Shares in Twitter have lost about half their value since peaking at the end of 2013, indicating that investors are losing confidence in the company's prospects.
At a time when archrival Facebook is growing fast, Costolo's departure is raising questions about where Twitter should go from here, and whether it has a future as an independent company.
With 302 million active users per month, Twitter has a long reach. An additional 500 million users visit Twitter's website each month without signing up for accounts. But Facebook boasts 1.44 billion active users per month, each with their own account.
Can Twitter make itself more accessible?
Facebook's popularity advantage over Twitter may have something to do with accessibility. Facebook users generally interact with real-life acquaintances and friends of friends, creating an intimate atmosphere. Facebook's algorithms rank shared content by popularity, keeping the most active topics at the top of users' News Feeds. Because users often know each other in real life, they tend to engage with each others' posts, making users feel like their voices are being heard.
In contrast, Twitter generally allows any user to interact with another, requiring users to curate their own experience by choosing whose tweets to follow. Content is delivered in a purely chronological format, resulting in a fast-moving stream of real-time information that can be overwhelming for casual users. Anyone can share a 140-character message with the world, but users without an established base of followers are left shouting into an online void, with no one to read their tweets.
Chris Sacca, an early investor in Twitter, says those problems like those are holding the company back from mainstream popularity. In an 8,500-word manifesto on the future of Twitter published in early June, Sacca recommended Twitter refocus its user experience on new users, rather than advanced users who understand the platform's many idiosyncrasies.
If Twitter can become more fun, more participatory, and provide users with a sense that they're being heard, wrote Sacca, "hundreds of millions of new users will join and stay active on the service, hundreds of millions of inactive users will return to the service, and hundreds millions more will use Twitter from the outside."
A venture-stage company, in the public eye
Despite being publicly traded, some argue that Twitter is still fundamentally immature, especially compared to Facebook.
"Twitter was and remains a venture-stage enterprise," wrote analyst Brian Wieser in a report for Pivotal Research Group.
"There are dozens of large-ish private companies we track in the ad tech space who almost certainly experience similar issues without anything like the glare that Twitter experiences."
Investor Chris Sacca agrees.
"The company has disappointed Wall Street more often than not," wrote Sacca. "If the company has a bold vision for the future, it doesn't come across in their communication with us on the outside."
Twitter's vision for the future has changed a number of times in recent years. In 2012, Costolo said he envisioned Twitter as a digital version of the ancient Greek agora, where the public gathered to share news and discuss ideas. Later, in regulatory documents filed before going public, Twitter described itself as "a global platform for public self-expression and conversation in real time." In November 2014, about a year after going public, Twitter's chief financial officer Anthony Noto said Twitter's new goal was to "reach the largest daily audience in the world."
When all else fails, get acquired
Instead of revamping its user experience, Twitter could always take a cue from other tech companies and get acquired by a bigger firm. In early June, Sacca told CNBC that Twitter would be an "instant fit" for Google, allowing the search giant to absorb Twitter's expertise in real-time social interaction.
Acquiring Twitter could also help Google boost its mobile capabilities. About 80 per cent of Twitter's 302 million monthly active users log in with mobile devices, and 89 per cent of Twitter's advertising revenue comes from mobile ads. Earlier this year, Twitter and Google signed a deal allowing Twitter messages to appear in Google search results as soon as they're posted.
Twitter hasn't announced a new CEO to replace Costolo, whose shoes will be temporarily filled by co-founder Jack Dorsey. To some analysts, that suggests an acquisition could be imminent.
"Prospective buyers have been interested in purchasing Twitter in the past, and during the interim search period we believe the opportunity for acquisition is heightened," wrote analyst Brian Pitz in a research note after Costolo stepped down."
Any acquisition, wrote Pitz, would have to value Twitter at a minimum of $30 billion US. Currently, shares in Twitter are worth more than $23 billion.
In an interview with CNBC, outgoing CEO Costolo said Twitter was committed to maximizing value for shareholders, but believes "we can do that best as an independent company."