Twitter Inc.'s Conundrum: Increase Revenue or Users?

By Markets Fool.com

ThoughTwitter co-founder Evan Williams said recently that slowing monthly average user growth, when compared toFacebook in general, and Instagram in particular, shouldn't be a concern for investors.

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But increasing MAUs by a mere 29 million over the past three quarters, as Twitter did, simply isn't good enough. To its credit, Twitter's revenue is climbing, more than doubling last quarter compared to year-ago period. Which brings us to Twitter's conundrum: Should it institute a sure-fire revenue-enhancing feature at the risk of alienating users?

What to do, what to do
In what's been described as an internal "tug-of-war," Twitter execs are debating the pros and cons of activating a Facebook and Instagram-likeauto-streaming video feed users would see as they peruse their timeline. Twitter CEO Dick Costolo alluded to implementing video during the company's recent, inaugural analyst day; the reasons for such a service both seem like no-brainers:improve user engagement and boost revenue.

So, what's to debate? Once again, concerns about MAUs apparently have one of Twitter's executive camps expressing angst that auto-play video will turn off users, negatively impacting the aforementioned problems at the core of many investors' bear arguments. The flip side of the MAU coin is increasing revenue, something video would almost assuredly do.

As Facebook knows firsthand, marketers love video advertisements. Users are more engaged, and more likely to purchase a product or service via a video ad than traditional banner ads. According to one report, the click-through rate -- a key metric marketers use to determine an ad's effectiveness-- of a video spot is five times better than banner ads. It's no wonder Facebook was able to charge its marketing partners a whopping $1 million a day to simply test video ads.

With click-through rates considerably higher, Twitter could charge its marketing partners more per spot, as Facebook already does. As it stands, Twitter sits at the bottom of the barrel compared to other social media sites when it comes to what it can charge per spot -- something video would instantly impact for the better.

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The solution
Facebook is in the enviable position to grow its properties first and fully monetize later. Instagram, Messenger, WhatsApp, and Oculus Rift are all in hyper-growth mode, and Facebook CEO Mark Zuckerberg is content to focus on MAUs for the time being, knowing revenue will soon follow. It wasn't long ago that analysts questioned if Facebook could continue its explosive revenue growth without inundating users with ads. Sound familiar, Twitter?

Zuckerberg and team realized some time ago the success of Facebook's marketing partners' ads -- and thus what it can charge per spot -- was not about quantity; instead, it means showing the right ad, to the right user, at the right time. Using its internal algorithms and reams of user data, Facebook has mastered the art of targeting its spots. The result? The user experience is untainted, and Facebook's revenue is soaring.

There's little doubt Twitter will, per Costolo, incorporate video into the user experience; from a revenue perspective, there's little choice, really. Twitter certainly has loads of user data, and to get the best of both worlds -- keeping both its users and shareholders appeased -- it had better figure out how to utilize it successfully. If not, it won't matter which side wins Twitter's internal debate.

The article Twitter Inc.'s Conundrum: Increase Revenue or Users? originally appeared on Fool.com.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.