Twitter: E-Commerce Takes Flight
By: Justin Tang & Carolyn Wu
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
The Fall of the Bird
Twitter has a long history of being unable to generate advertising dollars from its content. Despite having 313 million monthly active users, Twitter struggles to lure advertising dollars with uninspiring tweet-based ad offerings and sluggish user growth. Meanwhile, social media applications such as Snapchat and Instagram have experienced exponential growth, and advertising spending is stretched thinner across more platforms. These new mediums offer engaging dynamic media formats and modern video-based advertising opportunities.
As of February 7, 2017, Twitter’s stock was trading at $18.26, representing a fall of over 76 per cent since its historical high of $73.31 in December 2014. Just several months ago, Twitter announced its plans to lay off 9 per cent of its workforce as part of a broader plan to reduce costs and refocus the business. It is clear that the company has been on a downward spiral since its IPO, consistently slipping below earnings expectations driven by lackluster growth in advertising revenues.
Ever since co-founder Jack Dorsey returned to the helm of Twitter in 2015, the company has been increasingly focused on promoting live video and commentary in the hopes of revitalizing the platform as a social media news network. Twitter is betting on these “live” experiences to broaden its appeal and attract more advertising dollars from video advertisements inserted into these live streams. However, in the company’s latest attempt to invest in live events and entertainment, taking a page out of Facebook’s playbook, payback has proven to be slow.
Twitter could take an innovative approach to revenue generation by integrating e-commerce directly into its live-streamed content and unlock new value for advertisers. This can be done by partnering with e-commerce giant, Amazon, to power Twitter’s backend logistics.
Live Streaming - Twitter’s Saving Grace?
To bolster its “live” experience projects, Twitter recently acquired numerous broadcasting rights for high profile events including the NFL, Wimbledon, MLB, NBA, and PGA. The company also partnered with CBS and Bloomberg to provide non-sports TV content as well as red carpet live streams, through a partnership with Dick Clark Production.
On September 9, 2016, the first NHL game ever live-streamed on Twitter brought in an impressive 2.1 million users. More remarkably, up to 15 per cent of viewers who tuned in were new Twitter users, confirming live-streaming as the right catalyst to increase user growth. Nevertheless, investors demand to see concrete “impact on advertising spend” before the market’s neutral outlook on the stock can be upgraded.
Twitter’s strategy was questioned again by investors following the company’s release of its Q4 2016 earnings. The company’s reported revenues of $717-million missed Wall Street expectations of $740-million by a wide margin. Despite the fact that daily active users grew by 4 per cent, Twitter reported declining advertising revenues for the first time ever. User engagement is strong, but advertising sales clearly lagged behind. There is little evidence that money can be made through plain vanilla video ads.
E-Commerce - An Opportunity to Bring Flight to Revenues
Although Twitter’s initial effort to monetize live-streams failed, Twitter’s strategic shift towards live events, commentaries, and news consumption presents a unique e-commerce opportunity. By encouraging users to tune in to an account at a certain time and duration, user engagement to increased greatly. More importantly, the content that is being streamed often inspires product purchases through two main avenues:1. Product Placements: The most prominent example was by Beats by Dr. Dre; the brand that placed products in the hands of athletes during the 2014 Super Bowl game. Players could then be seen on television wearing these headphones prior to the games, which inspired viewers to explore Beats products in further detail; and2. Direct Endorsements: Popularized by Weibo and Taobao, two of China’s largest social media and e-commerce players, direct endorsements would enable live-streamers to showcase products to their followers in a live video stream. Users could then purchase the products directly on the platform. Similar trends can also be seen in North America through YouTube, where “YouTubers” endorse products through pre-recorded videos uploaded to the service.
These trends present tremendous opportunities to sell products in conjunction with Twitter’s live-streaming strategy. Twitter can leverage its live-feed content while integrating e-commerce directly with brand advertising campaigns so that viewers can directly purchase products showcased live on Twitter. This consumer engagement focused marketing alongside a complete e-commerce experience can lead to better conversion rates for advertisers.
Past Failed Flights
Although the idea is innovative, it is not entirely uncharted territory for the social media giant. In September 2014, Twitter introduced “shopping-enabled tweets” that allowed users to transact directly with merchants. To implement this project, Twitter partnered with multiple e-commerce platforms including Bigcommerce, Demandware, Shopify, and Stripe. However, earlier this year, the company phased out the feature due to a “lack of traction” and pivoted away from e-commerce completely.
While the proposed live-stream-enabled e-commerce platform is technologically similar to this failed implementation, the previous function was merely the addition of a “buy” button that allowed users to buy directly within seller’s tweets. The effort failed because of Twitter’s age-old problem: neither consumers nor advertisers seem interested by Twitter’s offering to promote products using brand accounts or tweets. In contrast, live-streaming with integrated e-commerce options would provide a compelling value proposition for both marketers and consumers.
Weibo and Alibaba - A Perfect Pairing
Although integrating e-commerce into live event coverage is a rather untested business model in the West, the marriage of e-commerce and live-streaming is a growing trend in China with proven successes. Weibo, China’s Twitter equivalent, is a microblogging website that enables users to follow celebrities and share user-generated content. In 2013, it entered a strategic partnership with Alibaba, the world’s largest e-commerce platform, to integrate e-commerce directly into the social media site. Users are now able to purchase Alibaba products directly on Weibo, where products can also be shared across its network. This deal is expected to generate over $380-million in advertising revenues for Weibo.
