Why Twitter Inc. Just Sold Its Soul to Google

By Markets Fool.com

Twitter recently signed a deal with Google to bring tweets back into Google searches. Tweets previously appeared in Google's search results between 2009 and 2011, but Twitter didn't renew that deal due to opposition from former COO Ali Rowghani, who believed that the company needed to more tightly control its own content.

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Source: Pixabay

However, Twitter CEO Dick Costolo claims that this new deal will be different. When Google users click tweets while logged out of Twitter, they won't reach the tweet. Instead, they will be redirected to a "logged out" page -- which contains ads -- where they can either sign in or sign up. Therefore, the more non-Twitter users are drawn to tweets via Google, the more new users might sign up.

User growth has been a sore spot for Twitter. Costolo previously set a target of 400 million monthly active users (MAUs) by the end of 2013, but MAUs only rose 20% year over year to 288 million in the fourth quarter of 2014. That's also a slowdown from the first three quarters of the year, when Twitter respectively posted 25%, 24%, and 23% MAU growth.

While signing a deal with Google might seem like a straightforward solution, I believe that the deal is a lopsided one which helps Google much more than Twitter.

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A deal with the devil
The problem with this deal is that it lets Google users bypass Twitter's News Feed and jump straight to the tweet. The News Feed is where Twitter's main sources of ad revenue -- Promoted Tweets, Promoted Trends, Promoted Accounts, and its new Promoted Videos -- reside. Although marketers can advertise on the "logged out" page, it's arguably a poor substitute for News Feed ads.

Letting Google users link straight to Tweets also undermines the value of Twitter's own internal search engine. That could decrease the average amount of time Twitter users stay on the site and diminish its value to advertisers. According to Alexa, the average Google user spends 18 minutes per day on sites within the Google domain, compared to just 7 minutes per Twitter user. There's a direct correlation between average revenue per user (ARPU) and average time spent on social networks. Twitter users have an ARPU of $1.66 per quarter, based on its fourth quarter revenue of $479 million. Facebook users, who spend an average of 19 minutes on the site daily, have an ARPU of $2.77.

As I mentioned in a previous article, Twitter is trying to maximize ARPU with new marketing and networking tools to offset slower user growth. That strategy has actually worked well over the past year.

Source: compiled by author from Twitter's quarterly earnings

But under the Google deal, Twitter wants to value user growth over ARPU growth. While that strategic shift is understandable, it's a dangerous one that could decrease Twitter's value to advertisers and cause ARPU to plummet.

When "firehoses" start setting fires
Twitter will hook Google into its "firehose" feed, which gives it a direct deluge of tweets at a much faster rate than its News Feed.

However, the automated use of firehose feeds is controversial. Since many news agencies and high frequency trading firms are subscribed to Twitter's firehose feed, a widely retweeted fake story can cause a "flash crash" in the markets. That's what happened back in April 2013, when the Dow briefly plunged due to a fake story about a White House bombing from a hacked AP account. Meanwhile, penny stock promoters have constantly used fake bot accounts to try to hijack this system.

Twitter admitted bots accounted for about 14% of its "active" user base last August. Yet Twitter still allows single users to sign up for multiple accounts, and hasn't done much to crush these bots.

In my opinion, Twitter might consider these bots -- which tweet and retweet much faster than any human -- to be a necessary part of the firehose business. Last quarter, "data licensing and other" revenue (which includes those firehose fees) rose 105% year over year to $47 million, accounting for nearly 10% of its top line. Twitter hasn't disclosed the terms of Google's firehose deal, but CFO Anthony Noto admitted that its proceeds were "considered" part of the company's forward guidance.

Twitter's rising dependence on the firehose business is troubling, since it arguably encourages the proliferation of more fake users.

Google wins, but Twitter might lose
For Google, the advantages of the deal are clear. Its search results will be enhanced by real-time tweets, which will likely enhance it targeted ads. For Twitter, it's a coin flip. If Google delivers substantially more MAUs to Twitter, the deal might be worth it. But marketer interest in its News Feed could fade as time spent on the site declines. If that happens, both Twitter's top line growth could start heading in the wrong direction.

The article Why Twitter Inc. Just Sold Its Soul to Google originally appeared on Fool.com.

Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Facebook, Google (A shares), Google (C shares), 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.