Case Study Directions
• Read in your textbook Case #4, “iRobot in 2019: Can the Company Keep the Magic?” and watch the following three videos.
o New Roomba Vac Maps Your House with Its Camera Links to an external site.
o iRobot CEO gives a Sneak Peek of Roomba’s New Product Lineup Links to an external site.
o Too lazy to mow the lawn? Roomba reveals Terra “Lawnbot” that can do it for youLinks to an external site.
• Write a 3–5 page paper, double-spaced, answering the questions below. The page count does not include the cover page, reference page, any charts, graphs, etc. Points will be deducted if the body of your paper (the responses to the Case Study Questions) exceed 5 pages. Do not include an abstract.
• At least 3 references of an academic or scholarly source are required for this case study to support your analyses and conclusions.
• Use APA 7th Edition writing style for your entire paper. Include narrative or parenthetical citations in the body of your paper and a reference page. Remember, all information that is not your own work or that is not common knowledge must be cited.
• Include headings to help organize your paper. Convert the questions to short descriptors. For example, an appropriate heading for Question 1 is: iRobot’s Strengths, Weakness, Opportunities, and Threats
• Set your margins to 1-inch on all sides and double-space your entire paper, including the reference page.
In addition to the above listed requirements, assignments are graded using the Case Study Assignment Rubric included in the online classroom.
Case Study Questions
- What are iRobot’s competitive and resource strengths, and what opportunities do you identify? What notable weaknesses and threats are facing the company? Assess the combined impact of these forces on iRobot’s future profitability.
- iRobot has the largest market share in a growing market, but does the company have a competitive advantage? A sustainable advantage? What additional strategies could the company adopt to secure or sustain competitive advantage?
- Which of iRobot’s competitors presents that greatest competitive threat? Why? Support your answer.
- From the provided financial data, what is iRobot’s financial condition? What do the financial statements suggest about the company’s future? If present trends continue, where do you see iRobot in the next few years?
- What advice would you offer to CEO Angle to improve iRobot’s market position and profitability. Support your decision.
IROBOT IN 2019: CAN THE COMPANY KEEP THE MAGIC? DAVID L. TURNIPSEED University of South Alabama JOHN E. GAMBLE Texas A&M University–Corpus Christi Having the largest market share in a rapidly growing industry, controlling over 75 percent of global revenue, and experiencing record growth and sales in the latest fiscal year was a situation that most companies would find calming. In 2018, its second year as a consumer-focused company, iRobot reported a 24 percent increase in revenue and a 10 percent increase in operating profit over the prior year, after absorbing the impact of tariffs imposed in the fourth quarter 2018, and announced expectations for about 17 to 20 percent revenue growth in 2019, which would push revenue to $1.28 to $1.31 billion. The company’s stock reached $130.57 on April 23, 2019, which was a 118 percent increase over the same date in 2018. Despite these successes, iRobot lost market share as the robotic vacuum industry moved from startup to mainstream.
A summary of the company’s financial performance between fiscal 2014 and fiscal 2018 is presented in Exhibit 1. EXHIBIT 1 Financial Summary for iRobot, Fiscal Year 2014–Fiscal Year 2018 (In thousands of $, except per share amounts) Source: iRobot Corporation, 2018 Annual Report, April 8, 2019, https://investor.irobot.com/static-files/afe34f92-c23f-4b64-b377-fb37788c0648.
However, for the management team at iRobot, those metrics only served to help fine-tune and develop strategy to improve the company’s performance and defend against several looming competitive threats. The company’s focus was the design and manufacture of robots that empowered people to do more both inside and outside of the home. The iRobot consumer robots helped people find smarter ways to clean and accomplish more in their daily lives. iRobot’s portfolio of robotic solutions featured proprietary technologies for the connected home and advanced concepts in cleaning, lawn mowing, mapping and navigation, human-robot interaction, and physical solutions that moved the company beyond simple robotic vacuums. The company had announced a relationship with Amazon Web Services (AWS) that was believed to enable iRobot to address significant opportunities within the consumer business and the connected home. The AWS Cloud would allow devices to interact easily and securely and enable iRobot to scale the number of connected robots it supported globally and allow for increased capabilities in the smart home. Although iRobot’s recent past had been magical, the company faced significant headwinds. Global penetration of robotic vacuums was about 10 percent, and iRobot had about 60 percent market share in 2017, but several serious competitors had emerged, and in many cases, offered similar products at much lower prices, resulting in a loss of market share for the company of about 3 percent. iRobot had divested its military and industrial robots and had become a consumer company with two product lines—robotic floor cleaners and robotic lawn mowers. Also, customer privacy issues and the threat of data leaks from the company’s robots’ cameras and mapping feature had caused negative publicity. The company’s CEO had ignited a furor when he announced that iRobot “could” reach an agreement to share data with Apple, Amazon, or Alphabet. Equally problematic, as the company moved into mid-2019, were unpredictable spikes in tariffs due to the U.S.-China trade problems, as well as market weaknesses including rising labor costs and weak protections for intellectual property.
