The Case for Jack Dorsey, Twitter CEO

If you spend enough time listening to Silicon Valley folks, you’d be forgiven for assuming that all tech companies, particularly startups, originated in Lake Wobegon: they are all strong, good looking, and above average. And, to be sure, there are a lot of benefits that come from the instinctual optimism that inhabits the place: the fact that seemingly outlandish ideas that (according to conventional wisdom) will never work can receive funding and the full-on commitment of thousands of exceptionally talented people is a big part of why the region churns out company after company that does in fact change the world.

Twitter is a classic example: a description of the product in 2006 would have had most people shaking their heads at the very premise of a service based on broadcasting 140 character micro-posts (the word “tweet” wouldn’t come till later), but here we sit 9 years later discussing a product and eponymous company that has, in a very real way, changed the world broadly and the world of its users dramatically.

The trouble with optimism, though, is that it can blind you to real areas of concern, and again Twitter is the perfect example. While early skepticism centered on Twitter’s ability to monetize, by the time the company filed for its IPO in 2013 it was obvious the company had fantastic revenue potential but a real problem retaining new users (I wrote about this at the time). Unfortunately, as best I can tell, Twitter’s product strategy basically consisted of optimism that the company would magically improve its ability to retain new users while the attention of the executive team focused on monetization, culminating in Q4 2014 earnings that showed barely any user growth but impressive revenue numbers — and a 16 percent stock jump.

On the associated February phone call with analysts, then-CEO Dick Costolo led with the great results and declared that Twitter’s user problem was headed in the right direction as well:

Financially we had another great quarter with strong revenue growth and very strong profit…Importantly, I want to highlight that the user numbers we saw in January of this year indicate that our MAU trend has already turned around and our Q1 trend is likely to be back in the range of absolute net adds that we saw during the first three quarters of 2014.

Everything was going to be fine.

Of course, everything was not fine; the following quarter Twitter showed even slower user growth and this time revenue missed as well, and the stock gave back January’s gains and more, plummeting 25% in just two days. That’s when I wrote that Twitter Needed New Leadership, and the motivation wasn’t so much the then just-released earnings as it was all the earnings and public pronouncements that came before: if an executive team continually says that everything is great when it clearly is not, then in my mind they lose credibility. It just happened to take an earnings miss for Wall Street to share my assessment.

This, then, is why yesterday’s Twitter earnings call was so important — and so impressive. Just as in January Twitter beat financial expectations handily, and the stock quickly jumped in after-hours trading. It would have been plausible, and even understandable, if interim CEO Jack Dorsey and CFO Anthony Noto had taken the opportunity to reiterate that Twitter’s plan was working and that the stock did indeed deserve to be worth more.

In fact, though, Dorsey and Noto did the exact opposite: instead of focusing on revenue they focused on users, and were brutally honest that Twitter had fallen short. Dorsey stated right at the top:

We’ve been very successful at monetization, with a strong Q2, delivering over $500 million in revenue and more than $120 million in EBITDA. However, product initiatives we’ve mentioned in previous earnings calls like instant timelines and logged out experiences have not yet had meaningful impact on growing our audience or participation. This is unacceptable and we’re not happy about it.

The stock tanked, but that’s because it was too high to begin with: it’s not that Dorsey and Noto presented poorly, it’s that they presented honestly, and while that hurts now, it’s the only way to rebuild the credibility that Twitter has lost through too many quarters of insisting things were strong, good-looking, and always, always, above-average.1

Just before the earnings call Kara Swisher reported that Dorsey and Adam Bain, President of Global Revenue and Partnerships at Twitter, were finalists to replace Costolo, who stepped down in June. It was great timing, because said call laid out why, in my opinion, Dorsey should be the choice — and why it’s not at all an obvious one.

The fact of the matter is that Bain has done a phenomenal job at Twitter: the company had only $28 million in revenue in 2010, the year he started, yet just this quarter delivered over $500 million; that’s a 70x increase on an annualized basis. Were the CEO job based simply on past performance, no one would be more deserving. However, to make the decision in such a way — to effectively prioritize revenue generation — would be to make the exact same mistake Twitter made over the past several years: putting advertisers and money ahead of users and product. In the long run the former depend on the latter — and in a disclosure that clearly spooked the market, Noto noted that Twitter could soon be in danger of not having sufficient inventory — because of a lack of engaged users — for all of the ads it was selling.2

The question, then, is who can best rebuild the product, and it’s difficult to come up with anyone better than Dorsey:

  • Product development requires vision. When you keep in mind the “vision” Twitter presented at last fall’s analyst day — Reach the largest daily audience in the world by connecting everyone to their world via our information sharing and distribution platform products and be one of the top revenue generating Internet companies in the world. — Dorsey’s clarity on yesterday’s call was profound:

    You should expect Twitter to be as easy as looking out your window to see what’s happening. You should expect Twitter to show you what’s most meaningful in the world to live it first before anyone else and straight from the source. And you should expect Twitter to keep you informed and updated throughout your day.

