"They have a nice and interesting base to build upon, but an exciting business with lots of users doesn't necessarily generate returns," says James Gellert, CEO of Rapid Ratings, a subscription service that examines the financial health of companies.
Rapid Ratings gives Twitter's financial fitness a rating of 19 on a scale of 100. Gellert says that 90 percent of the companies with a rating below 40 have defaulted on their debt at some point. By comparison, the firm rated Facebook at 73 just before its May 2012 IPO and Google at 80 ahead of its August 2004 offering.
With 232 million users and an IPO poised to as much as $2 billion, Twitter is unlikely to go bust like so many of the companies that disappeared after the dot-com bubble burst in 2000. So many investors are optimistic about the company's future that Twitter on Monday seized on the demand for its stock and raised the projected price range of its IPO to $23 to $25 per share, up from an earlier target of $17 to $20.
Despite that enthusiasm, Twitter faces a slew of hurdles that range from an outsize proportion of international users —who generate less revenue than their U.S. counterparts— to concerns about a slowing rate of growth at a time when its user base is less than a quarter of Facebook's.
Although they both compete for people's attention and posts, Twitter and Facebook work differently.
Facebook gives its users control over who's in their social circle and which of their online friends can see specific posts. Twitter is set up so users can "follow" anyone — whether it's a celebrity, politician, sports star or a pithy teenager — who also has an account on the service. This flexibility makes Twitter like an open book that can be read by anyone. Unlike Facebook, Twitter restricts each post on its service to no more than 140 characters.
Twitter's openness has left the service with a bit of an identity problem. While Facebook is known as a to connect with friends and family and LinkedIn is the go-to place for exploring career opportunities, Twitter's purpose is more difficult to define, says Scott Kessler, an analyst with S&P Capital IQ.
In its IPO paperwork, Twitter highlights the simplicity, accessibility and spontaneity of its service and depicts it as one big conversation. Gartner analyst Brian Blau believes many people see it as a "giant party line."
Blau's analogy is apt. Long before Twitter, a party line was a telephone line shared by multiple subscribers. Think of it as a line for you, your neighbor and maybe Mrs. Smith around the corner. In rural areas, an entire town might share a single party line. If the line was in use, other subscribers could pick up their telephone and either eavesdrop or join the conversation.
Jumping into the discussion is alluring to the chatty and vivacious, but intimidating for those who are still unsure of their voice. Twitter will have to find ways to get more users to overcome their timidity so they become more active — and more attractive targets for advertisers. According to a recent Associated Press-CNBC poll, 29 percent of people with Twitter accounts never tweet at all.
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