Trouble in Twitterland

Edited by Vani Rao

COO resigns on failure to revive declining user growth

Just six months after its high-flying debut on the public markets, Twitter Inc. (NYSE:TWTR) is drifting back down to Earth. On Thursday, June 12, 2014, Twitter announced the resignation of its Chief Operating Officer Ali Rowghani, who had been responsible for the social media company’s efforts to revive flagging user growth.

The exit illustrates Twitter’s rocky internal dynamics as it grapples with growing pains following its initial public offering (IPO) in November 2013. Rowghani’s job entailed helping Twitter increase members, yet the social media company has experienced decelerating user growth and has struggled to boost people’s engagement with its service.

Ali Rowghani, once viewed as a possible successor to CEO Dick Costolo, was in-charge of attracting new users and broadening Twitter’s appeal. However, those efforts failed, leading to a steep decline in the stock.

Fuelling the turmoil

Twitter is under growing scrutiny from investors who had hoped Twitter could one day beat rival Facebook Inc. (NASDAQ:FB). With 255 million users, Twitter lags far behind Facebook’s 1.3 billion. And although Twitter has reported a growth in revenue, the growth of its active user base has slowed down.

In the first quarter, Twitter halted four straight quarters of slowing user growth, adding 14 million monthly active users (MAUs), up 5.8% from the previous quarter. However, investors were not mollified, and Twitter’s stock hit a new low.

At this crucial juncture, Rowghani’s departure signals that Twitter still has not figured out how to get more people to embrace 140 characters. Rowghani’s has been credited with successfully orchestrating a series of financing deals for Twitter that culminated in a successful initial public offering in 2013. However, Rowghani’s exit, which had the backing of Twitter’s board of directors, underscores the tensions and pressures at the company to tweak its microblogging offering and thereby attract new users.

Formerly CFO at Pixar Animation Studios, Rowghani joined Twitter as CFO in 2010, but steadily expanded his influence to rival Costolo’s. He was appointed COO in 2012 and was tasked last year with increasing Twitter’s user base and revenue. His departure comes at a time when Twitter’s growth has trailed in the past couple of years. Costolo had at one time predicted that Twitter would close out 2013 with 400 million users. The figure still stands at around 255 million.

Source: Statista
Source: Statista

Musical Chairs

Twitter’s formation has been anything but smooth. An early Co-founder, Noah Glass, was pushed out and later Co-founder Jack Dorsey was also demoted from the CEO position in 2008. The discord continued when Jack Dorsey was forced out of the company so that Evan Williams could take over. After that, Williams was forced out to make way for Costolo. Costolo has been CEO since 2010.

Selling UP

In recent weeks, Rowghani alienated some employees when he sold 300,000 shares of his stake in the company for a profit of about $9.9 million. At the time, the stock had hit a near all-time low. In contrast, Costolo and Co-founders Williams and Dorsey pledged to hold on to their stock to signal confidence in the company.

Rowghani has been selling Twitter shares since May, when insiders were first allowed to sell shares after the company’s IPO in November.

Source: WSA/Bloomberg
Source: WSA/Bloomberg

Last month, he sold 300,000 shares worth about $10 million. And this month, he sold nearly 75,000 shares, worth more than $2.5 million. Rowghani remains a major stockholder, however, owning about two million shares, according to his latest regulatory filing.

Another Departure

The sudden resignation of Mr. Rowghani, who rose to become Costolo’s most-trusted lieutenant in his four-year tenure at Twitter, comes at a particularly thorny time in the company’s young history as a public company.

Twitter sold its shares at $26 a piece last November. They soared on the first day of trading, closing at $44.90, and reached $73 in December. After that, the stocks have been on the slide ever since analysts highlighted the company’s inability to pick up growth in the US, where it makes 75% of its ad revenue. After the news of Rowghani’s exit, Twitter’s stock stood at $36.75 as on June 13, 2014.

Source: WSA/Bloomberg
Source: WSA/Bloomberg

Twitter’s Q1 FY2014 earnings report revealed that MAUs, a key growth indicator, were lackluster, with only a 6% gain since the previous quarter. And the previous quarter saw only a 3% growth in MAUs. What was more alarming was the widening of net losses by more than $100 million. Twitter stock fell more than 8% on April 29, 2014. With Twitter’s stock down more than 42% year to date, the management shake-up is a clear signal that the company is taking initiatives to improve user growth and revenue numbers.

The Bird in Peril

Sometimes it’s difficult to see the warning signs of a company in peril, but with the recent happenings surrounding Twitter the panic is written on the wall. Twitter has been under siege for a multitude of problems. First and foremost, its user base is starting to tail off. When the platform first took off, users were excited by the instant gratification of microblogging and the fast way to share information. Since then, Twitter has been bombarded with sponsored content and advertisements, leaving many disillusioned and drawing comparisons to the declining experience that Facebook provides.

Facebook also holds an important element that has stolen a lot of Twitter’s thunder with its photo-sharing app Instagram. Operating in a similar style as Twitter, Instagram has seemingly become the default favorite app among the youth generation. Users follow each other and use hashtags on Instagram, much in the same way they do on Twitter, except that Instagram is a photograph-based sharing platform.

There are reasons that new users might not take to the platform. For people just starting out, it’s not always clear which other users to follow. And if there’s no one following you, sending out Tweets as a new user can feel like shouting in an empty room. By contrast, new users of Facebook, which has many more active users than Twitter, may find it easier to quickly link up with friends and read news through a feed curated by the social network.

In recent months, Twitter has tried to find way to entice new users to stay and re-engage with older users, including a profile overhaul that rolled it out across the platform. However, so far, the market remains skeptical despite the company’s significant revenues.

Another issue that Twitter is facing is a product-related internal problem. Engineers have complained to the management that there is no real way to expedite product changes and improvements going forward. This is in sharp contrast to Facebook’s culture, which is more willing to rush unrefined ideas out to the public and see what clicks. Now that Twitter has shareholders to answer to, executives are going to need to find a way to move things along and keep the platform fresh and updated if they hope to keep users on board.

What can be done?

There are many ways that Twitter can regain its lost footing, and it looks like the company plans on making the most of them. The upcoming World Cup is the biggest sporting event in the world, and Twitter has big plans to capitalize on its popularity. The company just flipped the switch on ‘hashflags,’ a new feature that works in conjunction with hashtags to place tiny flags for different countries surrounding World Cup-related tweets. The company also gave its algorithm systems an overhaul to be more fluid for soccer fans trying to follow all the action. If this strategy pays off, Twitter will be able to appeal to millions, if not billions of potential users across the globe.

Twitter is definitely up against the wall at this point, but all is not lost. In fact, it looks like the company has a few more tricks up its sleeve before it throws up the white flag. It’s also hard to deny that Twitter has done an impressive job of ingraining itself into the fabric of society, and is still one of the biggest social media networks in the world.

Twitter is up against a lot at the moment, and there is plenty of reason to be concerned if you are a stakeholder. While recent management shake-ups might not inspire confidence, it could be best for the long-term prospect of the company. If the World Cup can be a boon and bring in new users, Twitter might get right back on track.

The bird faces dark clouds, but will not go away quietly.

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