    But Twitter can’t just be the best window to the world; Twitter also has to be the most powerful microphone in the world. You should expect Twitter to increase your reach and you should expect Twitter to encourage live and direct conversation and participation around whatever you share.

    If we meet these expectations, and we will, Twitter will become the first thing everyone in the world checks to start their day and the first thing people turn to when they want to share ideas, commentary, or simply what’s happening.

    More importantly, if Twitter meets those expectations, revenue and advertisers will follow; the relationship is a one-way street, and for too long Twitter has been trying to back into what must come first.

  • Product development requires authority. Twitter has long been captive to its best users who rail against any change on the margins, much less even a rumor of changes to the core product; I suspect this hesitancy has been in large part driven by the fact that everyone in Twitter’s leadership was ultimately a hired gun. Dorsey, though, is a founder, and however controversial his first stint at the company may have been, there is no denying the authority this fact gives him when it comes to making changes.

    Dorsey is already indicating that there will be no sacred cows, stating in his opening remarks:

    You will see us continue to question our reverse chronological timeline and all of the work it takes to build one by finding and following accounts through experiences like ‘While You Were Away’ and Project Lightning which launches this fall. Our goal is to show more meaningful tweets and conversations faster, whether that’s logged in or out of Twitter.

    Dorsey noted later on that the traditional reverse chronological timeline would still be available, but he again made clear the strictly chronological timeline wasn’t gospel; it’s doubtful anyone else could say so so brazenly.

  • Product development requires buy-in. Perhaps the most severe issue facing Twitter is employee retention, particularly in light of the increasingly depressed stock. Two more executives left yesterday, on top of the 450+ employees that The Financial Times reported have left in the past year. Stemming that flow will require both vision as well as a reason to believe that vision is attainable, and here again Dorsey is the obvious choice.

    First off — and as evidence clichés exist for a reason — it should be noted again that Dorsey is a founder, granting him not only authority but also legitimacy. Twitter head of product Kevin Weil told The Verge:

    Jack brings the vision of the founder of the product back, so he has a very strong sense of Twitter’s place in the world. He’s bringing his perspective to how we develop products, and honestly it’s been a great experience so far.

    Secondly, whether by circumstance or not Dorsey’s time at Twitter (2006-2008) is very highly correlated with the times the product evolved the most; Dorsey was also a proponent of Twitter’s original API-centric model and isn’t tainted by the developer drama of 2012. Bain may be as likable as Swisher asserted, but likability does not translate into buy-in, particularly in an arena (product) where Bain doesn’t claim to have any particular expertise.

    Perhaps most important, though, was yesterday’s call: Dorsey reportedly told Twitter employees he would be blunt, and he was. He was, as I noted, honest, and honesty is the foundation of trust, something the next Twitter CEO will desperately need.

To be sure, there are plenty of arguments against Dorsey. For one, he has another job as CEO of Square, which late last week was reported to have filed for an IPO. Then again, there are whispers Dorsey is less involved with Square than you might think, especially as the company has pivoted away from a consumer focus (Dorsey’s passion) towards small business financial services, and if he were ever going to leave pre-IPO would probably be better than post (although both options aren’t great).

For another, while Dorsey supervised much of Twitter’s early innovation, it was innovation that was all too often barely accessible due to Twitter’s operational problems. Moreover, by all accounts the fail whale symbolized more than the fact that the servers couldn’t stay up: the entire company seems to have had very little structure or discipline. That said, people grow and mature: Dorsey would now be a CEO with proven CEO experience, not simply an engineer with a good idea and little else to go on.

And, of course, there is the famous Twitter dysfunction: according to Swisher Twitter’s other iconic co-founder, Ev Williams, is against a Dorsey return, small surprise given the fact both managed to help fire the other during their respective go-arounds as CEO. Indeed, that there is yet another reason why Twitter has such a significant hill to climb: not only do they need a new CEO, they probably need a new board as well. Having a mixture of former CEOs and folks who don’t use Twitter doesn’t exactly suggest that the CEO decision will be based on what is best for the product. And that makes me pretty pessimistic.

  1. To be fair, Dorsey and Noto were simply seizing the opportunity presented to all new CEOs: that is they implicitly threw the old leadership under the bus and dramatically lowered expectations for themselves. Still, in my mind the opportunism doesn’t make their honesty any less impressive (particularly when you remember it cost both of them millions of dollars personally)  

  2. This is a point I got slightly wrong in my piece calling for new leadership: I focused on the possibility that advertisers would desert Twitter for being too small, while Noto warned about Twitter not having sufficient inventory to satisfy demand; both, though, are driven by the fact that Twitter needs more active users (and I believe my concern remains warranted in the long run)