Why Twitter Inc.'s Acquisition of Niche Makes No Sense

By Markets Fool.com

Twitter recently acquired Niche, a talent agency which connects "social media celebrities" to clients like The Gap , American Eagle Outfitters , Procter & Gamble , Time Warner 's Warner Bros., and the NFL.

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Twitter reportedly paid between $45 million and $60 million in stock and cash for the start-up, according toBusiness Insider. Prior to the acquisition, Niche planned to raise another round of financing which could have valued the company at around $50 million.

Source: Pixabay.

But is paying for a social media talent agency wise, especially when Twitter remains unprofitable and is struggling with user growth? Let's take a look at the rise of the social media celebrity and whether or not it's a trend that Twitter can actually monetize.

Six figures for six seconds of fame
Niche's network of over 6,000 social media stars spans across Facebook , Instagram, and Tumblr. However, it focuses mainly on Vine, the six second "micro-video" sharing site which Twitter acquired back in 2012.

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Twitter hasn't been able to monetize Vine yet, since it doesn't feature ads. Therefore, Niche's matchmaking service, which pairs talent with brands to create customized ad campaigns, could offer companies a backdoor into the service with endorsements from social media celebrities.

Top social media stars often cost more per second than their Hollywood counterparts. The estimated rate per Vine for "Viners" is $1,000 per 100,000 followers, according to a BBC report last August. Based on that estimate, 17-year-old Vine star Nash Grier, who has 11 million followers, could be earning a whopping six figures for each six-second Vine he posts for clients like MTV and Virgin Mobile.

Vine's app on Android. Source: Google Play.

Therefore, it makes sense for Twitter to become the middleman in these deals to take a cut of those earnings. It also allows Twitter to monetize other social networks, like Facebook and Tumblr, when Vines are cross-posted.

A slippery slope
However, there are several flaws with Twitter's plan. First and foremost, Niche doesn't make much money. Niche co-founder Rob Fishman told The New York Times last June that the company was on track to earn $4 million in revenue in 2014, which equals around $667 earned per star client. By comparison, Twitter reported $1.4 billion in revenues in 2014.

Another problem is the size of Vine's user base. Twitter claimed that Vine had 40 million registered (not active) accounts in August 2013, but it hasn't updated the figure since. Since then, Facebook's Instagram, which lets users upload 15-second videos, hit 300 million users last December.

Niche previously hired social media celebrities to take pictures for companies on Instagram, but Facebook is developing its own monetization plans for the photo sharing network. If that happens, marketers could deal directly with Facebook and cut Niche out of the loop. The same threat applies to YouTube and Tumblr stars.

Lastly, top social media stars are often unpredictable teens who sometimes gain attention with shock value rather than creativity. Grier, for example, has been called sexist, homophobic, and racist for making Vines telling girls how to be attractive, mocking Asian names, and shouting homophobic slurs. That kind of negative publicity can quickly backfire against Viners' corporate sponsors and tarnish the platform. Meanwhile, if Viners make too many ads, irritated followers could simply abandon them.

Low competitive barriers
Niche also isn't the only social media middleman out there. RewardStyle, an invitation-only affiliate marketing network, helps top bloggers, writers, and YouTube stars monetize their content by making commissions off the items they write about. Those clients can reportedly make over $80,000 per month from affiliate sales alone. Another start-up, Gleam Futures, offers similar services as Niche.

Those sites highlight how low Niche's competitive barriers are. If another start-up pops up and undercuts Niche with lower commissions and offers better corporate sponsors, it could quickly win over more top social media stars.

A murky future
Niche and Vine certainly have the potential to spread creative content virally. But social media stars rise and fall quickly, and it could be risky for companies to attach their brands to unpredictable teens with cameras. Sponsoring too many Viners could also turn Vine into a river of thinly veiled corporate videos which ruins the network's charming amateur appeal.

Twitter deserves credit for trying to diversify its revenue beyond Promoted Tweets, Accounts, Trends, and Videos, but I believe that buying Niche won't generate meaningful revenue for the company, due to the fragile nature of its business, small client base, and low earnings per client.

The article Why Twitter Inc.'s Acquisition of Niche Makes No Sense originally appeared on Fool.com.

Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook, Procter & Gamble, 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.