The iRobot management team had an incredible track record on which to build—the task moving into the second half of 2019 was to avoid or overcome the external competitive threats and leverage prior achievements into future successes that would keep iRobot number one in its industry.
Company History iRobot, the leading global consumer robot company, was founded in 1990 by MIT roboticists Colin Angle, Helen Greiner, and Rodney Brooks, who shared the vision of making practical robots a reality. The company’s first robot was the Genghis, designed for space exploration. Five years later, the Ariel was developed to detect mines, and two years later in 1998, iRobot won a DARPA (Defense Advanced Research Projects Agency) contract to build tactical robots. The company’s PackBot robot was used in the United States to search the World Trade Center after the 9/11 attacks and deployed with U.S. troops in Afghanistan and Iraq. Also in 2002, the company developed a robot that was used to search the Great Pyramid of Egypt (and it found a “secret room”). Perhaps the most notable event in 2002 was the development of the first iRobot Robotic Vacuum Cleaner (RVC) named Roomba. Two years later in 2004, iRobot won a U.S. Army contract to build the 312 SUGV (Small Unmanned Ground Vehicle) that was used by soldiers and combat engineers for ordinance disposal. Also in 2004, the company entered into an agreement with the Japanese distribution company Sales On Demand Corporation (SODC) to promote and distribute iRobot products in Japan, the largest consumer robotics market outside of North America. page In November 2005, iRobot became the first robot manufacturer to have a successful public stock offering. The company sold 4.3 million shares of stock at $24.00 and raised $103 million. Also in 2005, the Scooba—a floor washing robot—was launched, followed in 2007 by the Looj gutter cleaning robot, the Verro pool cleaning robot, and the Create—a programmable mobile robot. The company continued its internationalization, and partnered with Robopolis, a French distribution company, to sell its products in Germany, Spain, Portugal, the Netherlands, Austria, France, and Belgium. iRobot continued a prolific trend of products, and in 2008 introduced the Roomba pet series and a professional series of RVCs. The company also expanded into maritime robots and won a contract from DARPA to build a LANdroid communication robot, which served as a mobile signal repeater. In 2010, iRobot’s Seaglider maritime robot helped monitor the oil leakage following the BP Deepwater Horizon oil spill in the Gulf of Mexico. The next year, 2011, the company introduced an improved Scooba floor washing robot, a new series of Roomba dry vacuum robots, and the 110 FirstLook, which was a small lightweight robot that could be thrown. The FirstLook was designed for use by infantry forces to locate and identify hazards while keeping personnel safe. In 2012, the company purchased a rival firm, Evolution Robotics, Inc., for $74 million. Evolution Robotics produced a hard floor cleaner that used Swiffer pads to clean wooden floors, which was different from iRobot’s products. iRobot’s home robot sales exceeded 10 million units in 2013. A new floor scrubbing robot and a vacuuming robot that included intelligent visual mapping and cloud connected app control were launched in 2015. In 2016, the Braava jet mopping robot was introduced, and the company opened an office in Shanghai, China, which significantly expanded its global footprint. iRobot made the decision to focus exclusively on consumer robots, divesting its defense and security robot business in mid-2016. There was increased investment in advancing mapping and navigation, and user interaction including cloud and app development. iRobot continued its globalization strategy in 2017, and in April of that year, the company acquired SODC, its distribution partner in Japan, and Robopolis, its French distribution partner that served Western Europe. Wi-Fi connectivity was included on two new Roomba vacuum models (690 and 890), which extended Wi-Fi connectivity to the full line of Roombas. The company introduced two new connected products to its product portfolio to bring the advantages of cloud connectivity to its consumers. The iRobot HOME App transmitted the robots’ maps directly to customers through “post-mission” cleaning maps. iRobot believed that the data sourced from the robots’ maps would accelerate new product development as well as digital partnerships for the smart home. iRobot introduced a new direction in 2019, when it introduced its newest line of consumer robot, the Terra.
