Is Twitter’s R&D a case of flogging a dead (race) horse?

Twitter has invested $2.2bn in research and development over the last three years. But with growth in net revenue slowing considerably in 2016, it appears this sizeable investment is no longer paying dividends. Data for this post can be found here.

As Twitter’s revenue growth slows and its share price continues to slide, it’s not surprising to find the company’s costs being scrutinised. Earlier this week Techcrunch looked at executive pay and the remuneration of CFO/COO Anthony Noto in particular.

Research and development expenditure is a key area for a technology company like Twitter. You would expect it to be a significant cost, and sure it enough it is. You would also expect to see a significant return from such investment in user growth and ultimately in revenue. Twitter’s lack of user growth has been widely discussed so I’ve focussed on the $s.

Twitter’s 2016 R & D Performance

Twitter spent $713m on research and development in 2016.

Twitter financials last 5 years

At the same time its net revenue (revenue minus the direct costs of earning that revenue) grew by $109m, a 7.3 per cent increase on 2015.

That represents $0.15 of additional net revenue for every $1 spent on R&D.

Facebook’s performance 10x better

To put that in context Facebook’s equivalent numbers were:

  • R & D spend – $5,919m
  • Net revenue growth $8,788m.
  • $1.48 of additional net revenue for every $1 spent on R&D.

If Twitter had achieved the same level of net revenue growth for every $ spent on R&D its net revenue would have risen by over $1bn in 2016 ($1.48 x $713m = $1,055m).

This would have represented a 70.8 per cent increase in net revenue versus the actual growth achieved of 7.3 per cent.

Decline in Twitter R & D returns

As the graph below shows, 2015 and 2014 were considerably better by this metric.

Twitter R and D impact on net revenue

Twitter achieved $0.66 of net revenue increase per $ in R&D spend in 2015 and $0.81 in 2014.

These figures were similar to those achieved by Alphabet (Google), though still only half (2014) and two thirds (2015) of Facebook’s.

These numbers show that matching Facebook’s 2016 performance of $1.48 revenue/$ R&D was probably too much of a tall order.

However even if Twitter’s 2016 performance had only been equal to its own 2015 figure the company would still have seen a rise in net revenue of $470m ($0.66 x $713m), $361m more than was actually achieved. This would have meant a growth rate of 31.6 per cent.

You can imagine the significant impact on the company’s share price that a stronger growth story like this would have.

So R&D is still being heavily funded, but revenue growth is fast disappearing. This begs the questions, where, in who and in what are these funds being invested?

Share based compensation

Another factor here is Twitter’s R & D staff are the single biggest recipients of share based compensation (SBC). Anyone unfamiliar with share based compensation please skip to the end of the post for a brief explanation of how it works before reading further.

In the last three years Twitter’s total share based compensation expense has totalled $1,929m and has exceeded the total adjusted EBITDA generated by the company ($1,610m).

Effectively all the underlying profit generated (and more) since its IPO has been invested in remunerating employees and officers.

Research and development SBC has totalled $1,099m over the last three years. This represents half of the $2.2bn invested in R&D and shows how crucial share based remuneration is to Twitter’s strategy for attracting and retaining product and engineering talent.

The problem is that this represents a transfer of value from shareholders to R&D staff of over $1bn since the start of 2014. Meanwhile any innovation and improvements made are having a declining impact on revenue growth, resulting in a reduction in Twitter’s value of $25bn over the period.

Not what you’d call a great deal for shareholders.

What does this mean?

I can see two key factors at work here:

  1. Competition for talent – Twitter needs to attract the same quality of people who could work at Facebook, Google et al. It therefore needs to offer competitive remuneration packages. Share based compensation has apparently formed a key part of this to date.
  1. Creative block – lack of successful new ideas, innovation and improvements to drive revenue growth.

Implying the following question:

Should Twitter be getting more out of its R&D resources or are even these talented individuals unable to add significant value to the platform?

If the former, then this is a management issue which needs addressing and fast.

If the latter then the company should be looking outside of its own teams for ideas and innovation and allocating funds accordingly.

Either way, if it continues to invest huge sums in R&D without significant improvement in net revenues, then the company’s declining value appears unlikely to turnaround.

Share based compensation expense – an explanation

In a company’s accounts share based compensation (SBC) expense represents value given to employees of the company in the form of shares or options.

It’s calculated in various ways, but in simple terms it’s equal to:

SBC expense = Market value (of shares/options provided) – Amount paid by employee

Share based compensation generally forms part of an employee’s remuneration package to attract new joiners, motivate them to create value and/or improve retention.

SBC is a non cash expense, however because it relates to the creation of new shares – either immediately or potentially in the future when options become exercisable – its effect is to dilute existing shareholders. Again in simple terms this dilution is equal to the value of the expense.

Shareholders therefore expect to see a return on this investment greater than the value that they have been diluted by.


Note this is a highly simplified example, but it should help to get the gist.

Today ABC Company has a market capitalisation (the value of its equity to its shareholders) of $1bn.

It gifts shares to a group of highly sort after new employees who it believes will be instrumental in creating a new product.

