Twitter: The hunt for a business model

by Mathew on October 18, 2008 · 24 comments

It’s been a Twitterific kind of week, in a lot of ways. Not just because Ev Williams seized the reins of power (such as they are) at the startup — which led to lots of theorizing about why Jack Dorsey, who originally came up with the idea for Twitter, was so suddenly sidelined — but because Twitter is probably the classic example right now of a Web 2.0-type service that has plenty of users, but still no actual business model. With the U.S. and even the global economy in a state of upheaval and layoffs sweeping through Silicon Valley, what happens to such a company?

Twitter investor Fred Wilson seems to be getting more and more exasperated with the question about the company’s business model, but as my friend Mark Evans notes, it’s a question that has become a lot more pertinent than it was even a few months ago. Another investor, Bijan Sabet of Spark Capital, says Twitter will introduce a business model of some kind next year, and Henry Blodget at Silicon Alley Insider believes that the company could eventually be worth $1-billion once it figures out how to translate a devoted user base into actually dollars and cents.

Fred’s comment — about how Google “eventually figured out how to make money,” and therefore Twitter will too — strikes right at the heart of the problem. Anyone who argues that building a user base and figuring out how to monetize it later is a dumb way to run a business has to deal with the fact that Google did exactly that, and that doing so hasn’t just worked out for the company, but has been spectacularly, mind-bogglingly successful. Does that mean anyone can do it, or was Google somehow special and/or lucky? I don’t think anyone really knows the answer to that.

Is Twitter the same as Google, in any fundamental way that matters? It’s true that Twitter has a large user base, but at the moment it’s primarily geeks and techies and social-media consultants. Can it go “mainstream” in the same way that Google did? I’m not sure. The need that Twitter fulfills isn’t quite as obvious as it was with Google, and the way in which Twitter is better than existing methods of communication isn’t obvious either. That said, the fact that it’s showing up on the evening news and even inside companies is a sign that mainstream use might not be all that far away.

What remains to be seen is whether the business models or revenue streams that Bijan Sabet is talking about interfere with what has made Twitter so popular. Will people care if there are giant ads in the stream, or if sending more than a certain number of updates costs money?

  • http://avc.blogs.com fredwilson

    matthew – as usual, you've got your finger on the issues.

    i regret that quote which i am calling the “stupidest answer in the world”

    http://www.avc.com/a_vc/2008/10/the-stupidest-q

  • http://www.mathewingram.com/work mathewi

    Heh — great response, Fred. I've had a few of those myself :-) Thanks for the comment.

  • Justin

    Sure Google found a way to make money post business launch, but pointing highly targeted advertisements at a person searching for something is much different that throwing ads in a twitter feed. Look at clickthroughs Facebook ads get (I believe Chris Anderson wrote an excellent post on this)-horrible. People don't head to social networks looking for products or services, they want to connect with their friends. How do you monetize that? Maybe Twitter could develop an enterprise version, keep the API closed off, and sell it? I'm not sure.

  • http://www.mathewingram.com/work mathewi

    I agree, Justin. I think those are exactly the kinds of questions that Twitter and its investors are probably struggling with right now.

  • http://blog.agoracom.com AGORACOM – George

    Mathew, great post. When Twitter first started out, it was pitched as a social tool for people (teens) that wanted the world to know what they were doing (having coffee, going to the movies, etc.). As such, I thought it was an utterly useless tool. In fact, if that remained its purposes, I'm confident it would be joining the deadpool today.

    However, Twitter has now unexpectedly turned into a business, PR and intelligence tool for many verticals. Yes, I'm sure a lot of kids are still using it (and you can sell ads beside their tweets) but its big revenue future lies in its business/PR/intelligence uses and charging a subscription fee (i.e. $5/month or $50/year) to commercial users. I know I would pay it.

    I'm not sure how you would describe “commercial users” but I'm certain the number of following and followers is a good initial filter.

    Twitter has a lot of possibilities and advertising will add a nice bump – but the sooner they start thinking about Twitter as a business tool (and adding some extra features to create a true offering), the faster it can become a real business itself.

    The Greek

  • http://www.schafer.com/ Ken Schafer

    Lots of people use the “Google didn't have a business model, why do I need one” argument. I recommend they read “Fooled By Randomness” by Nassim Nicholas Taleb.

    Looking BACK at one or two examples where not having a business model worked out doesn't mean any company can do the same. You have to look at the total number of businesses STARTED without a business model that went on to succeed. The fact that a few companies have found a way to make money late in life doesn't mean you will given that probably tens of thousands of companies without business models have been started and NOT succeeded.

    Let's call it the Keith Richards effect. Just because Keith could abuse his body for many years and be wildly successful financially and artistically doesn't mean smoking, drinking, and drugs is a good way to optimize for success.