The iRobot Product Line in 2019 i7 and e5iRobot debuted new Roomba vacuums in 2019 including the i7 and e5. The Roomba i7 is the only robotic vacuum that can empty its own dirt bin, and with its Imprint Smart Mapping, the only smart vacuum that can be scheduled to clean rooms by name. The i7, which sold for $799.00 (vacuum only) or $999.00 with the dirt disposal base, could be verbally controlled with Alexa or Google Assistant. Digital Trends named the Roomba i7 “Best Overall” in February, 2019, and in March 2019, PC Magazine rated it “Editor’s Choice.” The new Roomba e5 Wi-Fi controlled robovac had five times the suction of the Roomba 600 series vacuums, was WiFi connected, and was compatible with Alexa and Google Assistant. The Roomba e5, had intelligent navigation, could be controlled with the iRobot HOME app, and sold for $399.00. 900 Series Roomba VacuumsiRobot’s newest Roomba in 2018 was the 960, a lower cost alternative to the 980. The 960 won second place and Editor’s Choice in PC Magazine’s “Best Robot Vacuums of 2018.” The 960 helped keep floors cleaner throughout an entire house via intelligent visual navigation, the iRobot HOME App control with Wi-Fi connectivity. The Roomba 960 had five times the suction power of the previous generation of Roomba RVCs, and extended mapping, visual navigation, and cloud connectivity to a wider range of customers. The Roomba 960 sold for $699.99, compared to $899.00 for the 980. The Roomba 960 was named Editor’s Choice in March 2019 by PC Magazine, and the Roomba 980 received PC Magazine’s seventh place for best RVC. The greatest difference between the two models was longer battery life and deeper carpet cleaning for the 980. The greatest difference between the two models was longer battery life and deeper carpet cleaning for the 980. 800 Series Roomba VacuumsThe Roomba 800 series robots had an EROForce technology, which included brushless, counter-rotating extractors that increase suction for better performance than bristle brushes, while requiring less maintenance than previous Roomba models. The Roomba 890, which sold for $499.99 in February 2018, was selected “Runner-Up” Best Robotoc Vacuum by Consumer Reports. 600 Series Roomba Vacuums600 series robots had a three-stage cleaning system that vacuumed every section of a floor multiple times as well as AeroVac technology and improved brush design, which enabled the robot to better handle fibers like hair, pet fur, lint, and carpet fuzz. The Roomba 690 sold for $279.00 and was Wi-Fi connected. The 690 received PC Magazine’s third place choice for Best Robotic Vacuum of 2018, “Editor’s Choice” by PC Magazine in March 2019, and Toptenreveiws named it “Best Overall” in April 2019. The bottom-line Roomba 614, which sold for $299.99 in February 2018, was not Wi-Fi capable. Braava Automatic Floor Mopping RobotsThe Braava robots were designed for hard surface floors and used a different cleaning approach than did Roomba models. The Braava 380t robot, priced at $299 in February 2018, automatically dusted and damp-mopped hard-surface floors using popular cleaning cloths or iRobot-designed reusable microfiber cloths. The Braava robot included a special reservoir to dispense liquid throughout the cleaning cycle to keep the cloth damp. The 380t could use iAdapt navigation to map where it had cleaned and where it needed to go. The Braava 240 was designed for smaller spaces than the 380t, and could wet mop, damp-sweep, or dry-sweep hard floors. The iRobot HOME App was compatible with the Braava Jet 240 and helped users get the most out of their robot by enabling them to choose the desired cleaning options for their unique home. PC Review gave the Brava Jet 4/5 (tied for highest) in its May 2019 Best Robot Mops Reviews. The Braava 240 sold for $169.00 in April 2019. Mirra Pool Cleaning RobotiRobot’s Mirra 530 pool-cleaning robot was designed to clean any type of in-ground residential pools. It could remove debris as small as two microns from pool floors, walls, and stairs. The robot had a scrubbing brush to clean leaves, hair, dirt, algae, and bacteria off pool walls and floor, and a pump and filter that cleaned 70 gallons of water per minute. In April 2019 the Heavy.com reviews rated the Mirra 530 “best for deep cleaning in-ground pools.” The Mirra sold for $999.00 in May 2019. Terra Lawn Mowing RobotiRobot unveiled its lawn mower robot, Terra, in January 2019. The robotic lawn mower would be launched in Germany during 2019, and introduced to the United States in 2020, although some U.S consumers would be allowed in a beta test program. Pricing would be announced later in 2019. The Terra can be controlled from the company’s iRobot Home app, and the owner can adjust the mower deck height to cut grass to the desired length. CEO Angle said that the robotic lawn mower had been in design for over 10 years, and the company gave up twice because of issues with the satellite-based GPS and the lasers that direct the robot’s movements. The Terra has Imprint Smart Mapping that enables the robot to know exactly where it is on the lawn and cut in straight lines without boundary wires. Three iRobot products—the Roomba 960, Roomba 690, and Roomba 980—were listed among the 10 Best Robot Vacuums by PC Magazine in 2018; however, the Eufy RoboVac 11, selling for $219, was chosen number one, ahead of iRobot’s Roomba 960, selling for $699, over three times the price of the Eufy RoboVac 11. The iRobot Roomba e5 was chosen fourth-best robovac in January 2019 by Consumer Reports.
