AABA Altaba Inc

By Christopher Mims 

If you are among the 73% of American adults who don't log in to Twitter at least once a month, you can be forgiven for viewing it primarily as a place where presidential candidates launch broadsides and celebrities embarrass themselves.

Twitter Inc.'s long struggle to define itself goes hand in hand with its recent inability to grow beyond its active but hard to grasp subcommunities. The mix of content, curation, humor, self-promotion and invective confounds its product teams, leaders and investors.

So let's define Twitter once and for all. Twitter is a media company that happens to be based in San Francisco, and it should be structured, led and valued as such. Twitter is no longer a technology-driven hypergrowth unicorn. Twitter has, in a way, admitted as much. Last week, in a memo to Twitter staff, Chief Executive Jack Dorsey called the service the "People's News Network."

For investors, that means Twitter is hardly a bargain, even after a 30% drop in the price of its shares since Oct. 5. Potential suitor Salesforce.com Inc. said as much on Friday, when it said it was no longer interested in acquiring Twitter, joining Walt Disney Co. and Google parent Alphabet Inc., which also considered bids, and passed.

The definition of a media company, says New York University journalism professor Jay Rosen, is one that "makes the stuff that draws the attention." Today, Mr. Rosen categorizes Twitter as more of an "editorial" company, which aggregates attention and sells its judgments about content.

But Twitter increasingly is the place where content is born. Millions of people "work" for Twitter by creating content that could dominate the next day's news cycle. Twitter also curates and amplifies this content, prompting comparisons with a social network.

Republican presidential candidate Donald Trump uses Twitter, a powerful broadcast medium, as a primary means of creating and distributing his message.

Twitter also is licensing a growing stream of content, from Wimbledon and the NBA to the NFL and the presidential debates. Thursday, it announced a deal with BuzzFeed Inc. to stream election-night coverage on Nov. 8. With these moves, it begins to resemble companies such as Disney, Verizon Communications Inc. or Netflix Inc.

But Twitter's core of monthly active users has been largely flat for the past 15 months, growing to 313 million in the second quarter, from 302 million in the first quarter of 2015. During the same period, Facebook added 271 million users, almost as many as Twitter's total, to 1.71 billion.

Revenue is still growing -- up 20% in the most recent quarter from a year earlier. But that is the slowest growth rate since Twitter went public in 2013. With user numbers stagnating, Twitter's best hope is to generate additional revenue from each user, with more and better ad products.

For now, though, Twitter remains unprofitable, mostly because of the outsize stock grants it gives to employees, in part to keep them from bolting for greener pastures. During the past 12 months, the value of those grants amounted to 26% of Twitter's revenue -- second-highest among technology companies with more than $1 billion in annual revenue, behind only Palo Alto Networks Inc.

Employee compensation gets to the heart of Twitter's problem. Big stock grants are common in Silicon Valley, where there is furious competition for top talent that can create breakthrough products. But this kind of behavior makes less sense for media companies, where much of the talent is -- and I say this knowing I'll someday eat these words -- more interchangeable.

Most investors already view Twitter as something of a hybrid between a media company and a tech company. Without profits, Twitter can't be compared with others based on a price-to-earnings ratio.

After Friday's stock drop, it is valued at roughly 4.3 times its revenue in the past 12 months. Among media companies, Disney's price-to-revenue ratio is 2.6, Comcast Corp.'s is 2.1, New York Times Co.'s is 1.2 and News Corp, publisher of The Wall Street Journal, is just under 1. Tech companies tend to be valued more highly: Alphabet's price-to-revenue ratio is 6.7, and Facebook Inc.'s 16.7.

If investors come to view Twitter purely as a media company, its stock price could be cut in half. A Twitter spokeswoman didn't respond to requests for comment.

To be fair to Twitter, about 10% of its revenue isn't from advertising, but from sales of data derived from all those tweets. This, it has been reported, is one reason Salesforce Chief Executive Marc Benioff was interested in the company. But surely a better fit, once Twitter's market cap looks more like that of a media company, would be a company like Disney or Verizon, which owns AOL and has agreed to buy the core assets of Yahoo Inc.

AOL and Yahoo also make interesting comparisons for Twitter. At some point, each ceased to meaningfully innovate and became, for the most part, a content business.

Write to Christopher Mims at christopher.mims@wsj.com

(END) Dow Jones Newswires

October 16, 2016 14:45 ET (18:45 GMT)

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