Jack Dorsey has the privilege of running two high-profile, unprofitable companies at the same time: Square, a system for small business and individuals to make financial transactions, and Twitter, which was initially mocked as “a style of blogging that is as random and incoherent as writing on a bathroom wall,” became something cooler, and then degenerated into garbage.
Every few months, someone asks Jack Dorsey if he will continue to run both Twitter and Square at the same time. Yes, Jack Dorsey will say. I can have it all. “I can split my time and be present at both companies every single day,” he told The New York Times, explaining that the two companies' offices are just across the street from each other. “It’s not something I stress out about.”
This question popped up again this week on Twitter's earnings call. Twitter missed its fourth quarter revenue targets. The stock is down, and advertising revenue is down. User growth plateaued a year ago. Bloomberg estimated that Twitter has about 140 million daily active users, which was recently surpassed by the much-younger Snapchat.
At the same time, Twitter is more talked-about than ever for one reason: Donald Trump, the leader of the free world.
But the way Trump uses Twitter, and the way people react to Trump using Twitter, epitomizes all of its problems. Twitter is the fastest-moving social network we have, and that speed lends itself to mistakes, knee-jerk reactions, anger, insults, and brigading. At one time, Twitter was the tool of pro-democracy dissidents in Egypt. Now it’s a megaphone the most powerful man on Earth uses to attack Nordstrom.
Meanwhile, what is Square? The company started in 2010 with a device that enabled small family businesses to take credit cards at the farmers market. It’s diversified since then into Square Cash (personal payments by email), Square Register (point of sale software), Square Stand (a complete point of sale system and device), Square Capital (financing for merchants), Customer Engagement (email marketing, among other things), and Square Payroll (helps small businesses manage payroll). There’s also Caviar, the odd one out, which is a service that delivers from high-end restaurants.
Neither Square nor Twitter is profitable, but Square is on track. After its first earnings report posted a jump in earnings that beat investor expectations in early 2016, The New York Times ran a story with the headline “If Jack Dorsey Has a Problem Child Among His 2 Companies, It Isn’t Square.” In December, Deutsche Bank called it “underappreciated by the street” and labeled it a buy. Other analysts agreed, guessing that Square will grow earnings by 20 percent each year.
However, it’s not an easy ride: Unlike Twitter, Square has real competitors, including PayPal, Intuit, and Stripe. “Twitter’s got a niche where it owns that niche,” said Jay Ritter, a professor at the Department of Finance at the University of Florida who specializes in IPOs. “Square, on the other hand, has competition. It is not something where it owns a niche. There are other ways to have easy electronic payments. And consequently, investors are more concerned about, is Square going to be able to get sufficient size that it then becomes profitable? Or is a competitor going to wind up dominating the market?”
“Just because it’s a winner-take-all market doesn’t mean it’s a profitable winner-take-all market.”
That’s one reason why investors, and probably Dorsey himself, are still seduced by Twitter. While Twitter has seen user growth stall — a very bad sign for a social network — it’s still able to capture a lot of mindshare, and some investors believe that that means there is still a windfall to be made. Facebook, after all, saw its stock cut in half after its IPO only to rebound and march steadily upward. At this point, it’s clear that Facebook has a solid business and terrifying staying power. That’s what Twitter investors want: to dominate a market, trap advertisers, and conquer the world. The possibility that maybe Twitter has no competitors because there is no money to be made in microblogging is sidelined. As Ritter said, “Just because it’s a winner-take-all market doesn’t mean it’s a profitable winner-take-all market.”
Twitter’s market cap is about $13 billion, while Square’s is only $5 billion. That makes it much easier for Square to live up to its valuation. Given the real challenges in its market, it seems like it might make sense for Dorsey to commit to making Square into the revenue beast it has the potential to be, rather than mucking around in the swamp at Twitter, whose value to investors — and the world — has become increasingly dubious.
