Twitter Business Model – 8th Wonder of the World

Twitter – the microblogging platform that revolutionized social media. Tons of businesses today are revolved around the tweetoconomy (tweet economy) – right from developing applications, social media agencies, and so on.

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While it might be an billion dollar economy that revolves around twitter and social media today, unfortunately Twitter still is trying to evolve its own business model. My argument here is that although the Twitter ecosystem is valuable, its going to be very challenging to monetize it. Twitter may have some business model (as it now has – promoted tweets, trends and users) but it will not justify the investments made in Twitter and the valuation it has today.
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And discovering that business model which justifies the valuation & investment may be as good as finding the eighth wonder of the world. Here is why:
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Twitter ecosystem consists of three factors:

  • Users – who tweet
  • Tweets – the 140 character messages which users write
  • Applications – all applications that allow users to write these tweets

All other functions of twitter – search, trends, lists, etc are functions of these 3 factors.
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Twitter has 175 million users; 75% of all tweets are outside of Twitter website and about 40% of them from mobile devices. Growth of twitter was propelled by three factors:
- Acceptance by celebrities and big brand names, which lead their followers to come on-board twitter
- Twitter became a pet of mainstream television and offline news
- Widespread development of applications by developers across the world. The twitter API was easy to implement and build quick apps, many innovative applications where built by developers which would have taken twitter ages to come out with.
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As per twitter website, as of Sept 14 2010 – there are a whopping 95 million tweets a day. (Imagine the monetization Google will achieve with 95 million search queries!). However most tweets are irrelevant; according to a research report by Pear Analytics – 40% tweets are Pointless Blabber, 38% are conversational, 9% have pass-along value, 6% are self promotion, 4% are news while rest 4% are spam.
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Tweets get a very little attention span. A study did by Sysomos revealed that - 71% of all tweets generated get no reaction - 23% get replied  - 6% get re-tweeted.
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The life-span of a tweet is another big issue – and every tweet gets a fractional life-span before it gets lost on tweet streams. To put it simply, fractional tweets are seen, more fractional tweets are read and even more small fraction of them are responded.

The life-span depends on factors like
- number of followers you have
- % of followers online at that time
- rate of tweeting of people followed by your followers at that time for them to notice your tweet
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Twitter’s Business Model

Few months back – according to internal documents leaked and published on Techcrunch, Twiiter was expected to reach an revenue of $140 million for 2010. The documents were leaked in 3rd quarter of 2009 – post which Twitter launched its 3 business offerings – Promoted Tweets, Promoted Trends and Promoted Accounts.
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Was Twitter referring to these 3 offerings to generate an revenue of $140 Million. In that case assuming 33% contribution towards revenue generated for each of them, they have to generate $46 Mn per year – at rate of $125,000 per day.
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Thats very expensive! Should twitter be charging $125,000 per day for these offerings? The answer to this question may surprising be Yes!
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Reports mentioned on sites like Clickz, Mashable, Wall Street Journal, The Next Web, Read Write Web – and many others have indicated that costing of promoted tweets is upwards of $100,000 per day!
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Such high costs are not justified as the business model is still not proven. Advertisers paying for these should be aware that these features are mostly available on twitter.com, while 75% activity on twitter happens outside of Twitter through applications and mobile devices. While there is no or very little context and relevance in which these promoted tweets, trends or accounts are served.
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Twitter’s ecosystem cannot be monetized!
Twitter’s ecosystem may be valuable, but cannot be monetized! Here is why was we summarize each of its component.
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Tweets:

