Twitter’s Business Model - Won’t be Pay-Per-Click

by Sachin Balagopalan on October 19, 2008 · 1 comment

Your company sells widgets but with a slight twist. You don’t really “sell” the widgets instead they are given away for free. You’ve been doing this for a few years now and in the process increased your customer base exponentially. The widgets are popular and they are now being accepted not only by the die-hards but mainstream consumers are beginning to come on board as well - albeit the majority of your base still comprises of faithful believers. Because your business does not have a steady revenue stream - in fact it does not make any money at all - you’ve been able to stay afloat through a steady infusion of funding from VC’s and angel investors. However sooner or later the VC’s are going to want to see a return on their investment and quite frankly you can’t run a business forever without showing some profitability on your books. So now you’re faced with the dilemma of monetizing your huge customer base.

This is the predicament Twitter finds itself in today. The question then is “How is Twitter going to make money?” Some of the VC’s backing Twitter appear to be bullish and are simply dismissing the notion of Twitter not eventually making money as “stupid”.

“It’s like the stupidest question in the world: How’s Twitter going to make money?,” said Union Square Ventures’ Fred Wilson, another investor. “It’s like ‘How was Google going to make money?’

“Eventually Google was going to make money and they figured out how to do it and they figured out a great business, and I think the same thing is true with Twitter.”

Building a huge user base first and then monetizing it later has worked spectacularly for Google no doubt. Does that mean it will work for Twitter? The two products - search engine and messaging/micro-blogging service - are different animals. The search engine is a much “needed” service and quite honestly without search engines the internet would not be what it is today. Google happened to “make” the best search engine compared to others. Searching for information and having it presented to you in order of relevancy and in a timely fashion is taken for granted these days but back then it was a huge deal. Google was able to provide that through their PegionRank technology which ultimately led to ubiquity and the use of the word “Google” as a verb. More importantly they were able to take this technology and monetize it in the form of presenting relevant ads based on users search query.

Has Twitter reached that level where it’s ubiquitous and we cannot “live” without it? The answer is obviously no. We’re not even sure if Twitter will be the method people communicate with each other in the future. Personally I would rather prefer a service like Twitter integrated into a social network and replace eMail all together especially in the work place. But the reality is it’s not there yet. Henry Blodget over there at Silicon Valley Insider thinks that because people are obsessed with Twitter they won’t have problems figuring out a revenue stream…

… they’ll figure out a revenue model eventually, just like Google did. Why is Twitter different than the 9,000 other Web 2.0 companies that are intending to figure out a revenue model eventually? Because people are obsessed with it.

They will perhaps figure out a viable business model but it won’t be anything compared to Google IMO. Twitter simply doesn’t have the numbers to base it’s business on an on-line advertising model. In fact on-line advertising is a bad model for most on-line ventures. You can supplement your revenue with on-line sponsored links but unless your numbers are like Google - 100’s of millions of hits per day - it’s not a viable option for bread and butter revenue.

Twitter will no doubt figure out a way to capitalize on it’s vast and growing user base - it will most likely be a combination of advertising, subscription and partnership with businesses.

{ 1 comment… read it below or add one }

Daniel Gibbons 10.19.08 at 8:21 pm

I agree wholeheartedly. As I said in my comment on Mathew Ingram's blog, the argument that “well, Google didn't make money at first, so Twitter will be fine” is really crazy. Google redefined search as the cornerstone of virtually all online activity, and quickly captured a vast AND broad audience.

Sure there are people obsessed with Twitter, but there aren't entire businesses and revenue streams built around it, and I don't think there ever will be.

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