    Having said all that I think Twitter is a game-changing service that will eventually find a revenue model and be very successful.

  • http://www.mathewingram.com/work mathewi

    The Keith Richards Effect — good one, Ken :-)

  • http://www.allaboutnortel.com Mark Evans

    In many respects, Google did get lucky to realize that PPC was a good business model to embrace – and they can thank Bill Gross/Overture for leading the way.

    Twitter doesn't have to get lucky; they just need to decide how they want to make money, and then go for it. This could be the introduction of ads, which could piss some people off but likely not enough to see a mass exodus; a premium version with no ads; a mobile version with an ad at the top a la Twitterific; or a white-label corporate version.

    There's no lack of revenue opportunities. The question when Twitter finally makes a decision.

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  • http://www.schafer.com/ Ken Schafer

    I'm not sure why they don't just buy Twitterific and do a Windows equivalent. Integrated into the sign-up and normal use processes for Twitter that would be a great first step.

    Don't underestimate Twitter Search either. Ads running results page would be pretty simple to implement and could be contextual based on the search request.

  • Tom Poe

    When the day comes, and community virtual worlds become the norm, twitter rises to critical importance. I live in one community, but my interest in events occurring in other communities would make twitter extremely attractive. I would be able to keep in touch with what's happening, and be able to move to events almost instantly. Would I be willing to pay for a service that coordinates “channels” for me? I tend to think of twitter as the 21st century concierge. I hope twitter begins to move in that direction, sooner than later.

  • http://www.howardlindzon.com howardlindzon

    Ken is smart

  • Rob Hyndman

    I disagree with Blodget. I think $1 trillion at least. Can I have my journalist's cheque now please? ;)

  • http://carrieanddanielle.com Daniel Gibbons

    I find that idea that Google got lucky to be completely ludicrous. They were able to foresee, correctly, that search would be the cornerstone of all online activity. They invested all of their time and resources in nailing search. The fact that Overture came up with the concept of contextual CPC ads is completely beside the point — Overture didn't completely reinvent search.

    What's also completely different is that Google's users have never had to pay, either in the form of subscription fees or reduced usability as a function of ads. Twitter, by contrast, couldn't possibly get anything but worse with ads, and as others have noted in the comments here and elsewhere they would almost certainly suffer the same insanely low pricing as social networking ads.

    Is Twitter cool and useful? Yes, I think it's both. But is it indispensable? Is it paradigm-shifting? Does it really add more value to the normal person's personal or work life? I'm not so sure. Comparing Twitter to Google is like Dan Quayle comparing himself to Kennedy.

  • http://www.mathewingram.com/work mathewi

    Dan Quayle — ouch :-)

  • http://startupcfo.ca Mark MacLeod

    I agree that the need for a biz model is more important now than ever, but I do see Twitter as a valuable property even without it. If I could invest in it at the right terms I would. I'm with Fred on this.

  • http://republicofinternets.com Sachin Balagopalan

    Their business model won't be pay-per-click …

    http://tinyurl.com/5pg7wx

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  • kashif

    Skip the ad model – who the hell wants to view ads on a mobile phone – I know I don't.

    I think Twitter already has a business model under their nose: SMS.

    Each twitter SMS I send, all subscribers to my twitter feed (e.g. friends) get my message. That means carriers get to charge the sender and subscribers with SMS outgoing and incoming (some carriers are charging for incoming SMS now).

    SMS is already a fat gravy for carriers, increasing the gravy is only better (for them).

    Twitter would make money by a) licensing their application/tech to carriers to use where carriers would make it easy for consumers to send twitter messages. This will give it the mass-market adoption (without having to register/setup at twitter.com). b) Twitter should get a royalty fee for all messages sent.

    However, Twitter already faces a direct-competitor: Facebook and the super wall. if Twitter can do a good job making it's technology accessible (remember it's Distribution, Distribution, Distrubution as Reid Hoffman likes to say) and partners with carriers, I think it can bring revenue.

  • http://www.rgdirect.com Scott

    Google's success is mind-boggling. Giant ads in the stream would be useless though; http://zaggededge.com/?p=85 touches on it. We're basically trained to ignore ads, and the more obnoxious they become the more we train ourselves to ignore them or avoid sites where they appear if we can. I think there could be a way to make money but they're going to need to get really creative. Perhaps a sort of system where the consumer can easily tweet about things they like, done honestly but also offers some sort of incentive to make people bother to do it. People use social networks to achieve some sort of fame, maybe piggyback on their efforts.

  • http://www.findmesotheliomaattorney.com/ Alex

    Well Did stumbleupon or delicous find a successful business model yet? No!

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