Twitter primed for IPO; caught in IBM’s crosshairs

With Twitter’s IPO set to go live later today the company has priced its shares at $26 each, higher than the expected range of $23-25. With 70 million shares on offer the company is looking to score around $1.8bn in proceeds with a 30 day option for another 10.5 million shares to be sold.

Ovum analysts note that Twitter’s valuation just ahead of its IPO stands at $17.4bn at the upper end, a high number given that Twitter is still not profitable and has a much smaller user base than Facebook did at the time of its IPO. The company claims 230+ million monthly active users, 500 million Tweets sent per day, and 76 per cent of Twitter active users are on mobile.

Eden Zoller, principal analyst at Ovum, said: “Investors see social media and mobile as sweet spots and it is therefore no surprise that Twitter’s IPO is creating so much excitement and is oversubscribed. It is critical for Twitter to move quickly and effectively post IPO to address the challenges it faces in achieving growth and profitability. Twitter needs to step up and deliver on the expectations that are fuelling its valuation, and show that it has what it takes to provide a sustainable business model.”

The two foremost challenges Twitter needs to address are linked: how to keep users engaged while driving advertising revenues. To achieve these objectives Twitter will need to innovate in both services and advertising, but the format constraints that make Twitter such a dynamic and immediate service also limit its ability to innovate compared to a much broader platform like Facebook. Twitter has a difficult balancing act whereby it must introduce new ad formats into the Twitter stream without compromising the user experience. If it fails to get this right it will jeopardize user engagement and with it advertising spend. At the same time, investing in new service and advertising features will also push up costs, which if not carefully controlled will further impact Twitter’s ability to generate profits, Zoller said.

The IPO is attracting attention from other quarters too. Earlier this week however, IBM made claims that Twitter is infringing at least three IBM-owned patents to do with mobile advertising and web links. The claims have not yet made it to court but IBM has an extensive patent portfolio and has invited Twitter to negotiate for a resolution.