Twitter Is Working on New Ways to Sell Its Data

Twitter (NYSE: TWTR) generates most of its revenue from advertising, but many investors see a lot of value in its data-licensing business. With a catalog spanning 11 years, including nitty-gritty data points like time of day and location, Twitter's database of tweets could hold a lot of value for developers. Indeed, Twitter generated $325 million from licensing its data to enterprises over the last four quarters, more than 13% of total revenue.

But with Twitter's ad business struggling, the company is looking to grow its data-licensing business. Its latest step is to offer a new set of APIs to offer limited access to its data for small developers. Instead of charging tens of thousands of dollars annually like its enterprise APIs, access to the new APIs will start at just $149 per month.

The first tool from the set, historical search, offers access to the last 30 days of tweets and eventually all tweets dating all the way back to 2006. It also allows developers to see more tweets per request, make requests more frequently, and make more complex requests, among other features.

Catering to small developers again

Twitter started making efforts to cut its costs last year. After a round of layoffs and shuttering 6-second video app Vine, Twitter was able to sell its developer platform, Fabric, to Google.

After shedding several non-core assets and cutting costs, Twitter is set to produce a GAAP profit in the fourth quarter. But in order for Twitter to grow its newfound profitability, it needs to find a way to increase revenue, something it's failed to do in each of the first three quarters of 2017. Management says it's out of ways to cut costs going forward.

Leaning on its lone bright spot in the business (data licensing) is a way for Twitter to return to revenue growth. Filling a need for small developers is a big opportunity. That said, it also comes with certain risks.

Twitter will have to build support teams for its new APIs, which will result in an increase in SG&A expenses. Ideally, the company can scale the business quickly to offset the costs and produce meaningful operating profit from the new products, but that's far from certain. Twitter's past relationship with small developers isn't the best, so some may be hesitant to work with Twitter again.

Data licensing has similar pitfalls as advertising

One of the biggest reasons Twitter has seen a pullback on advertising revenue is it's been unable to meaningfully grow its active user base. What's more, the users that it does have aren't particularly engaged. As a result, many advertisers are seeing a poor return on investment.

User growth and engagement can have a similar impact on Twitter's data licensing business (albeit a bit more subdued). All else being equal, developers would rather harvest data from a broad and engaged user base. On the other hand, the depth of some users' engagement on Twitter (i.e., power users) could be much more valuable from a data-licensing standpoint than an advertising standpoint.

Whether Twitter's appeal to smaller advertisers will result in meaningful revenue and profit growth will be something to keep an eye on in 2018 as the company aims to maintain profitability.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.