  • Most tweets are blabbers, pointless
  • Most tweets do not have any intent like search keywords, and even if they have any intent – it will be momentary.
  • Most tweets are meant for others (for followers). Finding intents specific to self may be difficult task.
  • An user’s tweet can be completely different than his previous one – hence establishing relevance or context and validating seriousness of that context is not possible.
  • If Twitter is able to build an killer-product that deciphers user’s intent and in real time shows and advertise to the user, the only relevant format in which advertisement can be displayed to user is by tweeting a reply. This will lead to tweet-spam and users will protest!
  • Is the advertisement will include a link (of say ecommerce website) – chances of users to complete a transaction may be very less. Visitors from Twitter are known to have highest bounce-rates with a huge majority of users not exploring beyond 1-2 pages.
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Trends:

  • Trends are collective tweets of a large set of users. Most of the times trending topics are consequences of large offline news events and big announcements made by brands, companies and individuals (celebrities)
  • Its understood by commonsense that a promoted tweet may not cause same impact amongst users as a natural trend. The viral factor in a natural trending topic will be 1000X of promoted trends.
  • If twitter continues with promoted trends – at a costing of $100,000 per day – this model is not scalable and will not appeal to small segment of advertisers
  • Its not even possible for Twitter to monetize natural trending topics as they are usually related to subjects or topics that cannot be monetized. Twitter cannot predict a trending topic; and for an current trending topic which has potential to be monetized, it might be difficult for them to get find an advertiser before the topic stops trending.

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Users:

  • Most followed Twitter users are celebrities or big brands that have pulled more users to Twitter. Twitter will not have been at this scale without such users.
  • Twitter will continue to offer featured users and verified accounts for free, they may not be a business model here.
  • Promoted Accounts is being offered without much reference to user’s behavior or interest. Hence there may be little value to businesses for ‘promoted accounts’ to gather users to whom their tweets may not be relevant.

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Applications:

  • Twitter has indicated it will not allow applications to monetize tweets
  • Twitter cannot charge application developers. With 75% tweets coming from applications, Twitter is more dependent on them.
  • If Twitter starts monetizing individual tweets, they will also need to credit the applications that completed the monetization action.
  • While there are few benefits associated with applications like Quora to integrate with Twitter; stand-alone twitter applications will also need to have a way to monetize. If they are not able to monetize and generate revenue by themselves or through Twitter – they may start loosing interest in building or maintaining applications for Twitter..

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Twitter’s Speculated New Business Models:
Business model speculation and criticism is not new for Twitter. There were reports that Twitter may be be coming up with an eCommerce or News related business model. Here is my take of them:
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eCommerce:

  • There are few tweets shared between users about product recommendations, purchases and reviews. Tweets work in an open environment and Twitter may not be able to add more value to such conversations that are already happening.
    Example., if Dell continues to generate millions of dollars revenue through Twitter, there is not much Twitter can do to get a share if that.
  • In event if Twitter is forcing upon some business model related to eCommerce on to large brands on-board, there are multiple small accounts that will continue to converse as always. A business model that cannot be expanded to cover all its users equally will not last for long time.
  • Twitter itself is not an eCommerce seller like Amazon and can never be one. Neither can it act as an affiliate

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News:

  • Twitter is used by meaning leading publications and individual users to break stories. Once the story is pushed to twitter – its responded by followers, a huge story ends up becoming a trend and initiating conversations.
  • The process of publishing a twitter, spreading to follows, building conversations over it happens in a very short span of time. Twitter by itself is not a news service, any attempt to be in this domain will mean competition from well known and well followed media organizations. For a user – he is still very happy with the existing news publishers on Twitter.

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Concluding Remarks:
Twitter has always remained in the spotlight and seems like raising more capital is not a problem for them. For the fact that VCs have invested over $360 Million, Twitter is surely bound to give their investors a good exit and their quest of finding an business model will be going on for some time.
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Right now, its not clear if Twitter is or is not under great pressure to show an convincing business model, but some point they will have to. Twitter team is no doubt struggling to find a revenue model that fits its ecosystem – an ecosystem which has value for its users but is extremely difficult to monetize for the company that owns it.
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While Twitter is not ready to accept proven online business models like search and display, Twitter’s discovery for its revenue stream will be as good as finding the eighth wonder of this world!