feet. Now we'll see if investors have the stomach to follow them.
Dave Morris is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Dave on Twitter at @morrisdave.