Alibaba has also experimented with using live-streams to sell products in China. Shop owners and brands often hire popular live-streamers with large fan bases to promote their goods. The platform reported a whopping 32 per cent conversion rate, meaning that over 320,000 items had been added to shopping cart per one million video views.
Additionally, Weibo’s success with combining social messaging and e-commerce within one application has shown that integrated experiences are far superior to separate ones. Ultimately, these integrations could lead to higher user growth and better retention, two outcomes that Twitter desperately needs today.
Given similar trends in the growth of live media internationally, as well as proven advertising demand in this medium, the e-commerce monetization model for social media has the potential to be replicated globally. In China, live-streaming attracted over 109 million monthly active users in 2016 compared to a mere 53 million in 2015. Similarly in the West, 81 per cent of Internet users watched more live-streams in 2016 than they did in 2015. Most importantly, 82 per cent of viewers prefer brands that engage through live media rather than through social media posts or blogs, demonstrating the commercial significance and viability of global live-streaming. For these reasons, a live-streaming e-commerce business model that is spearheaded by Twitter could translate very well into the U.S. market.
Learning from Weibo and Alibaba’s Success
By introducing brand advertising during live-streams, Twitter can implement virtual product placements of merchandise, which users can click as they appear within the live video frame for purchase. This enables Twitter to serve as an online social marketplace, allowing merchants to build brand awareness through a unique, and engaging experience with customers. Users will also have the ability to leverage their network of followers by sharing product discoveries and recommendations.
These brands would find selling on Twitter a natural and effective extension of their strategy. In the case of Beats, the company will have the ability to advertise and directly sell the product to the audience. Ultimately, this strategy will provide an end-to-end marketing solution no other platform offers, leading to better conversion from advertisers’ spend. Studies have shown that such inbound leads have 8 times higher conversation rates relative to outbound leads such as traditional advertisements. This strategy will allow marketers to sell products directly from the lead, which also contributes to better conversion rates.
Flying Forward - The Amazon Partnership
When Twitter first attempted to introduce e-commerce functionalities into the platform in 2014, the company only operated as a transaction intermediary for a handful of small e-commerce sites, most of which were relatively unknown to consumers. It took over a year for key partners such as Shopify and Best Buy to come on board. Even then, the effort was fragmented and decentralized. The platform posed no clear benefits to merchants or buyers and its potential was not harnessed. In essence, execution was lacking and the e-commerce partners lacked infrastructure to support Twitter’s ambition.
Learning from the last misstep, Twitter could partner with Amazon and leverage their world-class e-commerce system. This partnership would provide Twitter with the backend necessary to support its e-commerce strategy. Rather than serving as just the transaction intermediary, merchants who wish to integrate selling into their Twitter advertising strategy can distribute their products through Amazon. This strategy allows advertisers to augment their advertising and convert potential targets into customers, all without leaving Twitter. The partnership will see the two companies come closer in areas of account connectivity, data sharing, and online marketing for merchants. It will also help connect millions of merchants on Amazon by leveraging Twitter’s 313 million active users, which will accelerate revenue growth for both parties.
Talking Returns
Incremental Revenue arising from the Weibo-Alibaba Partnership = $299.7-million
Weibo Incremental Revenue per User = 299.7 million / 3 Yrs / 198 million users - $0.5045 (per user)
Twitter Incremental Revenue Potential = $0.5045 x 320 million users = $161.4-million (per year)
The Weibo-Alibaba partnership in China earned $299-million dollars for Weibo in the past three years since the deal was in place, accounting for almost a third of Weibo’s revenue. The partnership even resulted in a 322 per cent increase in Weibo’s stock price since September 2015.
With 198 million users, that translates into 50.5 cents of incremental revenue on a per user basis. Twitter has roughly 313 million users worldwide. Scaling that figure to Twitter’s user base would suggest an additional $160-million dollars in revenue on a yearly basis. In 2015, Twitter recorded $2.2-billion dollars in revenue. That means that e-commerce alone has the potential to bring in an additional 7.2 per cent in revenue. Moreover, improving advertiser interest with this new offering could also spillover to other advertising products such as traditional promoted tweets, accounts, and trends.
In addition, Twitter should negotiate to receive a portion of Amazon’s incremental earnings from the partnership. Twitter could also charge advertisers who wish to have their products displayed during live-streams a fee on either a per impression or per click basis.
The partnership not only allows Twitter to leverage Amazon’s e-commerce infrastructure, but also poses significant upside to Amazon’s business. Amazon is a company that focuses on capitalizing on real-time trends to generate product recommendations for consumers. By partnering with Twitter, Amazon could leverage Twitter’s extensive live-stream content and vast social media network. It would be complementary to Twitter’s real-time e-commerce strategy and provide an additional channel to sell more products. Further, Amazon has long been vying for a deeper integration of social media into their platform. On Twitter, Amazon currently has a feature that allows customers to add products they see into their Amazon cart by simply replying #AmazonCart, showing the extent to which the company has gone to foster deeper integration with Twitter.
As brands today recognize the importance of engaging with customers at a deeper level and building strong relationships beyond just the transaction, a partnership between Amazon and Twitter would ignite both companies’ evolutions into accessible, end-to-end solutions for customers and advertisers alike.