Posted August 18, 2008 8:52 am by with 29 comments

Tweet about this on TwitterShare on LinkedInShare on Google+Share on FacebookBuffer this page

There’s a new Viewpoint column about Twitter, over at BusinessWeek. Before I go on, it’s important to note that Viewpoint’s are guest columns, not written by normal BusinessWeek staffers.

Anyway, "The Trouble with Twitter" takes an in-depth look at the money woes at Twitter, in particular its lack of business model. Now, when I say "in-depth," I mean it. In fact, you can safely skip the entire first page–unless you enjoy a little fluff with your morning coffee.

The second page gets to the meat, and has a pretty good analysis of the different types of monetization models Twitter could consider. I’ll summarize the suggested business models:

  • Twitter could ask users to pay
  • Twitter could get messages to pay
  • Twitter could extract money from user data
  • Twitter could sell ads

From what I can tell, selling ads is the best lifeline that could be thrown to Twitter at this point. Certainly, it’s likely the option that Twitter users would be least resistant to. Unfortunately, number crunching reveals that Twitter might not be able to make enough money from ads alone:

Advertisers would find Twitter ads generate $28.2 million in profits. So the maximum they logically would spend on such ads is $28.2 million.

Thus Twitter has a real value of $12.26 per user. Compare that with Facebook, which has a perceived value of $300 a userβ€”or at least it did last year, when Microsoft purchased its 1.6% stake for $240 million and the site had 50 million users.

And, that’s assuming some pretty generous CTR and conversion rates.

I’m a huge fan of Twitter–you can catch me discussing Twitter at SES San Jose this week–so I’m hoping it can figure this out before it runs out of money.

So, this is where you come in. What suggestions do you have for revenue model for Twitter? Leave a comment below and we’ll make sure we pass them on to the Twitter team.

  • Twitter will have a tough time selling ads. A key to their rapid adoption was the plethora of third party tools available via their API. The “power” twitter users, the ones that cost twitter the most, would never see an ad.

    Asking users to pay isn’t going to work out very well. How many people would stay with twitter instead of moving to a competitor if they asked for $5/month? Whatever that number is, it makes Twitter a lot less valuable to the people that stay because there are a lot less people to talk to.

    Extracting money from search or user history will be pretty tough since all of those updates are all indexed by Google already.

    There’s a possibility they could monetize by becoming an SMS provider, but I can’t see how there’s enough money to support them, much less give the VCs any chance of getting back their capital.

    The folly in all this is that they obviously built it, and the VCs went along with it, with no idea of what their end game was in monetizing it. That, and getting involved in a land war in Asia, is one of the classic blunders.

    Don Draper’s last blog post..Twitter Gave Me the Mark of the Beast

  • @Don – maybe Twitter is waiting until we’re all heavily invested. I have 3300 followers and 6,000 Tweets. I’d probably pay $5 a month, rather than start again with a new network.

  • Andy,

    I agree with the BW piece: Twitter should sell itself to a sugar-daddy and go about its merry way making techies happy.

    Ads would have been a good solution, but trying to convince people to pay for what had been free will be difficult.

    By the way, I thought the “fluff” portion served as in interesting explanation why having 3,000 “friends” may not be so attractive to advertisers.

  • @Andy – Sure you would, but how many of the 3300 followers would pay? Cut that number significantly, and the value to even a power user such as yourself would diminish heavily.

    Getting $5/month from the top 10,000 twitter power users is not going to feed the bulldog.

    How long will it take another network to offer a Twitter migration package?

    Don Draper’s last blog post..Twitter Gave Me the Mark of the Beast

  • @Ed – one man’s fluff (mine) is another man’s background. I tend to like articles that get to the point. πŸ™‚

    @Don – Good point! It wouldn’t be worth $5 if my network drops out.

  • Fans of Twitter, if they are serious about twittering should have no objection paying like Andy suggests.

    Nicole Price’s last blog post..Sale at Macy’s!!

  • The attraction to Twitter is akin to potato chips: requiring little thought or effort, sort of the technological equivalent of empty calories. Once we start billing for the service, it becomes more like a cell phone bill where we demand more of the provider (actually being available) and ourselves (maybe not Twittering about our trip to the barber.)

    The result, 99 percent of Twitter users go elsewhere, a competitor is created and what was the latest thing becomes the latest thing.

    However, if Twitter is sold to a deep pocket, the service survives, the users remain, Google gets another Gmail-like winner and everyone has a smile on their face.

    Ed Sutherland’s last blog post..Twitter: Destined To Be Google’s Hood Ornament?

  • MikeTek

    I’d pay for Twitter. Not a ton, but I’d pay for it.

    What about an uber-affordable pricing model? $3 per account per month. That might not solve all of their problems, but I’d certainly prefer paying a small amount rather than be suddenly bombarded by advertising.

  • MikeTek

    Follow-up – it’d also deter some of those spam account creators.

  • Mike, $3 per account would be around $6M per month. Nothing to sneeze at for most of us, but to provide a dependable service, it might be a tight squeeze.

