Why Twitter Needs More Users
A recent article in the online news source CIO Today entitled “Wall Street Thinks Twitter Needs More Tweeters” discusses the recent successes and downfalls of the social-networking platform Twitter. Even though Twitter generated more ad sales than expected in the last quarter, the rate of user growth has stagnated. According to the article, “analysts and investors are concerned that its slow pace of user growth could send advertisers elsewhere, such as Facebook’s 1.2 billion-plus active users”. There is no doubt that Twitter is one of the most universally known social network, but it seems that more people simply know about it than actually use it.
This scenario of advertisers trying to decide which social network to spend money advertising on can be modeled similar to an information cascade. An information cascade occurs in decision-making situations when the decision maker abandons their own inclination after seeing how previous people acted before them. There are two ways that previous people will affect a decision maker. The first way is the informational effect, where payoffs are not immediately affected by other’s decisions. The other way is a direct benefit effect, where the decision maker’s payoff is dependent to the actions of others. In the case of Twitter and other social networks, the amount of users on each platform has a direct benefit effect on the payoffs of advertisers. In class, we mentioned the example of a fax machine. Fax machines, which an advanced piece of machinery, are useless unless a significant portion of the population owns one. The function of a fax machine relies on other users having their own machine. Relating back to the advertisers, they benefit much more from buying advertising space on a social network that is used by a wider range of people. When advertisements reach a larger group of people, there is a higher chance the company profits from those people. Thus, Wall Street investors are justified in telling Twitter to grow its users. If the company doesn’t, advertisers will take their accounts to other platforms, which will hurt Twitter greatly in the long run.
Source: http://www.cio-today.com/article/index.php?story_id=0120013PKP20