Twitter Hand-Holds Advertisers Like No Other Social Media, but for What?

Share of Digital Ad Spend Stuck Below 1%

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Twitter's ad team will do just about anything to win over Madison Avenue -- going so far as to build new products or craft marketing campaigns for clients.

Yet ad agencies still devote most of their ad budgets to Facebook Inc. and Google Inc.

Last year, Heineken wanted to distribute Twitter ads on other websites during the European Football League championships -- a service that wasn't yet offered -- so the company built technology to accommodate the beermaker.

This hand-holding style has served the company well, leading Twitter to almost double sales every quarter -- until now. Revenue missed estimates in the first quarter, and the company scaled back expectations for the current period and this year. Growth is slowing as Twitter's share of the $145 billion digital-ad market stuck below 1% last year, compared with 31% for Google and 7.9% for Facebook, according to eMarketer.

Twitter's sales team, led by Adam Bain, has focused on building close ties with advertising agencies and customers for driving sales. Take Lisa Weinstein, the executive at StarCom MediaVest group in charge of the Heineken campaign. She speaks highly of the company's willingness to collaborate with advertisers on strategy. She says the Twitter team listens to her, and she's even had the opportunity to critique Twitter's business model privately with Bain, whiteboard handy.

Still, Twitter executives, blindsided by the revenue miss, can't deny some hard facts: the company's user base is still small, and its technology for tracking and measuring ads is still relatively primitive.

"Kids' table"
"They're working very hard, but it's difficult to justify continued spending and prove its impact, because it's still kind of small," said Brian Wieser, an analyst at Pivotal Research Group. "The efforts of the sales team have gotten Twitter a seat at the table. But it might be the kids' table."

Mr. Bain's strategy is unique. While larger competitors including Facebook have been criticized by advertisers for being arrogant and transactional -- offering less creative help -- Twitter's smaller size means it can't afford to rely on sheer audience numbers to woo marketers. His team's way of selling involves coming in for strategic meetings -- not just to hawk advertising but to speak with clients about how Twitter can help them address all of their needs, from data gathering to customer service.

New competitors
Facebook does have a creative lab for advertisers, but only works on a tiny handful of campaigns with big spenders. Twitter's approach is quality, not quantity: it has "several hundred thousand" advertisers, according to a recent report. Facebook has 2 million.

The Twitter ad team's fight for its sliver of market share is getting tougher. Twitter, with 302 million monthly users, has been dwarfed in size by new competitors, even since it went public in November 2013. Besides Facebook, the social-media leader with almost five times as many active users asTwitter, there's Facebook-owned message app WhatsApp, photo-sharing program Instagram and Messenger -- all bigger. Other competitors, like Pinterest and Snapchat, have started selling advertising in the past year, becoming the new playing grounds for inventive ad teams.

Mr. Bain, who joined Twitter in 2010, is the longest-standing executive reporting directly to CO Dick Costolo, and he built the advertising business from nothing. He makes the point that even with the first-quarter slip-up, Twitter is still growing faster than competitors. Sales increased 74% in the first quarter to $435.9 million. Facebook's sales grew 42% in the same period, to $3.54 billion.

New users
The company's user gains are also moderating, slowing to 18% in the recent period from 20% in the fourth quarter. While stagnating user growth is a new kind of challenge to have, Mr. Bain says he has beaten skeptics before.

"When we started this four and a half years ago, the big question was how Twitter was going to monetize," he said in an interview. "The question was, 'Twitter has a huge audience, how are they going to do it?' Now it's flipped."

Twitter may have gotten the attention of advertising executives with its collaborative approach, but now it needs to win bigger portions of their budgets. That will take a few things that Twitter doesn't quite have yet: a larger user base, and a set of technology that can more clearly show advertisers they're getting a worthwhile return on their investment.

Keeping score
When Twitter switched the pricing for its ads to focus on a result the advertiser wants, such as a sale, as opposed to views and engagement, it was surprised by the lack of demand, contributing to the company's first-ever sales miss, according to Richard Alfonsi, VP-sales.

"We did come in a little bit under the aggressive expectations that we had," he said in an interview. "People have a very specific way of keeping score -- very quantitative ways of measuring performance."

Chief Financial Officer Anthony Noto and Bain have taken meetings this month with institutional investors, seeking to calm their nerves after the quarterly miss, according to a person familiar with the matter. Twitter's stock has tumbled 29% since the company's report, including an 18% drop on April 28, the day of the announcement.

Mr. Alfonsi, who was in charge of building a similar business at Google, said Twitter is taking steps in the right direction. The company will sacrifice short-term sales for long-term advertiser loyalty while making the right deals. Twitter's acquisition of TellApart and a deal with Google's Doubleclick are intended to get the company closer to the kind of measurement advertisers are used to at larger competitors -- like letting them see which ads led to purchases.

On message
For now, Mr. Bain is sticking to his mantra for the team: "know more, care more and come with the best ideas." He tells his reports to read clients' quarterly earnings results before meeting them, according to Matt Derella, VP-strategy and sales. He answers texts in 30 seconds and this year added a team call on Sundays to discuss strategy, which engineering and legal representatives join.

"We know that to do what we want to do as a company, we have to work harder than our competition," Mr. Derella said. "So we set the bar higher."

That's how Twitter has brought advertisers in. Now it needs to keep them. James Cakmak, an analyst at Monness, Crespi, Hardt & Co., says the company still needs to improve its targeting, its focus on mobile ads, and on generating data from its main user base that advertisers can use.

Mr. Cakmak points out that besides Mr. Alfonsi and Mr. Derella, Twitter has culled a team of big names that have done the same at other companies -- like Nathan Hubbard, formerly president of Ticketmaster, running its e-commerce initiative.

"We want to love Twitter and see them succeed," Mr. Cakmak said. "But the road to recovery will not be an easy one. Their prioritization is mismatched with the trends we see in the market."

~ Bloomberg News ~

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