    A possible alternative would be two-tiered service: one level is free with no guarantees about up-time while a second is $10 per month with assurance of no spam and greater reliability.

    I’m afraid, however, Twitter might not recognize a good revenue stream if they fell into one.

    Ed Sutherland’s last blog post..Twitter: Destined To Be Google’s Hood Ornament?

  • MikeTek

    Ed, I see your point – $6m/month may not be enough to keep the bandwidth wide enough.

    I don’t know if I’d pay $10/month, though. I like Twitter, but there are plenty of things I like that I’m not willing to shell out $10/month for.

    It’ll be interesting to see how it plays out.

  • So is Scoble worth more than $12 or less than $12?


    Fifty Studio’s last blog post..I’m a Web Designer

  • Andy,

    Thanks for the thoughtful critique. Upon reflection, you have a point, my BW column’s wind-up was a bit long, but how often do you get Metcalfe cuffed by Dunbar?

    The point I tried to make in the BW column is that social media gets a lot of marketers hyped up by the Metcalfe vision that human networks will skyrocket in value … when in reality, the numbers don’t hold up for those who will pay for these models. In today’s society, advertisers foot the bill, and advertisers are not seeing high returns from social media. There are many reasons for this, primarily that social media users are in a mode of creation and sharing, not receiving, so the old dynamics of letting cable TV wash over you as you sit there passively … and then see an ad … don’t work well among active SM users.

    The real irony is services such as Twitter have *enormous* value for users, but much of that is at odds with the service making money. Twitter and Facebook and other online services have made communication seamless, uninterrupted and free. What makes people like me love these services is that we aren’t interrupted by ads — so their internal value among users would fall drastically if third-party advertisers start mucking up the place.

    Information wants to be free. Business models have a hard time with that.

    See you on Twitter πŸ˜‰

    Ben Kunz’s last blog post..Tweeting the child within

  • I saw that article this morning, too. I liked the Metcalf/Dunbar part of it, but I thought the options presented for monetization were short-sighted and rigidly traditional. This is a new paradigm of interaction and expression that needs to move beyond the limitations of subscriptions and banner ads.

    One model I can see working very well for Twitter, its members, and its advertisers is Self-selected advertising. That is, make it a requirement to follow 2-3 (minimum) official sponsors in the same way and context you would any other friend or organization. Doing so allows you to participate in the free service; not following the minimum restricts access or features. This will work particularly well if Twitter can manage to recruit sponsors covering a wide range of product and service domains. Because of the self-selection, the message is much more likely to be heard, and the advertising behaviors more likely to be improved.

    Kevin Makice’s last blog post..Phatic Power

  • @Kevin Makice – I think that’s an innovative model, but I don’t think the numbers work.

    Let’s assume Twitter can sell their tweets at $5/CPM (a very, very high estimate). If they can send 3 tweets/day to their 3.8M users, they get revenue of $20.8M/year. In other words, their best case is that their yearly revenue equals their VC investment. Adding customers doesn’t help because their limiting factor is users, which will trend down as they try to monetize. How many users are there actively using the service? And let’s face it, nobody is going to pay $5/CPM for 140 characters of advertising.

    Their problem remains that the vast majority of power users receive their twitters via a third party tool. It won’t take very long before the tools figure out how to filter the commercial messages out. Change the CPM to $1 and it’s a $4.1M/year business. I doubt that will keep the doors open.

    Don Draper’s last blog post..PMS Social Suite 1.1 Goes Live

  • @Don Draper – You may be right about the math; I’m not in a position to dispute figures.

    What I am proposing is a sponsored account — many, many of them — and a requirement for members to follow a few as part of using the service. How those sponsors choose to use their channel is up to them, with the consequences of misuse being missed opportunities with customers (too little activity) or an exodus of followers (too much, too inane activity). Aside from the fact that these accounts would (1) being paying money to Twitter, (2) be featured and required, they would operate under the same dynamics that currently exist.

    Estimates put the number of created accounts about 2.5 million since Twitter launched in 2006, and a healthy growth rate is still evident. Just using my local Twitter community as a sample, I’d estimate about 60-70% are still active, with about 10% religiously so (a typical power law distribution). Perhaps the nature of this channel makes it less necessary to count heads and eyeballs than to strengthen relationships with evangelist consumers. Look at the extra love some of the A-list bloggers got in FriendFeed just by being included as featured members, and we might glimpse what this could mean for savvy Twitter sponsors.

    There is already corporate use of Twitter that has proven highly effective, and some accounts “managed” by people who just don’t get it. These would still be available, but wouldn’t get the plug of being featured and part of the membership requirement for users. Twitter can charge a flat sponsorship fee, measured against their bottom line, and let the market and the capabilities of each company to connect to followers be what gives it value.

    Kevin Makice’s last blog post..Phatic Power

  • @Ben – thanks for stopping by and thanks for writing an article that’s sparked a debate! πŸ™‚

  • If Twitter turns into a paid model it’ll die for sure.

