Wall Street Daily

Twitter’s Desperate Move Won’t End Well

“We got them watching football on Twitter!!! Now what do we do?”

Sounds like a completely off-the-wall question, right? That is, until this week.

On Tuesday, Twitter Inc. (TWTR) announced a deal with the NFL to stream 10 Thursday Night Football games for a reported $10 million.

The Wall Street Journal’s Miriam Gottfried insists the deal “is the first sign [Twitter has] shown of a willingness to boldly experiment.”

Come again?

With shares down nearly 60% since its IPO – and user growth non-existent – the move smacks of desperation with a twist of cronyism.

Twitter edged out larger rivals, including Verizon Communications Inc. (VZ), Facebook Inc. (FB), and Amazon.com Inc. (AMZN), despite offering less money.

Confused? You should be. The lowest bidder isn’t supposed to prevail on Wall Street!

But let’s just say it’s no coincidence when you consider that Twitter CFO Anthony Noto previously served as the NFL’s CFO.

There’s our “a-ha!” moment.

Preferential treatment or not, the end result is the same: If anyone stands to benefit from this “bold” experiment, it’s definitely not Twitter or the company’s shareholders. It’s the NFL.

An Unnatural Extension

Twitter’s two-timing, recycled leader, Jack Dorsey, has made it clear what Twitter is all about.

“Twitter is live,” he said. “Live commentary, live conversations, and live connections.”

At first blush, the NFL deals seems like a natural extension of this promise. Until you think about the gargantuan challenge that Twitter faces.

The company needs to somehow convert football fanatics into faithful micro bloggers. Quickly.

That’s about as natural and likely a transition as Donald Trump going from billionaire and U.S. presidential candidate to missionary to the Guahibo Indians in the Amazon basin.

#NotGoingToHappen

At least not in a meaningful enough amount to reignite user growth.

Don’t believe me? Believe the math.

No Exclusivity = No Growth

It’s critically important to understand that the terms of the NFL deal don’t give Twitter any exclusivity.

That means Twitter isn’t guaranteed to receive any viewers.

Instead, the company needs to entice the 17.6 million people who typically tune into Thursday Night Football on TV to do so on Twitter.

As an avid football fan, I can’t think of any logical reason to make the switch. Can you?

If anything, the best Twitter can hope for is people doing both – watching the games on TV and tuning into Twitter on another device for the live commentary surrounding the action.

In such a scenario, Twitter’s NFL experience needs to be unique and compelling enough to keep people’s attention. That’s a tall order – particularly for a company that’s struggled to make its entire platform compelling enough to attract and retain new users.

But let’s be generous and assume it succeeds.

Let’s be even more generous and assume that Twitter succeeds in attracting 33% of the typical audience onto its platform to watch the game – and then converts 10% of them into full-time, faithful Tweeters.

If you do any research, you’ll quickly realize that I really am being generous here. My assumed conversion rates are way above the norm.

Admittedly, though, there’s an ulterior motivation to my charity.

As you’ll soon see, even if we overinflate expectations for the NFL deal, the math doesn’t add up.

Twitter Takes the NFL’s Sucker Bet

So 17.6 million average viewers for a Thursday night game works out to 5.8 million who’ll watch it on Twitter.

Applying our 10% conversion rate nets Twitter approximately 580,000 new users from the game.

Then we just multiply by the 10 games under contract, right? Wrong!

Each game doesn’t attract another set of 17.6 million new viewers. There’s significant overlap. (Most of them are probably Pittsburgh Steelers fans. In all my years of traveling, they seem to be everywhere and the most loyal. But I digress.)

Again, I’m feeling charitable. So let’s round up to the nearest quarter-million and assume over the course of the NFL deal, Twitter attracts 750,000 new users.

That works out to a pathetic 0.23% growth rate, based on Twitter’s current base of 320 million users.

And if we apply a basic cost analysis, the situation gets even more pathetic.

The NFL Wins Again

In our example, the $10 million sticker price for the NFL deal works out to $13.33 per new user.

That’s what Twitter is paying. So how much can it expect to make?

Well, we know that Twitter currently generates revenue of $2.33 per user, per quarter, via advertising. So the NFL deal works out to $9.32 in new annual revenue per user.

But those aren’t the only costs and potential revenue related to this deal.

On the revenue side, Twitter is going to be able to serve up ads to the entire audience, which will give it one-off opportunities to generate income.

However, Twitter’s ad inventory is limited. As CNBC’s Julia Boorstin reports, Twitter will only be able to sell 15 out of a total of 70 ads during each game.

On the cost side, Twitter needs to ramp up its infrastructure in order to live-stream the games to so many users.

For our purposes, let’s assume that any one-off advertising revenue will offset the capital expenditures. So add it all up, and Twitter’s actually losing about $4 per user on the NFL deal ($13.33 minus $9.32) for virtually no growth.

And the fewer new users Twitter attracts, the larger the loss.

Keep in mind… the company is already losing money without expanding its user base. So what’s the point here?

For the NFL it’s clear. They’re slicing and dicing the same asset to generate as much revenue as possible. For Twitter, not so much.

Forget Fourth and Long… This Is Fourth and Forever!

CFO Noto offers up an alternative justification for the deal. In an interview with Re/code, he said, “This is a great, great product for logged-out users.”

Sorry… but when your best growth strategy is to try to re-engage logged-out users, you’re desperate.

Meanwhile, Gottfried is convinced that the NFL deals shows Twitter is “finally starting to call some new plays.”

Indeed. But I’m afraid this one is a Hail Mary. From the company’s own 10-yard line, no less.

Even if it’s caught, there’s still a long way to go to the end zone and nearly no time left in the game.

Puns aside, I’ve been bearish on Twitter for a long, long time. And latest deal doesn’t change my outlook.

I’m convinced that the only deal Twitter should be working on is one to sell itself to the highest bidder before it’s too late.

Ahead of the tape,

Louis Basenese