Twitter - A Limited Universe?

02/12/2014 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The recent earnings from Twitter caused the stock to drop sharply and MoneyShow's Jim Jubak thinks that the "size" of the Internet advertising pie may be the reason.

Okay, Twitter (TWTR) is facing a kind of disk drive moment. For those of you who aren't as old as I am, that may not be very explicable, so let me go back and explain the inexplicable.

When I first was a cub reporter covering the venture capital and technologies industry, one of the stories I was doing back in the 80s was the disk drive industry, and, what I was doing was talking to a lot of venture capitalists about how they thought disk drives were the next new thing, new capacity coming online.

Everybody was funding disk drive companies, and it was a huge, huge wave, everyone wanted to invest in it. Retail investors and the stock market wanted to invest in disk drive companies, but I started to get this really weird vibe, and it became very clear to me, as I was doing this, that I was talking to more and more venture capitalists who were saying something like, “Well, all we need is 10% of the market,” and I realized there was a problem when I got up to my 22nd disk drive company and all these 27 companies needed was 10% of the market.

I think we're seeing something like that with Twitter, that we're going from a period where everybody was saying, “Oh, social media, I want to be part of that trend,” to a place where people are talking about social media companies as actually being competitors, that gains by Facebook mean, not just that the market is growing for social media as a whole, but it means that the advertising dollars that Facebook is getting are coming out of the potential advertising dollars that somebody like Twitter isn't getting.

That changed, I think, more than, really, the disappointment over Twitter's growth rate falling from 39% to 30% in terms of new eyeballs, if you will, for the engagement being down. I think it's the sense that maybe the pie is not infinitely expandable for all the companies involved, and that these companies actually do compete with each other and that, therefore, we are talking about, well, a large and growing, but still finite, universe of advertising dollars that social media can compete with and that it really matters who's good at this competition and who's not, and that's raised doubts about Twitter because Twitter, really, so far, doesn't look like it's got the advertising platform to win more market share in a competition like the one that we're starting to think about now for the whole social media sector.

This is Jim Jubak for the MoneyShow.com video network.

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