Twitter IPO: Risk factors and technology

Twitter IPO: Risk factors and technology

Summary: In the first of our series covering risk factors in Twitter's S-1 filing we look at technology and how it could impact Twitter's ability to grow its business after IPO.

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Twitter has submitted its filing to the U.S. Securities and Exchange Commission (SEC) and has listed its risks to the business across several different areas.

In this series, we look at what this means for investors.

From the filing (in bold):

"Our products and services may contain undetected software errors, which could harm our business and operating results."

Sometimes Twitter has service outages caused by bugs in its software. It experienced a bug in June 2013 after a “routine change” to its platform. This cascading bug meant that Twitter was down for about two hours.

This type of outage is difficult to predict or fix until the software is on the live system so the potential for loss of reputation, user complaints but more importantly advertising revenue could cause it harm.

The great thing about growing a business is that Twitter has hired talented engineers that produce code to a structured software development framework. This minimises the chances of outages caused by software failures.

Nowadays the ‘Fail Whale’ is a distant memory for most users.

"If our security measures are breached, or if our products and services are subject to attacks that degrade or deny the ability of users to access our products and services, our products and services may be perceived as not being secure, users and advertisers may curtail or stop using our products and services and our business and operating results could be harmed."

As a globally significant platform, Twitter experiences cyber attacks in attempts to bring the site down. In February 2013 Twitter was hacked affecting 250,000 users who had to change their passwords.

Errors by employees either unintentionally or otherwise could also compromise the high profile platform. Tweets from hacked user accounts receive a huge amount of visibility with the corresponding hit to reputation -- both for the hacked account and Twitter.

"Many of our products and services contain open source software, and we license some of our software through open source projects, which may pose particular risks to our proprietary software, products, and services in a manner that could have a negative effect on our business."

Twitter uses open source to code its platform. Open source code is subject to different laws around the world. Open source products are often subject to litigation by the ‘owner’ of the original code seeking payment or licencing for their work.

This might mean that Twitter could be forced to licence its proprietary software, or withdraw it until any claims are settled. This restriction could mean loss of revenue or an expensive settlement.

"We rely on assumptions and estimates to calculate certain of our key metrics, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business."

Twitter uses its own data source to calculate how many users it has. It needs to exercise judgement on how many spam or fake users it has and estimates this to be five percent of its user base.

It also counts as users applications that contact the servers for updates with no user action involved. These apps could give Twitter the impression that more users are accessing the service than in reality.

If its figures are proved to be significantly incorrect then perception about brand integrity will suffer.

"We rely in part on application marketplaces and Internet search engines to drive traffic to our products and services, and if we fail to appear high up in the search results or rankings, traffic to our platform could decline and our business and operating results could be adversely affected."

If you have a mobile device you have probably downloaded an app to access the Twitter API from Google Play, Apple’s App Store, BlackBerry World or Windows Marketplace.

If any of these app stores drop the app from their listings, then the ability to access Twitter from a mobile device could be compromised.

If Twitter stops appearing at the top of search engine results and becomes hard to find then users will turn away from the platform. Twitter is very much dependent on remaining top of the search engine results and an overhaul of the search engine algorithm could negatively impact it.

"More people are using devices other than personal computers to access the Internet and new platforms to produce and consume content, and we need to continue to promote the adoption of our mobile applications, and our business and operating results may be harmed if we are unable to do so."

Twitter generated over 65 percent of its advertising revenue from mobile devices. We change our devices regularly – and there is a risk to Twitter that we might not re-install an app to access Twitter on our new device.

This affects the amount of revenue Twitter will generate through advertising. If a new device form factor is released such as Google’s smart watch -- and gets massive market share -- then Twitter might not be able to generate ads on the new type of device.

"Our business depends on continued and unimpeded access to our products and services on the Internet by our users and advertisers. If we or our users experience disruptions in Internet service or if Internet service providers are able to block, degrade or charge for access to our products and services, we could incur additional expenses and the loss of users and advertisers."

Twitter is not available to users in every country. China currently forbids access to Twitter. This might change in the future. Iran shut down access to Google services last year. 

Anonymous successfully takes on websites on a regular basis. If Internet access is not available to users, then advertising revenue will fall.

So, based on the above risk factors would I buy Twitter shares? 

Twitter has covered a lot of topics around technology here, predicting and considering all the different factors that could affect its business. It has showed transparency in its metrics reporting and admitted its vulnerability in its dependence on other major players such as Apple and Google.

It shows a level of maturity that shows that whilst it is not yet pervasive around the world, it has considered its options. Based on the risks above, I would buy Twitter stock.

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