Photographer: Scott Eells/Bloomberg
Photographer: Scott Eells/Bloomberg

When Twitter Inc. announced its initial public offering, I was skeptical that investors were going to make much money:

Who couldn't make a profit out of a super-popular Web service with hundreds of millions of users who check their feeds with an obsessive fervor usually reserved for rats in lab experiments involving levers and cocaine dispensers? But the fundamental error that people make about the Internet is to confuse that which is popular with that which is profitable. If they were the same thing, the ranks of tech billionaires would be dominated by people who take pictures of kittens and compose poems about Jesus.

In fact, Twitter might find monetizing its popularity hard. Facebook found it harder than people expected to monetize its popularity, even though they’ve got a lot more users and a lot more space to run ads. The magic of Twitter is that your ad can generate a viral storm that takes it to millions of people. The problem of Twitter is that your ad can easily get lost in thousands of other tweets.

Don’t get me wrong: Twitter is a great marketing channel. The problem is, how does Twitter get in on the cash that flows from using that marketing channel? There are lots of celebrities being paid to tweet about products, lots of consultants being paid to run social-media operations and lots of companies using Twitter for outreach. But how many of those folks are paying Twitter?

When they priced the IPO, I followed up with more skepticism:

A few things about Twitter. The first is the ubiquity of bots (that’s why so many of us so easily went along with the deception). The second is the problem of selling advertising based on Twitter accounts, which is that @Horse_ebooks is probably not in the market for goods and services. Neither are the millions of bots that it emulated. It’s hard to know exactly how many junk accounts there are on Twitter, but reporting by the Wall Street Journal, and personal experience, both suggest it’s a lot.

And junk accounts aren’t the only problem. I have two Twitter accounts. Both are perfectly legitimate -- one is the private account I use to notify friends where I might be brunching, and the other is the public account I use to harangue you guys about stuff. (@asymmetricinfo, for anyone who would like to follow it, she said demurely.)

But you can only sell stuff to one of me. Which one? Do you have to pay to blitz me twice? Worse, from the perspective of an advertiser: How do you know that there’s only one of me to sell to?

That risk -- the inability of even knowing how many eyeballs you’re actually hitting -- will probably cause Twitter advertising to trade at a discount (as will the other difficulties that I outlined when the IPO was announced).

Advantage, McArdle! Twitter announced its second earnings report yesterday, and markets didn’t like it at all:

Oh, wait, I got it backward: Twitter’s ad revenue looks fine. It’s user growth that’s the problem.

Of course, a lot of companies would like to have such a problem: Twitter's user base grew 25 percent to 255 million. But that’s slower than last quarter’s growth. And those users aren’t as engaged as Twitter (and investors) would like to see:

“Timeline views,” an important representation of how active its users are with the service, reached 157 billion in the first quarter, an increase of 15 percent. That’s down from a 26 percent growth rate the previous quarter. It’s another sign that Twitter’s growth may be slowing, despite the company’s rollout of new features such as a redesigned profile page that allows users to further customize background photos and is similar in appearance to Facebook’s (FB) profile page.

There is a silver lining to this cloud, however: Its ad revenue looks surprisingly good. Ad sales more than doubled from a year earlier; the push to position Twitter as a companion to major media experiences such as the "Breaking Bad" finale and the Oscars seems to be working, and Twitter ads are particularly effective on mobile, which has been a hard space for a lot of media companies to crack. One hundred forty characters turns out to be a very good size for a smartphone. I was skeptical of this strategy, which turned out to be wrong, at least so far. And while I should have seen that Twitter would be especially good for smartphones, I didn’t.

On the other hand, there’s just as much reason for skepticism as there was before. For all its advertising success, Twitter is still not profitable, which means that it needs to show investors the kind of bacteria-like growth in its user base that conjures dreams of world domination. Unless it can reverse the slowdown -- or get so good at advertising that it's profitable anyway -- Twitter’s stock price will continue to suffer.

To contact the writer of this article:
Megan McArdle at mmcardle3@bloomberg.net.

To contact the editor responsible for this article:
Brooke Sample at bsample1@bloomberg.net.