On a seemingly normal day in October, investors of defunct audio retailer Tweeter Entertainment woke up to find that their penny stock had suddenly jumped nearly 700% in value. The company (currently in bankruptcy) had to scramble to figure out the cause.

1. 80 GlobeAsia November 2013
Technology
n a seemingly normal
day in October,
investors of defunct
audio retailer Tweeter
Entertainment woke
up to find that their penny stock
had suddenly jumped nearly 700%
in value. The company (currently in
bankruptcy) had to scramble to figure
out the cause.
Elsewhere, at 8:40 AM on October
10th, owners of the seemingly
unrelated TW Telecom found that
their stock too had skyrocketed in
value from $30 to $300 in a matter of
seconds. The trades made the company
jump from a market cap of $4.4 billion
to $44 billion before NASDAQ stepped
in and halted trading. Were these two
completely unrelated occurrences of
synchronicity?
Apparently not. Twitter’s
impending IPO has investors and tech
watchers all atwitter, chomping at the
bit to get a piece of the pie. Unrelated
stocks even remotely resembling their
planned symbol (TWTR) have been
soaring. Is all this excitement justified?
With Facebook as a cautionary tale,
will Twitter live up to the hype?
Now is a good time
The massive interest in Twitter has
many analysts recalling a time when
the word of the day was Facebook and
everybody thought they were going
to get rich if they just invested early
enough.
That was of course until after the
IPO when the stock took a beating for
several months. Now that Facebook has
recovered to its IPO levels, revisionist
investors have re-branded Facebook
as simply a delayed success. This is an
opportunity for other tech companies
contemplating public offerings, because
moh.defrizal
What does Twitter’s IPO
mean for investors?

2. November 2013 GlobeAsia 81
By Jason Fernandes
investors are more open to seeing tech
IPOs in a positive light.
Another fortuitous series of events
was Twitter’s acquisition of MoPub
and their increasing success in the
mobile ad industry. While Twitter’s ad
delivery system had thus far been fairly
rudimentary compared to the likes of
Google Ads/Facebook, their recent
acquisition is a complete game changer.
MoPub allows Twitter to offer
real-time bidding on advertising not
solely on the Twitter app, but across the
mobile app ecosystem in general. An
area that many social networks have
struggled with monetizing, the mobile
space appears to be one area Twitter
is actually making some inroads. Last
year, Twitter announced that they had
made more ad revenue from their
mobile app then they had from their
desktop offering.
The 2012 passage of the JOBS act
also changes the landscape somewhat.
Twitter is using the new law to give
it latitude to test the waters before it
goes public. The act, which allows
companies with revenues under $1
billion to file for an IPO in secret, does
not require the company to release
its S-1 to the public until three weeks
before the actual IPO.
This was a huge boon for Twitter
because while their final public
document differs little from the secret
SEC version, it allowed the company
to get a better feel for things based on
investor response before actually going
public. The new rules also allowed
Twitter to keep its most treasured
secrets private a little longer, protecting
them in the event that the IPO was
delayed.
Why investors should pay
attention
Potential investors should look at
Twitter very closely before making a
decision. Like many social networks
and other internet-based services, the
strategy for Twitter has always been to
focus on and develop market share first
before looking at modes of revenue
generation. In a public company
however, the paramount goal becomes
revenue generation and keeping
investors happy.
Twitter has been fairly successful at
gaining market share, but not quite as
successful in turning those users into
revenue streams. The company has
managed to grow its user base to 240
million accounts but while it continues
to add users, the rate at which it does
so has slowed down quite a bit. More
importantly, Twitter’s business is less
mature than companies like Facebook
which have been around for some time
and have already successfully dealt with
scaling upwards while maintaining
user engagement.
Twitter will certainly hit the
ground running with just under a $20
billion market cap, but the concern is
that unlike its bigger rivals, Twitter’s
revenues are relatively meager. Even
worse, any potential excitement
that their $254-million revenue
announcement might’ve caused was
immediately tempered by news of
a ballooning net loss totaling $69
million. The loss represented a 40%
increase from the previous year and
could be attributed to Twitter’s recent
accelerated spending.
Twitter’s S-1 filing has also raised
some questions. Most obvious is an
overwhelming silence on exactly
how it makes money. Unlike many
other online services that often use
advertising in conjunction with
subscription fees etc., nearly 90% of
Twitter’s revenue comes from ad sales.
This means that its ad network is
literally the lifeblood of the company,
yet the S-1 is surprisingly silent on
details.
The document does not discuss
Twitter’s sales force, its advertisers,
its ads’ effectiveness or the average
length of an ad campaign on Twitter.
While the filing ascribes its ad-growth
numbers to an increased user base, that
provides little information for analysis.
In order for investors to properly
evaluate a company that makes its
revenue largely from ad sales, investors
need information on the advertising
business itself.
The fact is increased user base does
not always scale linearly with increased
ad revenue. In many cases, advertisers
are targeting a certain specific
geographical market so the addition
of even several thousand Indian or
Chinese Twitter users would make
little difference unless that increase
was also coupled with a corresponding
acquisition of advertisers targeting
those markets. As Twitter begins
to experiment with new forms of
revenue generation this might fade
in importance but, as of now, this is a
huge concern.
On balance, there are some
encouraging signs. Unlike Facebook,
which sold 15% of its total float on just
the first day and continues to flood the
market, Twitter is only expected to sell
$1 billion in stock, less than 10% of its
total shares. This of course is designed
to generate excitement and benefit
early investors.
In order for investors
to properly evaluate a
company that makes its
revenue largely from
ad sales, investors need
information on the
advertising business itself.

