Twitter IPO puts social media on trial

With today’s initial public offering of Twitter shares, investors aren’t only passing judgment on the seven-year-old microblogging service, but weighing in on the very future of social media, as well.

By the numbers, Twitter’s IPO falls short of the biggest stock market tech-kahuna of them all, Facebook. With a strike price of US$26, the 70 million Twitter shares being offered today could raise just over $1.8 billion and value the company at $14 billion. Underwriters have the option of purchasing an additional pool of 10.2 million shares, which could bump the proceeds up by an additional $265 million,

These figures fall far short of the numbers from Facebook’s May 2012 IPO, where 421.2 million shares were sold at $38 per share for a total haul of $16 billion and an initial company valuation of $104 billion. It was the largest ever for an Internet company. Twitter also trails Facebook in monthly active users (MAUs). In a pre-IPO filing with the SEC, the company reported 232 million MAUs, compared to Facebook’s 1.2 billion.

Smaller, but just as influential

But relatively small size is only part of Twitter’s story. With 76 per cent of Twitter’s traffic, or 175 million MAUs, originating from mobile devices, the company is better positioned than more web-centric Facebook – which counts only 48 per cent of users as mobile-only – to ride the growing mobile wave. Its reputation as the go-to service for real-time Internet news is also unique among social media services. When governments fell across the Arab world and Toronto Mayor Rob Ford admitted he smoked crack cocaine, Twitter was – and is – the platform of choice for news-hungry consumers.

After announced Sept. 12 that it was going to go public, Twitter showed signs of having learned from Facebook’s IPO experiences. Facebook’s shares slumped almost as soon as they hit the market – and eventually bottomed out at half their initial value – amid fears by investors that the company didn’t have a concrete plan to build its subscriber base and convert their online activities into realizable, sustainable advertising revenue. Thanks to consistent growth and profitability, Facebook has since recovered and now trades well above its IPO levels. But the market remains haunted by its initial stumbles, and investors are looking to Twitter as a test of social media’s long-term sustainability.

Twitter’s pre-IPO moves show it learned from Facebook’s mistakes as it traced its own path toward public ownership. It embarked on a low-key road show, and took pains to explain in detail how it would drive subscriber growth and how its advertising and revenue models would work.

Careful expectation-setting

Twitter was also deliberately conservative in setting a price for the offering. Facebook’s optimistic share values – bumped a number of times pre-IPO – set relatively high expectations among investors. Twitter, on the other hand, set an initial range of $17 to $20, specifically designed to keep investor expectations in check and avoid the letdown that followed Facebook’s IPO.

Twitter’s subsequent decision to bump the range to $23 to $25 last week before finally settling on a $26 strike price yesterday amid growing demand suggested the investment community might be feeling some Facebook-like pre-IPO hype.

TWTR now has 136 characters to convince advertisers and investors that it’s the real deal, and that social media in general is more than just a flash in the pan.