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Twitter is having revenue problems because its ads are too expensive

Twitter’s revenue issue isn’t going away. It’s only getting worse.

Asa Mathat

We told you back in April that Twitter’s growth problem had expanded into an advertiser problem. On Twitter’s Q2 earnings call Tuesday afternoon, it became clear that that advertiser problem isn’t going away any time soon.

Twitter missed Wall Street’s Q2 revenue estimates Tuesday, and even more concerning was that the company dramatically lowered its revenue projections for Q3 as well. Twitter chalked up its ad issues to two main challenges:

  1. Competition is increasing for big brand advertisers, the kinds of folks that have historically spent money with Twitter. Instagram and Snapchat, for example, are starting to encroach on Twitter’s turf.
  2. Twitter’s ads are too expensive, or, as the company phrased it, “still priced at a premium” compared with other similar ads in the market. Specifically, Twitter charges for engagement, such as when you click a link in a tweet or retweet it, and those actions are too pricey for some advertisers to justify.

Twitter says it’s trying to fix this, specifically by proving to advertisers that paying its current ad prices is actually a good idea. The challenge is in the measurement, which means showing these ads actually lead to sales.

“There are some advertisers that just look at price,” explained Twitter COO Adam Bain on the company’s earnings call Tuesday. “There are more sophisticated advertisers that look at value and price to value exchange. We do think that while we have a premium, that premium is justified.”

In other words: Yes, our ads are expensive, but that’s because they’re more valuable than ads you find other places. But it’s up to Twitter to prove that’s the case, which it clearly hasn’t done yet.

Part of the challenge is that most of Twitter’s ad revenue comes from mobile devices — 89 percent, in fact — and its tough to track which ads actually lead to sales and which ones don’t, especially when people buy offline.

Facebook is trying to figure this out, too. The key difference is that Facebook has more data than Twitter, and also has a user base that’s five times the size. It can afford to spend some time perfecting mobile measurement. Twitter cannot.

Here’s a look at how Twitter’s ad growth has slowed over the past few years. It’s not a pretty chart.

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