Twitter Inc. Is Ready to Pay Up for User Growth

By Markets Fool.com


Twitter looks to expand in the growing Internet population of India. Source: Twitter

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It looks like Twitter is starting to return to its origins.

Last week, the company announced an agreement to purchase India-based ZipDial, which allows people to place a call to a special phone number and hang up before the call connects. ZipDial registers the phone number that placed a missed call, and sends that number text messages with coupons or sports scores.

The result is a free service for Indian phone users who don't get charged for a missed call or to receive text messages. The costs are borne by the sender. Twitter plans to use the service to get people to sign up for Twitter and receive tweets (for free) from people they follow via SMS, just like in the old days. The only catch is that Twitter will have to pay up for all the text messages it's sending.

Growing in developing markets
Twitter's growth in the U.S. and other developed markets is nearing a peak. In the third quarter, 10 million of Twitter's 52 million net new users (year over year) came from the United States. The company now boasts 63 million domestic users.

The strategy to buy ZipDial and essentially pay for people to use Twitter is somewhat similar to Facebook's efforts with its Internet.org initiative. Internet.org is expanding Internet access to developing markets and helping Facebook onboard more users in those markets. Essentially, a whole new group of Internet users see Facebook as their gateway to the World Wide Web.

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Twitter's plans for ZipDial move past the limitations of Internet access without having to build out the infrastructure to support broad inexpensive Internet access. Twitter is capable of expanding ZipDial to markets outside of India, too, like Brazil and Indonesia, which represent excellent opportunities to continue expanding beyond the U.S.

Hook 'em early
India has one of the fastest-growing Internet populations in the world, with over a billion people to potentially connect in the future. With the Indian population just starting to come online en masse, Twitter wants to make its product a habit for them before they even start using the Internet on a regular basis.

For that privilege, Twitter has to pay up (probably around half a penny) for each tweet it sends through ZipDial's functionality. As such, Twitter will have a hard time turning a profit on those users.

In the third quarter, Twitter generated $1.77 in ad revenue per 1,000 timeline views. If Twitter shows an average of one ad per timeline view -- a conservative estimate -- that implies it receives 0.177 cents per ad impression. That number would be less in emerging markets like India. The cost of sending an ad would hardly be worth the revenue Twitter could make from it.

Indeed, the deal to acquire ZipDial is based on the long-term user growth potential it provides, and is not about any immediate impact it could have on revenue growth.

Accelerating user growth
Part of what's driven Twitter shares lower since its IPO is that the company is not living up to expectations, particularly when it comes to user growth. When the company went public in late 2013 it had 230 million monthly active users, and it had grown 40% year over year. Last quarter, it had 284 million MAUs and grew at just 23% year over year.

While Twitter's management is pointing to different metrics for analysts to pay attention to, MAUs gives one of the best pictures as to how many people Twitter is actively selling ads to. Twitter recently started making efforts to monetize its content on other websites to take advantage of a large portion of its logged-out audience, which CFO Anthony Noto believes could be worth as much as $1.3 billion.

Still, the real path to revenue growth is to continue growing active users, and ZipDial represents an opportunity for Twitter to expand its audience.

The article Twitter Inc. Is Ready to Pay Up for User Growth originally appeared on Fool.com.

Adam Levy 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.