The Illusory Attraction of Mainstream
Twitter’s stock got hammered this week in part because growth still seems to be slow. As a result, it seems as though it will never achieve mainstream status but instead be consigned to the horrors of a niche market. The company understandably tried to talk up its MoPub business and the much bigger audience it’s able to address through its ad network beyond Twitter but to no avail.
The reaction to Twitter’s earnings this week is illustrative of a broader tendency to assume things that don’t go mainstream will ultimately be unsuccessful. It’s dangerous to think in this way, not least because very few online and mobile businesses ever go truly mainstream in the sense of reaching a majority of users. Comscore reports monthly on the top 50 US websites and on the top 15 US smartphone apps and websites visited from smartphones. What’s struck me recently as I’ve viewed this data is very few companies in these lists attract more than 50% of the addressable audience in the course of the month. Here’s the (short) list of companies that regularly break the 50% barrier in each of these three categories:
The total list comprises seven companies, six of whose logos I’ve shown below the lists (I’ve left Apple off for reasons I’ll come back to later). These six companies have reached broad audiences across devices and platforms and may be considered truly mainstream. They include both very successful companies, as measured by growth, profitability and valuations, but also a couple of companies (AOL and Yahoo!) which are typically considered more figures of fun than objects of admiration among the tech press, with financial performance and valuations to match. Yahoo! and Google jostle for top spot on Comscore’s US rankings on a regular basis but that doesn’t make them comparable businesses.
Meanwhile, other businesses much further down the list include eBay (30% of monthly web users), Netflix (13%), and WordPress.com (11%). Each of these companies has built a successful business of significantly less than half the online audience. If we expand our search beyond the online sphere, Apple and Samsung, the two leaders in smartphones and tablets, each capture well under half of global market share.
What these successful companies have in common is not majority market share but finding a way to successfully generate revenues and profits from the users they do have. Though many of the companies on the list above generate revenue directly from online visits, Apple doesn’t, and that’s why I left them off the list of logos at the bottom. The fact Apple is able to capture 50% of smartphone browser users in any given month is essentially irrelevant to its business, whereas the fact it captures about 40% of the US smartphone user base and just over 10% of mobile phone buyers is the key. Google is on the list above but does so well not just because of its high share but because of the consistently high revenue it generates from each of these users.
Yahoo! and AOL, on the other hand, have each long captured majority share of US audiences across desktop and mobile but have failed to adequately monetize that user base. Many of Marissa Mayer’s actions as CEO of Yahoo! have focused on capturing usage across many of the categories people spend time in, but it’s her work on building a better ad platform as well as her attempts to create or recreate video and search businesses that’s more likely to lead to long term success. AOL under Tim Armstrong has taken a while to get there but is also belatedly focusing on its ad platform (and it’s interesting both Mayer and Armstrong came from Google, the best company in the world at monetizing an online user base).
I worry that by obsessing over user growth, investors are driving many tech businesses to focus on that above all else, sacrificing predictable revenue streams, profits and much more besides. Just look at Amazon and T-Mobile, two companies currently acting like startups in their pursuit of growth at ridiculously low margins. Then there are all the tech bloggers and financial analysts trying to convince Apple to sacrifice margins to go after the lower end of the smartphone market. All these strategies miss the point: neither user growth nor massive market share is the key to success in the tech market: finding a successful business model that works for a well-defined and defensible user base, and iterating on it regularly, is the key.