The Robotic Vacuum Industry According to a market report by Persistence Market Research, the residential robotic vacuum cleaner (RVC) market was estimated at $1.3 billion at year-end 2015 and was expected to increase at an annual rate of 12 percent to reach $2.5 billion by 2021. Production of residential RVCs was about 1.9 million units at the end of 2015 and was forecasted to increase at an annual rate of 16.5 percent to reach 4.8 million units by 2021. The market penetration was quite low for robotic vacuums, and in 2018 was approximately 10 percent of the total households in the United States. In March 2019, MarketWatch forecast global demand for RVCs to grow at a compound average growth rate of 18.6 percent over the next five years. iRobot believed that the immediately addressable market in the United States was double the current base of about 13 million households, with a long-term potential of 86 million households. Improved functionality and superior performance were among the key factors driving adoption of robotic vacuum cleaners in households. Product innovation was paramount for key companies in the RVC industry. A majority of leading companies were increasingly concentrating on research and development (R&D) of unconventional products in order to gain a competitive edge. There was a trend of bagless vacuum cleaners that could accelerate market growth. New product launches of RVCs included advanced features such as vacuum cleaners with UV sterilization, spinning brushes, security cameras, Internet connectivity, voice response, app features, and mapping features. Such advancements were expected to drive the market further. Innovation of a novel technology stair-climbing robotic vacuum cleaner was expected to present lucrative opportunities in the near future. The industry was not without challenges, as the huge market size and low penetration attracted new entrants and resulted in price-based competition. There was also a trend toward new and low-volume products. All these combined to put pressure on gross margins.
iRobot’s Strategy: The company’s offensive strategy going into 2019 was to maintain Roomba’s leadership in the consumer robotic industry while positioning the company as a strategic player in the emerging smart home. iRobot believed that it was critical that the company protect its design, marketing, and branding lead with respect to floor care, while extending it into new areas like lawn mowing over the next few years, even at the expense of reduced short-term profitability. CEO Angle set out the company’s 2019 strategy, designed to protect iRobot’s market share as the global industry matured, as: Diversification of the manufacturing and supply base from China. Aggressive competitive pricing to fend off competitors. Driving higher top-line growth and maintaining dominant market share. Increasing investment in research and development to extend iRobot’s technology and product leadership. Aggressive spending on advertising and marketing. iRobot’s strategy had provided market-leading positions in the robotic segment of the global vacuum cleaner industry. In 2017, iRobot had 88 percent of the North American market, 76 percent of the European/Middle East/African market, and 34 percent of the Asia/Pacific market; however, increasing competition had resulted in a 3 percent loss of market share in 2018. CEO Angle warned that the new strategy of diversifying the manufacturing and supply base, plus the increasing industry challenges, would reduce profitability in 2019 and 2020. Mr. Angle estimated that the company’s gross profit margin would decline from about 51 percent of sales in fiscal 2018 to about 48 percent in 2019.
iRobot’s Technology Focus iRobot believed that a better robot lives in the world by moving around and acting more intelligently in its environment, by cooperating with the people it serves more compellingly, and by physically interacting more effectively with its surroundings. As the number-one global consumer robotics company, iRobot strived to develop best-in-class technology in mapping and navigation, human-robot interaction, and physical solutions. Mapping and NavigationiRobot was focused on mapping and navigation technology development to make its robots smarter and simpler to use, and to provide valuable spatial context to the broader ecosystem of connected devices in the home. Robot-built and -maintained home maps were core to the company’s long-term strategy, providing important spatial context by capturing the physical space of the home. Maps provided the information needed to enable robots to purposefully navigate throughout their environment and accomplish meaningful tasks. User Experience and Digital FeaturesiRobot invested in the development of interfaces for its robots to provide its customers with rich and convenient ways to interact with the entire iRobot family of products. iRobot’s customer interaction and experience with its products was intended to be enriched as a result of connecting the company’s robots and integrating them with connected devices in the home, and with other cloud resources and services. Physical SolutionsiRobot was dedicated to designing and producing robot solutions with market-leading cleaning mission performance that provided convincing value to its customers. The company’s robots’ core value from the customer’s perspective was the ability to effectively and efficiently perform the physical mission—cleaning. iRobot believed that it produced the best mission performance solutions on the market, whether it was vacuuming, mopping, or any other cleaning tasks.
