Twitter’s Costolo Bets on Product Tweaks to Stem Slowdown

Kyle Bowes signed up for a Twitter account more than two years ago to keep up with his favorite soccer team. In that time, he’s sent a total of 12 tweets.

Bowes, 21, works just two miles down Market Street from Twitter Inc. (TWTR)’s San Francisco headquarters, where engineers are working to solve the problem he represents: members who don’t actually use the microblogging service’s product, or worse -- people who don’t think they need Twitter at all.

“I don’t know what I would say on Twitter,” said Bowes, who follows postings about the Arsenal Football Club, based in London. “Sometimes the players will say things that are important news, so that’s why I’m on there, but I’ve never actually done anything.”

Chief Executive Officer Dick Costolo is facing a slowdown in new member growth at the same time as some Twitter users are checking in less often. To cope, he’s planning such changes as more images and different ways to organize information, designed to make the service more appealing and easy to access, especially for newer users.

The pressure to overcome these hurdles is increasing as Twitter seeks to boost advertising revenue and justify a stock price that has more than doubled since November. Twitter doesn’t have the war chest to acquire growth like rival Facebook Inc. (FB), which last week signed a $19 billion deal for mobile-messaging service WhatsApp Inc. With just $2.2 billion in cash, Twitter has to invent blockbuster products internally.

“It’s absolutely critical that they re-engage audiences and get some growth going,” said Arvind Bhatia, an analyst at Sterne Agee & Leach. “It’s the number one issue with investors today.”

Costolo’s planned changes also include ways to woo reluctant consumers. He’s also hunting for a product chief to replace Michael Sippey, who left last month.

Growth Potential

Twitter, which sold stock in an initial public offering at $26 per share in November, has since ballooned to $55.92, making the unprofitable company worth $31.7 billion. Investors are paying a premium for Twitter shares compared with Facebook Inc. or LinkedIn Corp., based on the company’s growth potential. Analysts project Twitter’s revenue will rise 85 percent this year, according to data compiled by Bloomberg.

Some investors were expecting the company to deliver on that potential sooner. The stock tumbled a record 24 percent on Feb. 6, a day after Twitter said monthly active users rose 30 percent from a year earlier to 241 million in the fourth quarter -- slower than the 39 percent gain posted in the prior period. Facebook has 1.2 billion monthly active users.

Avoiding ‘Panic’

Many people use Twitter for following live commentary from friends, news sources and celebrities such as pop stars or sports figures. While the service is something that many consumers want, it may never be viewed as a social need -- such as a grandmother logging into Facebook to see pictures of her grandchildren, said Martin Pyykkonen, an analyst at Wedge Partners in Greenwood Village, Colorado. Costolo’s challenge is adding features that will hook casual users and get them to spend more time on the site.

“If you’re Twitter, you have to be thinking about how to make it more mainstream, more general-purpose for usage,” Pyykkonen said. “Making it easier to use while still maintaining that real-time information flow is going to be really important for them, and you’d hope that they were already thinking this way and aren’t in panic mode.”

Twitter, whose service lets users send 140-character status updates to followers via the Web or mobile device, has already had some success in influencing user behavior by changing its design. Making photos more prominent in users’ feeds in the fourth quarter led interactions with Tweets to rise 35 percent, Costolo has said. Putting a messaging option more prominently in Twitter’s mobile application caused message frequency to rise 25 percent.

Joining Up

To jump-start user growth, the company will make the product more focused on conversations, integrate more photos and videos, and test ways to organize information along topic lines, instead of just chronologically.

Twitter also plans to make it easier for people to get started on the service. Unlike on Facebook, where people build their social networks based on an existing set of friends, Twitter users have to decide what information sources to follow and how to personalize the product, making for a longer journey before understanding what value it can deliver, Pyykkonen said.

That can alienate potential users like Irma Sanchez, 22, of San Francisco. She was introduced to Twitter through her sister, who follows celebrities, yet didn’t create her own account.

“My sister uses Twitter to be up in famous people’s business,” Sanchez said. “I don’t know why I need to spend time on that. It didn’t seem interesting to me.”

Familiar Design

Costolo said recently that Twitter now lets people import their mobile-phone contacts to see who they can follow on the service to get started, one step in a longer-term plan to make it more accessible.

Some of Twitter’s new designs look like a product that Sanchez does use -- Facebook. The company this month started testing a version of profile pages with a wide background photo across the top of the page and a smaller profile picture on the left-hand side, similar to what Facebook does on its member pages.

Twitter has also been increasing the pace of its product testing to release new updates on Android-based mobile devices every week, for example. The company did 23 things in the fourth quarter to improve its product, like letting users send photos in private messages and allowing advertisers to target people talking about television shows, according to Heath Terry, an analyst at Goldman Sachs Group Inc. The volume of product tests the company can run simultaneously is much higher than it was a year ago, Costolo said earlier this month at the Goldman Sachs Technology & Internet Conference in San Francisco.

Road Map

“There’s no date or single product feature that I think we will launch that will be the one where you see the quantum step change, step function in growth,” Costolo said. “It will be a combination and the cumulative effect of this specific road map we have over the course of the year that will drive growth.”

Facebook raised the stakes when it agreed to buy WhatsApp, backing a 450-million-member app that competes with Twitter’s message services.

Any new product guru Twitter hires may have fresh ideas to add to the mix, or a flawless way of executing Costolo’s detailed plan. Still, the fact that Twitter hasn’t staved off the slowdown after tweaking the product so much already is alarming, Bhatia said.

“Their fourth-quarter results did not help answer the question: Is Twitter going to be mainstream or is it just going to be a niche platform?” he said.

To contact the reporter on this story: Sarah Frier in San Francisco at sfrier1@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.