Google's Many Benefits From A Twitter Acquisition

  • Google has been struggling in the social media market for years and an acquisition could help them gain a significant market share.
  • As another in-house development is not an option for Google, acquisition is its last resort.
  • Twitter is the only available social media site that could benefit Google significantly to justify such a move.
Google Can Benefit From A Twitter acquisition

Once again, internet giant Google (NASDAQ:GOOG) is rumored to acquire Twitter (NYSE:TWTR) in another attempt to challenge Facebook’s dominance in the social media market. In recent years, social media usage has slowly evolved from personal interacting and day-to-day event-sharing to news consumption, social involvement, job search, and crowd investing. As the impact of social media on internet users increases, Google’s absence from this market is alarming. Google had a number of social media attempts in the past, and it appears that they came to realize that an acquisition may be their only and last resort to win in this market. This is not the first time such rumors have spread across Wall Street; however, as it happens more often, it is important to understand Google’s point of view and possible benefits from such a move.

(Also see: Google Stock Analysis, Twitter Stock Analysis, Facebook Stock Analysis)

Google Social Media Attempts

Google had three previous failed attempts to launch social media sites that could gain a substantial market share. Google’s first attempt was Orkut, which was started in 2004 and with time became the leading social media site in two of the biggest emerging online markets: Brazil and India. In 2010, Google launched Buzz in order to become a global power in the social media market but retired the site only a few months after it was launched as it was unable to gain any traction and significant market share. In 2012, Google launched Google Plus, its recent attempt to create a Facebook-like social media site that could compete with Facebook worldwide. Last year, Google decided to retire Orkut and migrate its users to Google Plus in order to consolidate all its social media activity in one place and to focus the battle against Facebook in one place.

Google’s Benefit from the Twitter Buyout

As mentioned above, social media usage has expanded to many aspects of life, and many consider social media sites as the go-to portal for everything online. With the shift of Internet users from traditional sites to social media, online advertising is moving in that direction as well. As most of Google’s advertising revenue is generated from promoted search phrases or banner-based advertising, it has become vital for Google to launch a successful social media site and generate revenues from social media advertising. As shown in the chart below from Wearesocial, a social media research company, Google Plus is lagging behind Facebook in monthly active users.

Google_chart 3_040915

A more disturbing fact is that the three most popular non-Chinese social platforms are Facebook, Whatsapp, and Facebook messenger, all owned by Facebook. And not far behind Google, you can find another Facebook platform—Instagram. The chart above clearly shows Facebook’s dominance in this market, and when time spent on social media worldwide continuously increases every month, up to 2.4 hours in January 2015, Google is significantly behind Facebook.

Google’s acknowledgment of its misunderstanding of the social media market and its lack of time to develop a new tool is the first step towards the change in Google’s mindset. Once Google embraces the fact that it cannot develop an in-house successful social media site, it has to turn to acquisitions in order to complete this gap. Google needs to acquire a leading social media site that already has a large audience and attracts many monthly active users to save the time from developing brand awareness and market penetration. Looking at the list above, other than Facebook, most of the leading social sites are Chinese-based. After removing the Chinese-based applications, only a small number of sites remains. Among the remaining sites, only Twitter has the worldwide magnitude that could drive Google’s success.

Twitter has been named as a central means of communication in many political events in Asia, the Middle East, and Europe along with Facebook. Even though Google’s You-Tube is considered the company’s closest initiative to a social media site, the company is not mentioned with Facebook and Twitter as a global influencing tool. Acquiring Twitter will add Google to this closed group and increase Google’s online presence. According to this eMarketer research, Twitter is the third largest player in the US digital display ad revenue after Google and Facebook and will have a 7% market share in 2017, just behind Google with 11% and Facebook with 27%. In the case of an acquisition, the combined market share of Google and Twitter will be 18% in 2017, a significant share that puts Google in an excellent position to challenge Facebook’s dominance.

Besides a large market share, strong branding, and proven advertising success, Google will benefit from Twitter’s increasing ad revenue. In 2014, Twitter generated $432M (88% generated from mobile advertising), which is almost a 100% increase from 2013. Even for a tech giant like Google, adding a $0.5B business that is expected to triple in three years is a good deal financially, from the top-line perspective.

As the terms of the possible deal have not been disclosed yet, it is hard to comment on the full P&L and balance sheet impact for Google. However, in the long term, in order to gain a significant market share in the social media market that will drive substantial ad sales and challenge Facebook’s dominance, acquiring Twitter will be a great move for Google.

Conclusions

Google has failed a number of times before to penetrate the social media market successfully with its in-house social initiatives. The company is rumored to have discussed terms of a buyout with Twitter as a last attempt to penetrate and win the social media market. A Twitter acquisition will allow Google, above everything else, to make sure it does not miss the last attempt to join the social media boom.

Disclosure: The information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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Comments on this article and GOOGL stock

stocksman
bearish
Twitter is damn too expensive. Twitter had difficult time making money out of the millions of users it claims to have. Why will google spend those Billions?
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