The Smart Home: An Ecosystem of Robots Working Together iRobot imagined a home that maintained itself and miraculously did just the right things, anticipating its owners’ needs. The smart home would be built on an ecosystem of connected and coordinated robots, sensors, and devices that provided homeowners with a high quality of life by seamlessly responding to the needs of daily living—from comfort to convenience to security to efficiency. iRobot was working to build an ecosystem of robots and the data required to enable the smart home. Robots and other devices in the smart home need to understand the environment so they can figure out what they should do. Angle explained that there was no point to being able to understand the sentence “Go to the kitchen and get me a beer” if the robot doesn’t know where the kitchen is.1 You could also have smart thermostats, lights, blinds, door locks, humidity sensors, TVs, radios, and speakers that sit in this ecosystem. Those would be the building blocks of the smart home. The unifying intelligence tying everything together and what enabled the home to be smart could come from iRobot or a different company. Guy Hoffman, a robotics professor at Cornell University, said detailed spatial mapping technology would be a major breakthrough for the smart home. With regularly updated maps, Hoffman said, sound systems could match home acoustics, air conditioners could schedule airflow by room, and smart lighting could adjust according to the position of windows and time of day. If a customer bought a Roomba, owned a smartphone, and had connected devices, the Roomba could build a map of the home, place the connected devices on the map, and share that information with all other devices. Then the ecosystem or interconnected system could give the owner a choice of preferences based on the included devices, and have the room start behaving intelligently. If the homeowner did not like how the home behaved, he or she could change preferences and the system would learn. The Amazon Alexa and Google Home devices could also supplement that behavior by providing a voice interface to the system, extending the smart home’s reach to things to which they are connected. iRobot CEO Colin Angle explained the smart home concept to MIT Technology Review in December 2017: What we’re seeing today is a collection of devices that are all controlled by their own apps. The promise of enhanced utility is actually being reduced by the complexity we’re introducing. A successful smart home should be built on the idea that nobody programs anything; the basic services in your home would just work. So you would walk up to your front door, which would unlock if you were authorized to enter. You would go in and the light would turn on, the temperature would adjust, and if you started watching TV and moved to another room, the TV show would follow you. When you’re no longer using various services, they could shut down automatically to save energy, or be set to respond to the weather or the time of day. That might sound like an idealized vision of a smart home, but it’s completely reasonable to do if you have a robot in the mix that is actively going out and discovering what rooms exist and what the different devices in them are, and you have a way of figuring out what room people are in. iRobot currently has an app that can analyze Wi-Fi coverage in homes using its Wi-Fi connected Roombas. It can provide a map showing where wireless signals are strongest and weakest. The positioning for iRobot is we’re going to be the spatial-understanding people. . . .We’re trying to make the home sufficiently self-aware to be self-configuring and useful. . . . The emerging AI home dimension is going to play out in a big way over the next two years.2
iRobot Ventures As part of iRobot’s Corporate Development team, the iRobot Ventures group fostered engagement with the entrepreneurs and early-stage companies driving innovation in consumer robotics and in the connected hardware ecosystem. iRobot understood how difficult it was to bring a product to market, and to build a company. The company believed that investors should provide more than just capital and validation of an idea. iRobot Ventures delivered value by facilitating access to the company’s engineering and operations resources, as well as a network of external service providers, investors, and partners. iRobot Ventures: Sought strategic investments that generated attractive financial returns. Syndicated with top-tier VC firms, strategic and angel investors. Provided access to internal and external resources. Embraced standard terms. Made informed investment decisions rapidly. Did not seek special treatment or control. iRobot Ventures supported teams that were passionate about using technology to solve hard problems. The company invested in applications that were consistent with its core business or represented new market opportunities, and participated in the early stages of the innovation lifecycle, where iRobot had the most to add, focusing on the following: Consumer technology Service-based business models Recurring revenue streams Cloud services and infrastructure Computer vision Localization and mapping Machine learning and artificial intelligence Robotic mobility and manipulation
iRobot’s Financial Performance iRobot enjoyed a meteoric ascent in its financial performance between fiscal year 2016 and fiscal year 2018. Revenue had grown from about $661 million in fiscal 2016 to approximately $1.1 billion in fiscal 2018. The company’s gross margin had improved from 48 percent of net revenue to 51 percent between fiscal 2016 and fiscal 2018. Operating income increased from 8.7 percent of net revenue in 2016 to 9.7 percent in 2018, and net income grew from 6.3 percent to 8.1 percent during that time period. iRobot stock also had an impressive gain, increasing from $20.00 in January 2005 to $125.06 in February 2019.
iRobot’s Rivals in the Floor Care Market The floor care market was crowded with big-name competitors. However, the iRobot Roomba models placed numbers two, three, six, and seven in the NPD Retail Tracking Service poll in 2017. The iRobot Roombas were the only robotic floor cleaners to place in the top 10. Shark’s upright replaced Dyson at number one in the February 1, 2017, Consumer Reports reviews, and Shark entered the robotic vacuum market in 2017. Eufy RoboVacIn January 2019, Consumer Reports selected the Eufy RoboVac11S, which sold for $224.99 on Amazon in January 2019, as the Second Best Robovac, and the Eufy 30C, which sold for $299.00 on Amazon, as the third best. In January 2018, PC Magazine selected the RoboVac 11 as Editor’s Choice and first place among eight in “Best Robotic Vacuums of 2018.” In February 2018, the RoboVac 11 sold for $219.00 on Amazon. The Eufy Robotic mop was picked number one in Atopdaily’ s 2018 Robotic Mop Review.
