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Monday, February 16, 2009

Twitter's Business Model

Twitter is old news to technophiles, but the micro-blogging service that has been around since 2006, has recently received a tremendous amount of attention in the media.  In a flurry of articles and predictions, we learned last week that the 29 employee firm, with no revenues to speak of, carries a valuation of approximately $250 million.  What is even more remarkable is that Facebook purportedly offered $500 million for the company earlier this year.  What gives?

The usefulness of Twitter is subtle at first but its appeal is obvious.  In short 140-character snippets, the service allows you to send messages to your friends, or those that have opted-in to hear your tweets.  Think of it like a text message that gets sent to your entire phone book, except your friends choose to be in your phone book or not.  

Twitter has grown to an estimated 55 million daily users because it is simple and rejects the cluttered and bloated functionality that sabotages many web services.  In addition, it relies on friends op
ting-in rather than opting-out for communications.  This lets users select whom they’d like to hear from, not visa-versa.  Lastly, Twitter is noncommittal—you aren’t obliged to respond to tweets, but can merely enjoy the ebullient flow of information, acting on it when you like.

So it’s a great service, but why are venture capitalists willing to pay an implied $250 million for the company when it hasn’t attempted to earn a dime in revenue?  Fred Wilson, of Union Square Ventures, an early investor in Twitter explains, “You can't monetize web services very well until you have an audience of scale…every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the goal of getting to scale.  Because if you don't get to scale, you don't have a business anyway.”

But how exactly will Twitter make money?  After all, the company has consumed a tremendous amount of resources (venture capital) and we expect to see economic value from it.  Here are some of the ways I expect Twitter to monetize its users:

1. Business User Accounts: A recent phenomenon is that companies are turning to Twitter as a way to connect with customers and promote themselves on the web.  Sign up for Twitter and you will find plenty of corporate “friends” to follow, whose tweets are mostly spam.  Twitter can charge businesses to use the service to communicate with customers.

2. Pay Per Lead: Twitter recently released new functionality that allows you to pick from suggested people to follow.  Companies will pay to have people enjoy their ambient presence by subscribing to their tweets.  This will generate click-throughs and potentially sales.

3. Advertising: Injecting relevant advertising into tweet feeds could garner some click-throughs, but certainly not enough to warrant a $250M valuation.

So what does this all amount to?  None of the business models described could compel a venture capitalist to offer $250 million for the company.  Twitter has something else up its sleeve.  The web service taps into the ambient desires, life-events, and the emotions of its users.  Users volunteer to share this intimate information with their friends.  These intentions and personal moments are far more valuable than cold hearted search terms that are plugged into the likes of Google and Yahoo everyday.  The Twitter opportunity is to tap into genuine needs, feelings, and human interactions--a hundred-billion dollar bonanza for marketers.

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