twitter, biz stone
Matt Sayles/AP
Twitter co-founder Biz Stone speaks at the 140: Twitter Conference in Los Angeles, Tuesday,
September 22, 2009.

Twitter Valued at $1 Billion, But How Will It Monetize?

October 01, 2009 11:00 AM
by Liz Colville
Twitter, the San Francisco-based micro-blogging service, is reportedly receiving an additional $100 million in funding, but many still wonder how the service will become profitable.

Twitter Gets More Money, Time

According to reports that surfaced last week, Twitter is expecting an addition $100 million in funding that will, as The Wall Street Journal put it, “buy the fast-growing Internet-messaging company more time to figure out its business model.”

This new round of funding includes investments from two new groups, T. Rowe Price Group Inc. and Insight Venture Partners, the Journal adds, citing undisclosed sources. Dominic Rushe writing for The Sunday Times of London notes that previous funding in the company amounted to about $50 million, adding that other investors include Spark Capital and Benchmark Capital.

The investors now value the company at $1 billion, despite the fact that it “has yet to generate more than a trickle of revenue,” according to The Journal. Still, this valuation means bigger companies rumored to be interested in buying it—“Facebook, Google, Microsoft and others have all reportedly been on the phone to Twitter’s founders hoping to buy the business”—now have access to the price tag.

But data from comScore shows immense growth: The site had 54.7 million unique visitors in August, while it had just 4.3 million in August 2008, The Journal reports.

Harnessing the Twitter Audience

Twitter’s vocal crowd of millions did not spare its opinions once news of the valuation broke. As the Sunday Times of London noted, “the reaction was almost as swift and harsh as that handed out to Kanye West after his unsolicited intervention at the MTV Music Awards.”

This kind of relationship between site and user, some say, warrants the company’s high value. Charlene Li, founder of tech consulting firm Altimeter, explained to The Times that “people all around the world are now addicted to sharing their thoughts on Twitter, even their negative thoughts about Twitter itself—that’s a relationship that could be worth a billion.”

According to the Pew Internet & American Life Project, the average age of a Twitter user is 31, Rushe notes, and there is also ample evidence that few tweens or teens use the site. “Just 11% are aged 12 to 17,” Rushe says, citing data from comScore, a research company. That data was backed up by a widely circulated July report written by 15-year-old Morgan Stanley intern Matthew Robson on the Internet habits of his peers.

Although this data allows the company to clearly see its audience and work on catering to them, Rushe adds that the prevalence of third-party applications—browser- or desktop-based tools such as TweetDeck and HootSuite—makes Twitter’s traffic more difficult to track than it used to be, when the only option was to use the service via the Web, text messaging or instant messaging.

Opinion & Analysis: Twitter's Potential Revenue Routes

The most common revenue model—advertising—is believed to be a route Twitter is exploring. But Twitter CEO Biz Stone says there will be no ads placed on Twitter in 2009, according to the U.K.’s Internet Advertising Bureau (IAB), citing 140: The Twitter Conference, which took place in Los Angeles from Sept. 22-23.

“Any kind of approach toward advertising is going to be a while,” Stone said at the conference. “We're not thinking about that just yet.”

But according to IAB, Stone did discuss other plans for monetization, including “paid-for commercial accounts” and “improved search functions.” Last year, the company bought the search company Summize as part of its effort to bolster its search capabilities. But the outbreak of swine flu earlier this year highlighted the inconsistencies of a user-generated flurry of information and misinformation; people searching the term 'swine flu' on Twitter were at the mercy of the site's ever-changing, lottery-like, real-time results of users' tweets.

The Times’ Dominic Rushe says the company must “build a more solid service as it moves toward a sale—which the founders have so far fought against—or float.”

Earlier this year, the firm Sanford Bernstein “argued that the Web 2.0 model of building a product and then figuring out how to monetize it has been largely debunked,” according to DealBook, a New York Times blog. Speaking of Twitter, the analysts said that monetizing “would be difficult at best and likely unsuccessful.”

Sanford Bernstein went on to describe the Web as “littered with examples of promising but ultimately value-destroying acquisitions,” according to DealBook, “citing deals such as AOL’s $4.2 billion acquisition of Netscape, and eBay’s $4.1 billion acquisition of Skype.” YouTube is another example. As Rushe puts it, YouTube was bought by Google in 2006 and has been “a money loser ever since.”

At the beginning of 2009, Silicon Alley Insider commissioned readers to come up with business plans for Twitter. It chose a winner, and writer Nicholas Carlson featured some of the best entries in a slideshow, “11 Business Plans for Twitter.” Some suggested that Twitter users could opt-in to a kind of “mailing list,” and could allow marketers to direct message them and even ask them questions about a product or service. Another suggested Twitter create a tier structure, splitting “into three different services and serve ads or charge as appropriate.”

Silicon Alley Insider’s Nicholas Carlson also wrote “Twitter’s Road to $1 Billion,” highlighting several of the “milestones” that he sees as having led to the company’s current valuation, including the Iran elections and the ensuing protests, Oprah joining the site and CNN creating its “CNN Breaking News” account at cnnbrk.

Earlier this year, Forbes highlighted the analytics work that Twitter is doing behind the scenes, suggesting that, like Google, Twitter could sell its technical services and expertise. Twitter’s Kevin Thau explained that he and his team are trying to come up with meaningful and useful ways to “measure” the information contained in tweets. “We can measure the tweets,” he told Forbes. “We're trying to figure out what are the appropriate metrics around engagement and how to convey those.”

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