Twitter was a giant in the industry; however, it faced serious competition from companies such as Facebook (including Instagram and WhatsApp), Snap, TikTok, Alphabet (including Google and YouTube), Microsoft (including LinkedIn), and Verizon Media Group. There are also foreign competitors that are regional social media and messaging companies, with strong positions in particular countries, including WeChat, Kakao, and Line, which pose competitive challenges. Many of these competitors were growing at a multiple of Twitter’s growth—over the two-year period 2017 to 2018, Facebook had an increase of 296 million monthly active users (+15.8 percent), WhatsApp increased by 300 million (+30 percent), and Instagram had increases of 200 million (+33 percent). Over the same period, Twitter increased only 13 million monthly users (+4.1 percent): In 2018 its share of worldwide digital ad revenue dropped to 0.8 percent in 2018 (compared to Google’s 38.2 percent and Facebook’s 21.8 percent). Although Twitter had made a good profit in fiscal 2018, was it due largely to keeping costs at unsustainably low levels? Could the company continue to grow revenue and operate without allowing costs and expenses to drift up and erode income? Twitter’s CEO and its Board were faced with two daunting questions: (1) what could they do to assure Twitter’s continued growth and profitability, and (2) was the company an increasingly attractive take-over candidate? The majority of the top 10 most-followed Twitter accounts were entertainers who used the service to communicate with their fans, spread news, or build a public image. The near-instant gratification through direct updates from celebrities such as Rihanna, Jimmy Fallon, Lady Gaga, and Taylor Swift and the feeling of inclusion in a specific group of fans was a major reason for social media users to use Twitter. The accounts of high-interest people such as entertainers, politicians, or others at risk of impersonation were verified by Twitter to authenticate their identity. A badge of verification was placed on confirmed accounts to indicate legitimacy. Major sporting events and industry award shows such as the Super Bowl or Academy Awards generated significant online action. The online discussion enabled users to participate in the success of celebrities who often posted behind-the-scenes photo tweets or commentaries. On-set or in-concert tweets were other methods utilized by celebrities to enhance their appeal and fan interaction. Twitter was quite simple: Tweets were limited to 140 characters until late 2017 when the limit was raised to 280. The character constraint made it easy for users to create, distribute, and discover content that was consistent across the Twitter platform as well as optimized for mobile devices. Consequently, the large volume of Tweets drove high velocity information exchange. Twitter’s aim was to become an indispensable daily companion to live human experiences. The company did not have restrictions on whom a user could follow, which greatly enhanced the breadth and depth of available content and allowed users to find the content they cared about most. Also, users could be followed by hundreds of thousands, or millions of other users without requiring a reciprocal relationship, enhancing the ability of users to reach a broad audience. Twitter’s public platform allowed both the company and others to extend the reach of Twitter content: Media outlets distributed Tweets to complement their content by making it more timely, relevant, and comprehensive. Tweets had appeared on over one million third-party websites, and in the second quarter of 2013, there were approximately 30 billion online impressions of Tweets. The Twitter Brand Image Twitter had a powerful brand image. Its mascot bird was not chosen because birds make tweeting sounds, but rather because “whether soaring high above the earth to take in a broad view, or flocking with other birds to achieve a common purpose, a bird in flight is the ultimate representation of freedom, hope and limitless possibility.”1 Twitter was initially named “Jitter” and “Twitch,” because that is what a phone would do when it received a tweet. However, neither name evoked the image that the founders wanted. Noah Glass got a dictionary and went to “Twitch,” then to subsequent words starting with “Tw.” He found the word “Twitter,” which in the Oxford English dictionary means a short inconsequential burst of information, and chirps from birds. Dorsey and Glass thought that “twitter” described exactly what they were doing, so they decided on that name. The name was already owned, but not being used, and the company was able to buy it very cheaply. In 2012, the old Twitter bird was redesigned, slightly resized, changed from red to blue, and named Larry the Bird (named after NBA star Larry Bird). The lowercase “t” icon and the text “twitter” were removed; the company name was no longer on the logo. The blue bird alone communicated the Twitter brand. “Twitter achieved in less than six years what Nike, Apple, and Target took decades to do: To be recognizable without a name, just an icon.”2 According to a Twitter survey conducted to help understand the company’s brand legacy, 90 percent of Twitter users worldwide recognized the Twitter brand. Twitter’s 2018 ad campaign “What’s happening” used only the Twitter logo and hashtag symbol. The Twitter brand was called “minimalization at its finest”3—an advertising