When Twitter had its first quarterly earnings report as a public company on February 5, there was plenty of good news. The company’s stock had doubled in value since its IPO; its fourth-quarter 2013 revenue of $243 million was up 116 percent from last year, exceeding estimates; and advertising revenue per 1,000 views of the site’s timeline feed was up, particularly in the international market. But the stock fell 17 percent immediately after the report was released. Why the incongruity?
During the earnings call, the news came out that Twitter’s user growth has slowed, for the fourth quarter in a row. The service added just nine million users during that quarter compared to 14 million the quarter before, and altogether has only 241 million monthly active users (Facebook has 1.2 billion, in comparison). Twitter CEO Dick Costolo predicted a year ago the company would have as many as 400 million users by the end of 2013, overestimating by almost 160 million. Overall timeline views also fell seven percent, with a significant drop in international audience.
The reason for the dip in Twitter’s stock is that for social media companies whose revenue models depend entirely on advertising, audiences are the surest sign of potential profits. In the eyes of the stock market, users are money, and failing to gain them fast enough is reason alone to sell, rather than buy, a stock.
These stock prices and valuations are bets on how much value can be generated from a user base compounded with how much that user base might grow in the future.
That investors are looking at users rather than revenue to judge a company’s viability is a symptom of the “invisible economy,” a phrase that’s increasingly being used to describe how digital technology is overhauling traditional economic structures. Companies like Twitter, Tumblr, Instagram, and Facebook don’t create value in the way that Apple, General Electric, or Ford does (or did)—by producing and selling physical products to consumers. Instead, they gather a community of users around a free service. That value is much harder to quantify than how many iPhones get sold year-over-year.
“Digitization is distinctive because much of the value it creates for consumers never becomes part of the economy that Gross Domestic Product measures,” writes New Yorker columnist James Surowiecki. “That makes the gap between what’s actually happening in the economy and what the statistics are measuring wider than ever before.” The share of G.D.P., the sum of all final goods and services produced in a country in a given year, attributable to the information sector has only grown four percent in the past 25 years, despite the rise of information technology and social media giants.
In the absence of other hard value numbers, user count becomes a way to quantify the invisible economy. The emphasis on eyeballs means we could also call it the “attention economy,” as MIT economist Erik Brynjolfsson does in a blog post. In collaboration with Joo Hee Oh, Brynjolfsson found that the value of free goods available online in the U.S. totaled $139 billion in 2010, one percent of G.D.P. and equal to $647 per person. Over the past decade, the total was $300 billion, or $1,400 per person. “G.D.P. measures only the total amount spent on goods and services, not their value,” Brynjolfsson writes. “A money-only model may be missing 95 percent of the value consumers derive online.”
“Consumers pay with time, not just money,” according to Brynjolfsson. Social media companies want to attract users with their technology like flowers attract bees with pollen—the better the technology, the more users will flock to you, and the more time they’ll spend with your product. That engagement can be packaged and sold to advertisers or investors who prize a strong community of users who might create future value, even if they’re not immediately driving big—or any—profits.
The stock market might be better at reading the non-traditional value of this new economy than G.D.P. is. With 1.2 billion users and a market capitalization (the net worth of its current released stock) of around $162 billion, Facebook is worth $135 per user. Twitter now has a market capitalization of $29 billion, meaning each monthly active user is worth $120. (The similar valuations per user are striking, given that Facebook had $2.59 billion in revenue in the fourth quarter of 2013 versus Twitter’s $243 million, but Twitter likely has a more engaged audience that presents a higher potential value for advertisers.)
Social media companies that have been acquired rather than IPOed tell a different story. Tumblr was bought for $1.1 billion by Yahoo last May, and was said to have 30 to 50 million active users at the time. If we assume a middle estimate of 40 million, that’s a valuation of $27.50 per user at the time of acquisition. Instagram was acquired by Facebook for $1 billion and in September 2013 reported 150 million monthly active users. That’s just $6.50 per user. Instagram’s advertising program only appeared after the acquisition and wasn’t tested in the same way as Tumblr’s, which may have lead to the lower price (some argue Instagram would have IPOed at a much higher valuation).
Rather than the salability of a particular final product like a car or a washing machine, these stock prices and valuations are bets on how much value can be generated from a user base compounded with how much that user base might grow in the future. Facebook and Twitter have created attractive online platforms that gather huge, international communities around them—for now. If the pollen stops working, then business is in trouble. Hence Twitter’s stock plunge: When user growth is dropping, ad revenue will likely soon follow. As the saying goes, if you’re not paying for it, you’re the product.
As users in the invisible economy, we are all constantly contributing to the perceived value of these companies. So should we be compensated $135 or $27.50 or $6 a piece for our efforts? Probably not, since we’re already being paid in the form of services that aren’t so easily valued: the ability to effortlessly keep in touch with friends, share photos, communicate with our peers. And if you don’t like being sold? Start paying for a subscription service, or stop spending your time tweeting.