    Utah SEO’s last blog post..Mobile SEO – SMX Local Mobile 2008 Presentation

  • The article is just wrong… Yes they will advertise, but YES they will monetize it better then the article implies

    Andrew Finkle’s last blog post..Monetizing Twitter

  • @Andrew – interesting take, but the numbers just don’t add up. What % of the tweets people are making can be monetized with context advertising? I just looked back through the last 100 tweets I’ve received and I saw one (a reference to a specific model Dell Latitude) and maybe two (a location tweet) that could get some advertising. Neither of those is going to convert very well.

    Let’s be ultra generous and say Twitter can apply context advertising on 5% of their traffic. What’s the click through rate? 1% of that? Let’s be more generous and say 2%. How many tweets a day do they process? Again, being ultra generous we can say their 3.8M users tweet 10x day. No way it’s anything like that, but let’s blue sky this. How much revenue can they get from a click? A nickel? Again, let’s be generous and say they can get $0.25. 3.8M * 10 * 5% * 2% * 0.25 = $9,500/day or $3.4M/year. Peanuts. It’s not even going to cover the vigor on their VC money.

    And let’s remember that we’re talking about twitter, the guys that can’t keep their systems up. Does anyone think they have the chops to put a natural language context filter on top of their firehose of tweets and put decent advertising into the mix? And how do they keep all those third party readers from just filtering out the ads? And keep in mind that their membership goes down, not up when they start trying to monetize.

    Don Draper’s last blog post..Cross Pollinate Your Social Media Profiles

  • @Don – I think you missed the point(s) of my response to the original article (I do not disagree with your math).

    1) Twitter has (will have) a multitude of ways to monetize their service, NOT just advertising.

    2) One can not get hung up on what Twitter is today, they will be an entirely different service a year from now (see an earlier post @ which won me a Nokia Tablet from Jeremiah Owyang πŸ™‚ ).

    3) When a platform becomes “location aware” its value (from an advertising standpoint) increases exponentially – It is not a matter of if this will happen with Twitter, it is a matter of when. This has already started, but is in its infancy. Twitter + FireEagle (LBS service enabler) = $$$$

    4) In the Twittersphere there will be (already are) 100,000’s of vertical communities. The more vertical, the more targeted your advertising can be. The more targeted, the more valuable to an advertiser.

    5) Open API’s = Ecosystem. Facebook gets it, Firefox gets it, etc. When you open up your software, you become the platform, the ecosystem. By being the ecosystem, your partners bring the users, bring the value. Having a mass of users has no small value, it is irreplaceable, and there are substantial “first mover advantages” to dominating ones space.

    Andrew Finkle’s last blog post..Monetizing Twitter

  • I think the government should pay for Twitter. It’s in their interest to support free speech and this is a great way to do it. Plus, they don’t seem to mind taking on more debt.

  • @Andrew – I agree Twitter will be completely different, but only because financial reality will force them to be sold to someone.

    One of Twitter’s many problems is that there are a lot of ways to monetize, but when you add them all up they’re still not a $20M company. They’d have to execute perfectly on a lot of different strategies to be a success. They need lightning to strike over and over again.

    Where do you get your 100,000s of verticals estimate? If there were 100K verticals, then each vertical would have at most 38 people if they were evenly distributed across 3.8M users.

    Most of the chatter on Twitter just can’t be monetized. It’s cool, but it’s not going to make much money.

    And no matter what the pie in the sky options are, they’re going to run out of runway from their VCs before they can make it happen. Their chances of raising another round of venture capital without revenue in this market are minimal.

    Don Draper’s last blog post..Why Twitter Will Be Sold in a Fire Sale

  • You can not assume 3.8 Million users, it will be dramatically more then that in a few years (hell, they grew 800% since January!!).

    You can not assume that their only source of revenue is advertising. Just off the top of my head, I came up with over a half dozen revenue streams other then advertising (posted on my blog )

    Andrew Finkle’s last blog post..How to monetize a Tweet (update)

  • Twitter should make money by selling ads instead of getting it from users…

  • If you ask me twitter should sell ads, put ads and get a small amount of money from users too. That way it will make a lot of money.

  • At the Start conference, a speaker pointed out that if you tried to describe twitter to typical nonusers, they would think that it was a gossip engine for 13-year-old girls, but that it’s really a trust engine for 20-something software developers.

    It may be more than that, but if it becomes a spam engine, only the 13-year-old girls will stay with it. But if I can pay $60-$100 per year to get a steady stream of trusted intelligence from people I self-select, with the benefit of being able to publish my best ideas/links/queries to N000s of self-selected followers, I won’t miss the girl-gossip at all.


  • 28 million dollars is certainly sufficent to keep the servers running and support a decent sized staff. What would the problem be?

    Peter Monroe’s last blog post..Peter Monroe

  • Pingback: How Do You Think Twitter Can Make Money? | SEO Backlinking - SEO and Online Reputation Management Blog()