campaign that did not page 287have one word, but yet delivered a powerful message from the brand. Twitter’s Global High Profile Twitter had become very well-known because of several high-profile users. Several of the world’s leaders had millions of followers, as shown in Exhibit 3. From May 2017 to May, 2019, U.S. President Donald Trump’s follow count increased to 60.3 million. President Trump regularly used Twitter to break news, praise his friends, campaign for supporters, and feud with his enemies; consequently, Twitter was in the daily news almost constantly in 2019. Although the world’s leaders had millions of followers, others have far more. As of May 2019, Katy Perry had over 107,400,000 followers, Justin Bieber 105.5 million, former U.S. President Barack Obama 106.1 million, Rihanna 90.9 million, Ellen DeGeneres 77.6 million, Lady Gaga 78.6 million, and Justin Timberlake 64.9 million. The miraculous plane crash on New York’s Hudson River in 2009 was broken on Twitter, and on May 1, 2011, an IT consultant in Pakistan unknowingly live-tweeted the U.S. Navy Seal raid that killed Osama Bin Laden over nine hours before the raid was on the news. Prince William announced his engagement to Catherine Middleton in 2010 on Twitter. Whitney Houston’s death and the bombing at the Boston marathon were broken on Twitter. President Obama used Twitter to declare victory in the 2012 U.S. presidential election, with a Tweet that was viewed about 25 million times on the Twitter platform and widely distributed offline in print and broadcast media. Twitter Services, Products, and Revenue Streams Twitter’s primary service was the Twitter global platform for real-time public self-expression and conversation, which allowed people to create, consume, discover, and distribute content. Some of the most trusted media outlets in the world, such as CNN, Bloomberg, the Associated Press, and BBC used Twitter to distribute content. Periscope was a mobile app launched by Twitter in 2015 that enabled people to broadcast and watch live video with others. Periscope broadcasts could be viewed through Twitter and mobile or desktop web browsers. The company operated a mobile ad exchange and received service fees from transactions completed on the exchange. The Twitter mobile ad exchange allowed buyers and sellers to purchase and sell advertising inventory, and it matched buyers and sellers. The addition of Twitter was unusual because the S&P regulations required that the sum of a member company’s four most recent quarters, as well as the last quarter, were positive. In April of 2018, Twitter reported its second consecutive profitable quarter, which followed 16 consecutive quarters of losses. The addition of Twitter to the S&P 500 Index would increase the number of individual investors who owned the stock through index funds that track the large company stock gauge. Twitter’s addition to the index fueled a rally that pushed the company’s stock to more than $40.00/share, which was its highest price since March of 2015. Twitter’s Major Competitors Facebook Facebook was the world’s largest online social networking and social media company. It was founded in February 2004 by Mark Zuckerberg, Eduardo Saverin, Dustin Moskivitz, Chris Hughes, and Andrew McCollum. As was common among online social networking companies, Facebook was not immediately profitable; however, after becoming profitable in 2010, it had its IPO in 2012 at $38/share. Although the stock price dropped to under $20 in August 2012, it rebounded and was selling at $217.50/share in mid-July 2018, and then began a slide down to $124.95 in December 2018. In late December 2018, Facebook stock began a recovery, and in May 2019, was trading at $195.47. In the fourth quarter of 2018, Facebook had 2.32 billion users worldwide—India had the largest number of users at 270 million, the United States was second with 240 million, and Indonesia was third with 140 million. In January 2019, Facebook had 2.23 billion average monthly users, and 83 percent of the total users were from outside the United States. Facebook’s year-over-year revenue growth rate in the first quarter of 2019 was 26 percent. A financial summary for Facebook, Inc. for 2014 to 2018 is presented in Exhibit 6. WhatsApp WhatsApp was a freeware and cross-platform messaging and IP service owned by Facebook. The company was founded in 2009 by ex-Yahoo employees Jan Koum and Brian Acton. WhatsApp used the Internet to send messages, audio, video, and images, and was similar to a text messaging service. However, because WhatsApp sent messages over the Internet, the cost for users was much less than texting. The company page 290grew quickly and within a few months of startup, WhatsApp added a service charge to slow down its growth rate. In 2014, WhatsApp was acquired by Facebook for $21.94 billion. Facebook Annual Report, 2018. In early 2018, after a long feud with Facebook founder and CEO Mark Zuckerberg about how to get additional revenue from WhatsApp, Koum and Acton resigned from Facebook. Zuckerberg was focused on using targeted ads to WhatsApp’s large user base; Koum and Acton were believers in privacy and had no interest in the potential commercial applications. When WhatsApp was sold to Facebook, the founders pledged privacy of WhatsApp. Four years later, Facebook pushed WhatsApp to change page 291its terms of service and give Facebook access to WhatsApp users’ phone numbers. Facebook also wanted