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Why Royal Mail’s IPO looks better than Twitter’s

Twitter or the Royal Mail – which IPO is a better bet? It sounds like a no-brainer. On one side of the Atlantic, you have a whizzy, social media enterprise at the cutting edge. When it's not fomenting revolution in Egypt, Twitter tells us what Rihanna is wearing (or not wearing). Cut from Hollywood to London (cue: drizzle, Big Ben and an old red post box) and you get warehouses full of people in high-visibility jackets, fat men driving little vans and snarling dogs chasing mail carriers.

It's a no-brainer; if you have cash burning a hole in your pocket, you ignore Twitter's public offer and you buy the Royal Mail alternative. If the choice is not completely obvious, let me explain.

For starters, why compare them at all? Apart from the coincidence of their IPO announcements, they are both in the communication business but poles apart; some might say centuries apart. Indeed, Royal Mail's heritage goes back to the 16th century when the King's Post was established as a monopoly, delivering letters. If you buy a share in Royal Mail, it is the relic of that franchise that you are buying – the monopoly was officially ended in 2006. Royal Mail's business is under attack from without – TNT has started a rival doorstep letter delivery service in some cities while DHL and FedEx are aggressively targeting the parcels business. It is also under threat from within by a curmudgeonly public service union, which is fearful of privatization and threatening strike action.

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That sounds like many reasons to avoid a dinosaur business which is shrinking day by day, thanks to e-mail and other high-tech means of communication. Who writes letters, anyway, when you can tweet to your friends and the whole world?

Look at Twitter. What do we know about its business proposition? Unlike the Royal Mail, which publishes oodles of data, including its revenues, cash flow and profits – £440-million ($722-billion) last year – Twitter tells us zilch. It has taken the secretive SEC filing option, which allows you to hide your vital statistics until three weeks prior to sale. All we know is that Twitter revenues are less than $1-billion (U.S.) and insiders insist it is profitable. Income comes from sponsored tweets – annoying, paid-for messages with which Twitter bombards Twitter followers, selecting a target audience using search algorithms.

This might be the future of advertising; others wonder why a sponsored tweet is any more likely to generate business than a cold call from a time-share salesman. What is certain is that Twitter will be valued at big multiples of its revenues and if you buy the stock you therefore must believe that advertisers are gagging to buy sponsored tweets in ever larger volume. There is no existing franchise, no barrier to entry, only a business to be built out of thin air. Think of a better idea, a better algorithm, a better way of turning electronic communication into cash flow and you have a rival business model.

There must be a better, safer way of profiting from the rise of the Internet than Facebook or Twitter. Consider the great titan of Internet commerce, Amazon. What is the key thing that underpins all e-retailing, that guarantees repeat business? It is the delivery of the parcel. In Britain, Amazon uses Royal Mail and without an efficient doorstep delivery, the entire edifice of Amazon would collapse tomorrow. Likewise in Canada, where Amazon uses Canada Post. There is no guarantee that the incumbent state letter carrier will keep the business or any other business, but it has an established infrastructure and the purpose of the flotation is, in large part, to raise capital to invest in e-commerce parcel delivery. Royal Mail is full of warts, but it delivers to every doorstep in the U.K. It is a tangible piece of infrastructure, expensive to replicate; Twitter offers no such thing; just the opportunity to be annoying in 140 characters.

Still, the mail will always be yesterday's idea, you say. Twitter is expanding so fast and there must be billions to be made in social media. The answer is: yes, there is money to be made. It will be made by the people who already own Twitter.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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