The SBC expense of these shares is $10m at the point they are gifted i.e. 1% of its equity value.

The new employees are prohibited from selling the shares for a period of one year.

All things being equal the existing shareholders now only own 99% or $990m of the company.

A year later the company is valued at $1.2bn, with the $200m increase in value being wholly attributed to the success of the new product created by the team.

The shareholders 99% is therefore worth $1.188bn representing a gain of $188m.

The new joiners can now sell their shares worth $12m ($10m value when they were granted plus 1% of the increase of $200m in the overall value of the company).

Everyone’s a winner. The company didn’t have to find any cash. The new employees have banked $12m (less associated taxes) and shareholders have seen the value of their shares rise by nearly 19%.

Note: I do not own any shares in Twitter, Facebook or Alphabet. All analysis is based on publicly available information from Annual Reports, SEC filings and Proxy Statements.

Google isn’t killing PR, but it may be applying some Weedol

There were two big topics of conversation in the PR world last week. The first was Google’s updated Link scheme guidance on how it treats links with keyword rich anchor text in press releases and Tom Foremski’s resulting post on ZDNet asking if this was the end of PR Agencies. The other was the Channel 4 fakefans investigation showing how some in the PR and Marketing world are buying fake likes and followers to inflate brands’ apparent popularity.

The first issue has particular relevance to us at RealWire. In response to Google’s guidance we have implemented the rel=”nofollow” attribute to all links within releases published from today onwards and will apply it to all links across historic press releases hosted by us over the next few days. We were already planning our response before last week’s “excitement”, however staff absence due to holidays delayed our ability to implement the changes necessary until today (note to self, don’t allow staff holidays!).

We considered limiting the changes to the types of anchor text links Google highlights, as such links are very infrequent in releases our clients ask us to distribute. Ian McKee highlighted this option in his very well thought through post on the whole debate. However given the nature and quality of our client base, we’re confident that any marginal page rank that might accrue from our site for the odd editorially relevant keyword is unlikely to impact materially on their rankings, or feature very highly on their list of reasons for using our service. Taken inconjunction with Google’s apparent preference for all links in press releases to be nofollow, we’ve decided that this approach is both safer for our clients, and avoids any confusion.

It’s also worth noting that a recent report by Searchmetrics (a user of our service) highlighted the increased importance to search rankings of having a mixture of backlinks, including nofollow links, and the reduced importance of links with target keyword anchor text.

So what about the wider questions raised by Tom Foremski’s post? I think these have generally been summed up as follows:

Is this change by Google the end of PR?  No.

Is it the end of PR Agencies? No.

Is it the end of newswire services? No, but it could hurt some, particularly any that are reliant on a client base that has been producing the very keyword rich, link filled, low quality content that Google is out to target.

It’s in this context that I would characterise Google’s action as more like treating a lawn with Weedol. Google is seeking to eliminate poor quality and irrelevant content i.e. spam, from its results, but it doesn’t want to destroy the good stuff.

The fakefans situation is also just another form of spam. The idea that buying fake likes on Facebook or followers on Twitter has any value is just ridiculous. Facebook and Twitter should take a leaf out of Google’s book.

The only thing that professional PR people, and quality distribution services, have to fear from these changes and practices is complacency. We need to make sure that once the weed killer has done its job, the lawn that remains is rich and green.

Finally, on a RealWire note, it may be coincidental but during the same period Google has been making its Penguin and Panda updates our ranking for keywords relevant to our own market has improved. So much so that at the time of writing we are ranked No.1 for “press release distribution” on, when we were rarely in the Top 10 before Google started its clamp down.

Read into that what you will….

Google isn’t people Google is an algorithm

The title of this post is a comment I made in my presentation at 3i and have used a few times since. (I suspect I heard or read this somewhere once so if anyone knows the who, what and when please tell me so I can attribute).

I was reminded of the quote when reading last week about Eric Schmidt’s comments regarding Twitter and the concept of Twitter as a search engine. Drew Benvie is also carrying out a Twitter search experiment which has resulted in some discussion todayThose with more knowledge of these things than I will probably be able to point out many other reasons but IMHO Google’s success in search was based on five (probably pretty obvious) key factors:

– a simple interface
– low time to get started
– quick
– relevant results
– high coverage of topics

So how does Twitter compare? The table below is my (basic) attempt to summarise a comparison of the two against these five factors. I have added the last two to highlight the key differences as I see it between the basis for the responses.


For those active members of the Twitter community (like @drewb for example) I think that:

– the potential for increased trust due to the basis of response being real people and;
– for the same reason (potentially) increased relevance of the “results”

are likely to mean that they use Twitter more frequently to answer some of the questions they would have directed towards Google in the past.

However I suspect that these early adopters are the sort of internet sophisticates that already use a wider variety of means to find information – Social bookmarking, Blog searches etc.

For those occasional Twitter users, and those outside of the community altogether, Twitter has a way to go before it will be a significant search competitor to Google in market share terms for the key reason of time investment.

So for the majority of the world’s 1.5bn internet users I suspect that the ease of getting an answer from Google will continue their hegemony of the search market for the foreseeable future – however long that is these days!