Can Twitter Solve Its Engagement Problem?

By Markets Fool.com


IMAGE SOURCE: TWITTER.

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The lack of user growth at Twitter has been well documented. While other social networks, such as Facebook's Instagram, caught up and surpassed Twitter's user base, Twitter has had trouble holding on to new users. In the fourth quarter, active users declined sequentially if you don't include low-value SMS Fast Followers.

But Morgan Stanley analyst Brian Nowak and team point to an even more troubling trend at Twitter: User engagement is declining. Twitter already exhibits remarkably low average user engagement, with users spending an average of 2.7 minutes on Twitter's mobile app per day. Comparatively, Facebook users spend over 30 minutes per day in its app, and users spend over 7 minutes per day browsing Instagram. The fact that its engagement levels are still declining while they're already so low is very troubling for investors.

What Twitter is doing to improve engagement
Twitter has known engagement levels were a problem for some time. The company detailed some features it was experimenting with at its 2014 analyst day meeting. In January of the next year, it released While You Were Away, which highlights the top tweets users missed since their last login. Additionally, it made changes to the logged-out experience and onboarding experience to try to make it easier for new users to get started.

When Jack Dorsey took over as CEO last summer, he told investors on its first earnings call that none of these efforts have really worked. "Product initiatives we've mentioned in previous earnings calls like instant timelines and logged out experiences have not yet had meaningful impact on growing our audience or participation," he said on the company's second-quarter earnings call. "This is unacceptable, and we're not happy about it."

In the fall it launched Moments, which collects the top tweets around specific topics and events. The company is betting big that the new format will pay off, focusing its first national marketing campaign around the feature. The company has yet to provide any update on its impact.

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Additionally, Twitter just rolled out an algorithm-based timeline to replace the reverse-chronological timeline. The idea is to present the best tweets higher in the timeline, so users get the most value out of Twitter every time they log in. But if While You Were Away didn't provide meaningful growth in engagement, it's hard to see the new timeline organization having a major impact, either.

While user engagement continues to decline, the trend is improving. Morgan Stanley expects a 10% decline in engagement during the first quarter, an improvement from the 31% decline it saw during the same period last year. Fourth-quarter engagement growth improved to negative-21% from negative-26% in the year-ago period.

2016 may be Twitter's chance to turn things around
Twitter has an opportunity this year to improve its engagement levels and set it back on the path toward user growth. The Olympics are happening in August, the U.S. presidential election takes place in November, and Twitter just secured the rights to stream Thursday Night Football.

All of these events are likely to spike engagement levels on Twitter. Management's job is to ensure that those spikes translate into long-term increases in engagement by ensuring that it highlights the value of Twitter in the moments users come to see what it's all about. Those events can only do so much.

With user growth stagnating, engagement becomes ever more important. Revenue growth expectations are high, and Twitter needs to be focusing on how it can generate the most revenue per user possible. Part of that equation is increasing the engagement with the audience it does have.

Facebook generated an average ad revenue per user of $11.38 last year. Twitter, comparatively, brought in only $6.29 in ad revenue per user in 2015. I've argued in the past that Twitter ought to be capable of generating higher ad revenues per user than Facebook because of the type of data it has on its users. That it generated more than half of what Facebook did per user with less than 10% of its engagement is a testament to that potential.

If Twitter doesn't turn things around in 2016, it's a very bad sign for investors. The good news is that it will have just about every opportunity to do so.

The article Can Twitter Solve Its Engagement Problem? originally appeared on Fool.com.

Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.