3. 82 GlobeAsia November 2013
Technology
Going forward Twitter
has a tough road ahead. It
must grow as a company
and mature as a business.
Minimizing the float is considered
one of the key positive indicators
linked to strong early returns from an
IPO. This correlation was evident when
LinkedIn went public. LinkedIn used a
similar strategy, selling just 8.3% of its
shares to the public. The limited supply
resulted in LinkedIn doubling its first
day trading volume. While Facebook’s
earliest investors have seen only a
33% increase, LinkedIn’s are up 160%,
clearly vindicating the strategy.
What changes should you expect?
While the everyday user-experience is
unlikely to alter much post-IPO, judging
from other tech companies Twitter is
expected to invest more heavily in areas
outside its core product. Google for
example went on to develop a whole
new mobile market with Android just
four years after it went public. Facebook
too has gone on to develop products
like Facebook Home, which while
complementary were certainly outside
its primary focus.
It is likely that Twitter for its part
will follow the same strategy and
tweak its product line. This is already
happening somewhat. The release of
Vine and Twitter #Music is a positive
indication that Twitter is giving serious
thought to expanding its offerings.
The company has also been recently
experimenting with displaying tweets
to users that originate close to their
geographical area. Ultimately all new
features are about revenue generation
and this one in particular could be
used by marketers to advertise to
Twitter users based on their location
(think in-store flash discounts).
Twitter will likely continue to
experiment with new products,
features and revenue generation
options especially now that the specter
of quarterly reports constantly looms
on the horizon.
Design changes are also likely for
Twitter going forward. The strategy
for Twitter would be to de-emphasize
its core product (the Twitter stream)
and encourage users to explore other
ways to interact with the service and
discover new interests. These design
changes would take place across
the board and affect both its mobile
apps and the website with the aim of
increasing the services “stickiness” and
corresponding ad revenue.
Twitter is also expected to
continue its push into television. This
year Twitter has quietly acquired
not one but two TV analytics start-
ups. Additionally it has also signed
agreements with television networks
that allow it to include TV clips within
Tweets.
The purpose of this push is to take
advantage and monetize a trend that
finds an increasingly large number of
people glancing at their cell phones
and tweeting while they watch TV.
These “second screen” enthusiasts offer
advertisers a whole additional screen
on which to display their commercials.
When coupled with location-based
tweeting, this could really be a killer
product for Twitter especially because
it allows for much better targeted ads.
Another possible change is
Twitter’s relationship with third-
party app developers. Third-party
apps piggyback on Twitter’s system
displaying Tweets but not ads. As
time passes, however, there will be
an increased move towards either
disabling these clients or otherwise
forcing advertisements onto them.
The potential danger in this regard is
that those using third-party apps do so
because they prefer not to use Twitter’s
default client. It is quite possible that
shutting down these services or forcing
ads on them might alienate third-party
app users who unfortunately also
happen to be Twitter users.
Going forward Twitter has a
tough road ahead. It must grow as a
company and mature as a business.
These processes would likely involve
several changes and it remains to be
seen whether active user numbers will
emerge unscathed. When Twitter goes
public it will have to deal with skittish
risk-averse investors, regular financial
filings and a sense of always living
under a microscope.
As early-stage employees cash out
and move on, there will also be intense
pressure on the remaining employees to
continue to innovate. The company will
have to maintain the delicate balance
of experimenting with revenue streams
without alienating their user base.
Overall Twitter’s prospects look
good. If done right, Twitter can
successfully navigate the various
minefields and emerge successful. Its
revenues, while on the low side, have
doubled in the past six months as the
company continues to experiment
with new products. Quite a few of
these products have great unrealized
potential and could lead to new income
streams for the company if it plays its
cards right.
Now public, Twitter will really
have to sell itself to investors, users
and its partners. Can it do that in 140
characters or less? Thankfully, it doesn’t
have to!
Jason Fernandes is a tech commentator
and the founder of SmartKlock.