Problem
Twitter is not Flying High. In the summer of 2015, Twitter's stock price was 50 percent lower than what it was shortly after the social networking service went public November 7, 2013. Twitter's disappointing performance led to the departure of its CEO, Dick Costolo, who served from 2010 to 2015. Cofounder Jack Dorsey was brought back as Twitter's CEO. With several high-profile departures and continuing unabated demotions, the young company faced turmoil among its executive ranks.
Launched in 2006, Twitter is often called the "SMS of the Internet" because it allows users to send short messages or "tweets" restricted to 140 characters with pictures and videos often attached. Twitter's leader described the social media service as an "indispensable companion to life in the moment" and "the world's largest information network." Users can follow other people on the social network. For example, Katy Perry, the American singer, songwriter, and actress, has more than 70 million followers. Justin Bieber (with 65 million) and President Barack Obama (with 60 million) round out the top three in terms of followers.
When a user follows another, she can see that person's status updates in her Twitter feed. Twitter has some 300 million worldwide active users, that is, people who log in at least once a month. Core users stay connected pretty much permanently, providing multiple status updates throughout the day. Although most tweets cover trivia, Twitter's claim to significance rises from its role in political revolutions such as the Arab Spring or live coverage of breaking news, including the raid on Osama bin Laden's compound in Pakistan. Twitter also appears constantly in the mass media. TV channels show tweets of athletes, politicians, or other celebrities, often live during their shows. Some 20 percent of smartphone users in the United States, and close to 10 percent internationally, use Twitter regularly. Twitter's business model is to grow its user base and then charge advertisers for promoting goods and services to that base of users. Individual users pay nothing. Their tweets give Twitter free user-generated content to drive more traffic. Companies pay for "promoted tweets" that are directly inserted into a user's news stream. Advertisers value how Twitter can deliver their ads in real time. In one famous episode, when a blackout halted the 2013 Super Bowl for over half an hour, Nabisco promoted Oreo cookies by tweeting, "Power out? No problem. You can still dunk in the dark." Advertisers can also target their ads based on the user's interests or location, the time of day, and so on.
Twitter faces several challenges that make its future prospects highly uncertain. Amid turnover and reshuffling in the management and engineering ranks, Twitter struggles to grow its user base. Compare Twitter's 300 million monthly users to Facebook's 1.5 billion. Twitter needs a larger user base to attract more online advertisers and better monetize its social media service. When serving as CEO, Costolo made the tweet-worthy declaration that Twitter's "ambition is to have the largest audience in the world." Yet, the trend runs in the opposite direction as Twitter's user growth has slowed considerably while Facebook is getting even larger, with a steep rise in users on mobile devices. If Twitter fails to grow in user size to increase the value of the communication platform for online advertisers, it might become either a takeover target for much larger digital advertising companies such as Google or be overtaken by a new social media news app.
Class Case Study:
The excitement was high when Twitter went public in the fall of 2013. Twitter's share price soared from $26 at its initial public offering (IPO) to over $73 within a few short weeks. But a year and a half later, after ups and downs, Twitter was trading well under the IPO price. To add insult to injury, Twitter's debt was rated "junk," reflecting the higher risk of default in relation to investment-grade bonds. At the same time, Twitter's market capitalization was about $25 billion (share price × outstanding shares) with annual revenues of $1.4 billion, while losing roughly $1 billion a year.
By the summer of 2015, Dick Costolo was coming under increasing pressure because of Twitter's lack of user and revenue growth. As a consequence, he was forced to resign July 1. A former improv comedian, Costolo's leadership style involved not only frequent but also often unexpected and rapid shifts in strategy. This may have worked well in Twitter's early days when he turned the rough-and tumble startup into a highly sought-after candidate by Wall Street for an initial public offering (IPO). Costolo struggled to define a clear and consistent strategy for a business that continued to lose money despite a tremendous cultural impact. This led to frustration and confusion among Twitter employees and other stakeholders. What Twitter needs, they argued, is a leader who takes a more proactive and strategic stance, as Mark Zuckerberg did when he declared that services on mobile devices is the future of Facebook and backed up this commitment with a high level of investments. In July 2015, Twitter co-founder Jack Dorsey returned as CEO; Dick Costolo tweeted "Welcome back, @jack!!" The question remains whether Jack Dorsey, who served as Twitter's CEO from 2008 to 2010, can turn the company around. He is quite busy, because he is also the CEO of Square, a mobile payment services company.
Task
I. Why is Twitter struggling? What role do industry and firm effects play here?
II. What grade would you give Dick Costolo, Twitter's CEO from 2010 to 2015? Support your decision with specifics. Also, list some of his leadership strengths and weaknesses. What recommendations would you have for the new Twitter CEO to be a more effective strategic leader?