Breakingviews on Twitter
Search League Tables

Sunday, 23 November 2014

Protect the nerds

Twitter's sky-high R&D hits the right spot

Twitter’s research and development spending may be sky-high, but it hits the right spot. At 44 percent of revenue in the first half of the year, the microblogging site is spending far more as a proportion of its top line than Facebook. But with a lower number of users than its rival, Twitter needs to grow to make new investors happy.

Technology tends to be a winner-takes-all – or almost all - market. If a company can establish a useful standard or platform, network effects usually mean users will flock to it. Twitter’s a good example, with monthly active users growing more than fivefold over the past three years to 218 million. That’s a big reason revenue is growing at an even faster pace. It should hit around $700 million this year, well over 20 times larger than in 2010.

Twitter is also growing into its spending. Granted, R&D expenses more than quadrupled over the past two years. But the amount it spends as a percentage of revenue has dropped as advertising income has grown. In fact, as recently as three years ago, R&D costs outstripped sales. Since advertising is seasonal, this metric should fall further in the second half of this year.

Twitter’s biggest risk is a dramatic fall in the rate of people joining the service. The number of new users appears to slowing already - and the company has less than a fifth of Facebook’s monthly users. The larger social network is steadily rolling out features, such as hashtags, that it has cribbed from its smaller rival.

Facebook has aggressively ramped up R&D spending, too, boosting it from 7 percent of revenue in 2010 to 27 percent last year. Its far larger size means its budget dwarfs Twitter’s – it spent more than 10 times as much last year. Sure, the two companies don’t entirely overlap. Facebook is largely built around semi-private interactions while Twitter is more open to strangers.

Twitter’s strategy of hiring engineers at a fast clip to build new features and services is the best way to ensure growth. Curtailing that hefty investment too soon would be a big mistake.

Have your say

To have your say, you have to be signed in

Context News

On Oct. 3, Twitter filed public documents with the Securities and Exchange Commission to sell $1 billion of stock in an initial public offering. The social messaging service did not disclose the number of shares it proposes to sell or their price.

The company had $254 million of revenue in the first half of the year, compared to $122 million in the first half of 2012. Twitter had an operating loss of $63 million in the first six months of this year. It has never made a profit.

The company spent $112 million on research and development in the first half of 2013. That is equal to 44 percent of the company’s revenue during that period. The company spent $119 million on R&D during all of 2013.

(Launches in a new window)