a unified profile that could be used for ad targeting and data mining, and a recommendation system that would suggest Facebook friends based on WhatsApp contacts. WhatsApp had 1.5 billion users in 180 countries in 2019, with 1 billion daily active WhatsApp users and 65 billion messages sent each day. Snapchat Snap Inc. was a camera company that believed that reinventing the camera was a great opportunity to improve the way that people communicated and lived. Snap, Inc.’s products empowered people to express themselves, live in the moment, learn about the world, and have fun together. The company’s flagship product, Snapchat, was a camera application that helped people communicate visually with friends and family through short videos and images called snaps. Snaps were deleted by default, so there was less pressure to look good when creating and sending images on Snapchat. By reducing the friction typically associated with creating and sharing content, Snapchat became one of the most-used cameras in the world. Snapchat had 300 million users in February 2019 and, on average, 186 million people used Snapchat daily, creating over 3.5 billion snaps every day; however, its users were declining. Instagram was a video- and photo-sharing social network service created by Kevin Systrom and Mike Krieger in 2010. Facebook acquired the company in 2012. The agreed price was $1 billion (a mixture of cash and Facebook stock); however, the final price was $715 million because Facebook’s share process tumbled before the deal was finalized. If Instagram was a standalone company, it would be worth more than $100 billion, which would be a 100-fold return for Facebook. In March 2019, Instagram reached 1.1 billion monthly active users, 88 percent of which were outside the United States, and expected revenues of over $8 billion in the next 12 months. Instagram attracted new users at a faster rate than Facebook’s main site. At its present rate of growth, it would have over 2 billion users by 2023. LinkedIn LinkedIn was a social media service that operated through websites and mobile apps, and focused primarily on professional networking, which enabled members to create, manage, and share their professional identities online, create professional networks, share insights and knowledge, and find jobs and business opportunities. The company was founded in December 2002 by Allen Blue, Reid G. Hoffman, Jean-Luc Vaillant, Konstantin Guericke, and Eric Ly. LinkedIn was named by Forbes as one of America’s Best Employers in 2016. LinkedIn was acquired by Microsoft for $26.2 billion in June 2016. In March 2019, LinkedIn had 575 million users in more than 200 countries and territories worldwide.4 Further Signs of Encouragement in First Quarter 2019 Twitter’s first-quarter 2019 financial results were positive and unexpectedly robust, with revenue growth up 18 percent year-over-year, from $665 million to $787 million. The company’s revenues enjoyed growth across all major product and geographic areas. Twitter’s largest growth in income was from the United States, which increased by 25 percent, year-over-year, from $347 million to $432 million. Also, international revenue increased 11 percent, year-over-year, from $318 million to $355 million. Year-over-year advertising revenue increased by 18 percent during the first quarter of 2019, from $575 million to $679 million, and data licensing revenue increased from $90 million to $107 million, year-over-year, which was a 20 percent increase. Cost of revenue increased 18 percent, and stayed steady at 34 percent of revenue, as in the same period, 2018. Research and development and general and administrative expenses were unchanged, as a percentage of revenue year-over-year, at 34 percent and 19 percent, respectively. Sales and marketing expense dropped to 26 percent in the first quarter of 2019 from 27 percent in the same period in the prior year. Income from operations increased to $93.6 million (12 percent of revenue), up from $74.9 million (11 percent), and net income for the first quarter of 2019 increased to $190 million (24 percent of revenue), up from $60.9 million (9 percent of revenue) in the same period in the prior year. Twitter announced expectations for fiscal 2019, but did not provide a revenue expectation. The company expected operating expenses to increase by about 20 percent year-over-year due to growth and support for the company’s investment priorities. Going into the second quarter of fiscal 2019, Twitter was focused on: Health as the top priority. To help people find credible information and feel safe participating in the conversation on Twitter. Conversation as Twitter’s superpower. Promoting more conversation on Twitter to ensure that it is the place where people all around the world go to see and talk. Revenue product and sales to support the growth of Twitter customers around the world. The company will continue to invest in revenue product and work to improve its ad platform and ad formats to help its ad partners launch new products and services and connect with what’s happening on Twitter. Also Twitter plans to grow its sales page 293teams in the United States and internationally to better serve large and medium advertisers. Platform investments to ensure long-term success, in the data centers that host Twitter, customer data security, and the technology to support and improve the service.
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