Twitter Inc spells out the many risks of failure
The stock’s value to shareholders is inevitably linked to the quality of users’ tweets
If you’re of the view that Silicon Valley-born media companies typically speak two languages, a faux-jocular corporate-speak and a Pollyanna-esque puff, then the Form S-1 Registration Statement is the perfect bedtime reading for you.
A Form S-1 Registration Statement is the document that companies in the US are legally required to file to the Securities and Exchange Commission ahead of an initial public offering (IPO). In the international language of hyped-up stock market flotations, it is more commonly known as the IPO prospectus. Twitter Inc, which floats on Friday, filed its Form S-1 to the SEC at the start of October, and it’s a festival of bluntness.
The section marked “risk factors” begins with the standard line that “investing in our common stock involves a high degree of risk”, and then proceeds to describe those risks over the next 32 pages. (Google and Facebook managed a mere 22 pages of risks each). Next comes a tautology: “If we fail to grow our user base, or if user engagement or ad engagement on our platform decline, our revenue, business and operating results may be harmed.”
As with all media companies, boredom can affect the bottom line. Twitter’s tally of 218 million monthly active users is fast-growing, but in terms of “wow, Twitter” appeal, Twitter has probably peaked for anyone who has been on it since the “fail whale” days.
There are still good times. The satirical @YourRTÉGuide account continues to tell you everything you need to know about Ireland. Only a few weeks ago, Susanna Hoffs from the Bangles tweeted that “contrary to popular opinion, Saturday is actually my fun day”, which is the kind of revelation for which Twitter is made. But it turns out it is possible, after the first hundred mentions of it in your feed, to feel jaded by the idea of astronauts covering David Bowie songs from space.
Luckily, this is entirely subjective assessment, and Twitter newbies are still encountering the joys of new social-network love and wondering why everyone else is complaining about grey and blue lines. Twitter is, however, bound to note the possibility that a more widespread ennui will take hold.
“Influential users”, by which it means “world leaders, government officials, celebrities, athletes, journalists, sports teams, media outlets and brands”, may even decamp to another social media platform, perish the thought. Katy Perry is the first among equals here, with her 46.5 million followers exceeding all others. So what Katy Perry does or doesn’t do on Twitter counts, as the many investors who have made Twitter’s IPO oversubscribed are doubtless aware.
More generally: “If our users do not continue to contribute content or their contributions are not valuable to other users, we may experience a decline in the number of users accessing our products and services ... which could result in a loss of advertisers and revenue.”
So from now on, every time a joke bombs on Twitter, or every waking hour a journalist fails to tweet, a Twitter Inc shareholder cries.
Loss of advertisers would certainly be something of a drawback for a company that in the first six months of 2013 generated 87 per cent of its revenue from advertising – a sum of around $221 million for the half-year.
Twitter says it is the amount of advertising revenue it can collect for every time someone views or refreshes their timeline that is the best measure of its ability to monetise its platform and, in the three months to the end of June, this figure stood at $0.80. It will be an interesting metric to track.
But if there is one single number that jumps out from the prospectus, it is the deficit of $418.6 million that Twitter has accumulated to date.
“We have incurred significant operating losses in the past, and we may not be able to achieve or subsequently maintain profitability,” the prospectus shrugs. Its legal duty to sound defeatist then reaches new levels when it acknowledges that its limited operating history in an unproven market “makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful”. This translates as “we can’t really be sure what we’re doing, which makes it hard for us or anyone else to predict if we’ll be around in the future”.
Indeed, by the time you’re finished reading through the list of inherent weak spots in Twitter’s glorious plans, you will either be wondering how any media company manages to stay in business, or you’ll come to regard the prospectus as a giant dare to pour your life savings into its stock at the earliest opportunity.