Investors Briefly Cheered Dick Costolo's Resignation. What's Next?

By Markets Fool.com


Dick Costolo is stepping down as CEO of Twitter. Source: Flickr/TechCrunch.

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The era of Dick Costolo at Twitter will come to a close at the end of this month. The current CEO took over for co-founder Ev Williams in 2010, and he'll be replaced in the interim by one of the other co-founders, Jack Dorsey, who's also chairman of the board.

The announcement of Costolo's resignation came after hours on Thursday, and the share price of Twitter stock spiked as much as 7% before falling back down. As of 1 p.m. Monday, Twitter stock was trading about 2.5% below where it closed Thursday. Public opinion of Costolo has been on a steady decline, and may have hit rock-bottom after the company's poor earnings results last quarter. While Costolo's stepping down from the CEO post might provide some short-term relief for Twitter investors, it puts the long-term outlook for Twitter in limbo.

Twitter's immediate future
While co-founder Dorsey is taking over in the interim, he has shown an inability to manage competitive forces at mobile payments company Square, which Dorsey co-founded in 2009 and where he will remain CEO. Since Square started, a slew of competitors have popped up in the space, including established names like PayPal, Intuit, and Amazon. Meanwhile, banks aren't standing down from their stronghold on the payment processing market. Despite Square's clear-cut revenue model, the company saw widening losses last year.

With the resignation of Costolo, Twitter has essentially bought itself time. A new CEO is generally granted some leeway to develop a plan and start executing. No one expects a new CEO to come in and work miracles right off the bat. Costolo himself was granted a pretty long window to start executing, but ultimately, the frenzied rollout of new features, starting about six months ago, has failed to deliver quickly enough.

Action + vision needed
To his credit, Costolo valued the long term over creating an immediate impact on Twitter's financials. That meant investing in R&D, and maintaining the user experience above ramping up monetization. In that regard, Twitter operates similarly to Facebook under Mark Zuckerberg.

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Zuckerberg hasn't done it alone, of course, but he's consistently provided a long-term vision for Facebook that his team members all align themselves with. Costolo may have had a long-term vision for Twitter, and his team may have had a long-term vision, as well, but that vision was never properly communicated to investors, nor was it clear that the executive team was completely aligned. The constant shakeups in upper management can attest to that.

Despite his long-term thinking, Costolo failed to adapt to changes in the market. For example, as messaging apps were blowing up, Twitter's direct messaging service remained dysfunctional. Whereas Facebook moved to compete with its own messaging service, separated the app out of its flagship platform, and eventually bought market leader WhatsApp, Twitter did nothing about focusing on gaining more users for its main platform. The irony is that Twitter is built on sending short messages, and messaging is a perfect complement to microblogging.

Under Costolo, Twitter failed to see the opportunities that were right in front of it and the long-term impact they could have. The company famously blew its chance with third-party developers when it cut off access to its data through the platform's API. The long-term thinking was that Twitter needed to start monetizing its users, and it had no way of doing that when anyone could make an app that replicated Twitter's timeline without the native ads. However, it failed to see the opportunities that third parties could create to attract new users to its platform -- the very problem that it's facing today.

Hold on
Without any knowledge of who the next CEO will be or what he or she might be able to do for the company, it's hard to evaluate Twitter. However, Twitter's current users hold a lot of value, especially in the interest graph they clearly communicate by the accounts they follow. Twitter failed to fully unlock that value under Costolo, and the next CEO will be given some time to crack the code.

I think it's prudent to hold tight until a new CEO is named, and he or she clearly expresses a long-term vision and strategy for Twitter.

The article Investors Briefly Cheered Dick Costolo's Resignation. What's Next? originally appeared on Fool.com.

Adam Levy owns shares of Amazon.com and Apple. The Motley Fool recommends Amazon.com, Apple, Facebook, Intuit, and Twitter. The Motley Fool owns shares of Amazon.com, Apple, Facebook, Intuit, 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.