Why I believe Twitter is a billion dollar company

Last night I read a post by Neal Wise called Twipocalypse Now: Warnings of a Twitter Bubble and this morning I feel the strong need to express a lot of the things I’ve experienced and learned from Twitter, and why I think this service, (which to me is the closest thing to being able to read a lot of people’s minds) has a potential billion dollar business up it’s sleeve if they play they cards right.

Starting with my personal Twitter History
According to TwitterHolic, I joined Twitter on February 28th 2007 at 7:53:01pm. Since then I’ve sent 9,880 updates (as of this blog post), or about 13 Twitter updates a day. That probably makes me an addict since day one, and I admit it.

First Twitter was fascinating because it was a lot of fun, sharing and getting to know a little better how some “internet friends”‘s lifes were like, and sharing mine with them. Now, I find myself using it in more advanced ways, and trying to analyze how trends are spread and what causes you to have an ever growing number of genuine loyal followers.

Twitter didn’t invent the idea of Micro blogging, I believe Jaiku has the credit for this, at the beginning we all opened accounts on as many services as possible (Jaiku, Twitter, identica, plurk, pwnce, friendfeed,…), but it seems Twitter’s simplicity (and board of directors and contacts) had the magic to grow virally like no other service in its field.

One thing they did right from the beginning is that they opened up the service with an accessible API for developers available from the very early days. I remember using a Python-Twitter and being fascinated with how easy it was, then I wrote integration scripts for (the almost deceased now) wedoit4you.com’s blog directory and twitter, for MyBloop.com, and scripts to send me direct messages which twitter would send to my cell phone via SMS when my linux servers were having trouble.

They had a very rough first year in terms of scalability (they still have some issues), the service was always going down, and for a time, I found myself cheating on it on plurk, service which I also found fascinating until I reached it’s “Nirvana“. Along the worth mentioning competitors there was also Pwnce.com which closed up shop last December, and I don’t blame them, they were probably in this to be number one, and they realized they just couldn’t keep up with Twitter’s popularity.

Many Twitter based services came along, and also many competitors including Facebook which copied the whole notification thing and put it on the facebook timeline feed, and it became really annoying cause with Twitter being down all the time you would be tempted to try Plurk for a while, and then ping.fm came along to post on all of them from one place.

Introducing Power Twitter
About a month ago, I found a Firefox extension called Power Twitter that made me abandon ping.fm for good, and therefore all the other micro blogging services. I’m doing all my micro blogging on twitter now.

Twitter likes to be proud of it’s simplicity, but I think little by little they will have to add functionality that us addict/advanced twitter users appreciate from extensions like Power Twitter. They should thank Power Twitter for bringing back some of us.

Where Twitter is now
So now that the Twitter service is a lot more stable, and it’s grown a lot in the past two years, it seems that it’s becoming a mainstream phenomenon. Every day you hear something on the TV, and Google News is a good way to see how much web press they get every few hours. This in my Internet business experience is the best thing that can happen to your company. The amount of genuinely interested traffic that press can get you can’t never be matched to any publicity campaign, so I’d say Twitter is already profitable by not having to spends tens or hundreds of millions of dollars in publicity.

But let’s see a little bit of numbers.

The following graphic is why I think Pwnce’s board made a wise decision to leave the race and move on to other things, they were in it to be number one or a close number two, but it didn’t happen, Twitter has no match in its arena as it is right now, and it’ll be very hard even for a company like Google to build something similar and compete, they’d be better off buying Twitter (but twitter can’t sell out for less than a 10 figure sum).


Monthly Visits: Twitter vs Jaiku vs Plurk. 54.2M as of Jan 09

As you can see, it’ll be very hard for the competitors to catch on, even for Jaiku which was the first to do this, and which got acquired by Google. As it is, they’re clearly the number one by several orders of magnitude. The others might have decent businesses going for them, but they won’t be a billion dollar landmark on the internet. Competition will always be good though.

So they beat everyone in their field very early, now it’s time to take over the world, let’s see what Twitter has to do to become a billion dollar company (be it on their own, or by valuation and acquisition)


Uniques: Twitter vs Facebook

This graphic shows unique visitor count according to compete.com for Twitter and Facebook until January 09. Twitter had 5.9 million unique visitors monthly at that time, today analysts are talking about 7 million uniques a month. Twitter is not a fool and that’s why they dind’t sell out to Facebook, they’re going for an user base as big (and of course bigger) than Facebook’s, which shows here some 68 million users as of January 09.

Mark Zuckerberg, Facebook’s founder has said it clearly too (and that’s why he didn’t sell out either), his goal is to connect EVERYBODY, so he’s probably looking to get traffic like that of Yahoo’s or Google’s 131 million unique visitors a day, and of course the whole planet the day we’re all finally using the internet the way we use electricity (that’s going to be a really interesting to live on).

So how can it make money you ask
Before you read this section, keep in mind that Twitter has already achieved $55 million dollars in funding. To have an idea how much this money can last, try to remember how YouTube used to spend around $1 million dollars monthly in bandwidth alone right before being acquired by Google. Twitter by no means eats that much bandwidth, and it’s a small operation of 29 employees. Making things expensive, put each employee at an average salary of $100k a year, plus let’s say $20k a month in (bandwidth, hardware, office) expenses to cover my basis, that would put their costs in around $4 million a year (I believe it’s much lower if they run things cheap like we do). They got enough money to run for 13 years if their costs didn’t grow, so let’s say they have enough money for sure to run for the next 5 years without making a penny, 5 years is a long time to make things happen on the internet. So in response to Neal’s Post, the internet and the whole financial system would have to go down for a Twipocalypse to happen, not even this economy, or a depression would make it go away, the service is FREE, and they got plenty of money to run it for a long time.

This graphic shows the number of Visits per month the site it’s getting (according to compete.com, it could be more). As of January 2009, this was 54 million visits a month. That makes around 10 visits a day per unique visitor, not bad at all, almost like email.

So let’s do a simple exercise, thinking very very small. If Twitter was run by a couple noobs that weren’t really ambitious and just wanted to make a good living off of it, they could be raking in right now, easy $12-$50 million a year without being very creative.

I’ve seen way smaller sites with good sales team selling CPM campaigns at $20, $25 and even higher. I cannot imagine a good sales team selling CPM campaings on a site like Twitter, which could be perfectly well targeted based on reading your twitter update history and that of your followers, your re-twitts, etc. Let’s use the numbers of January:

With only ONE Ad, and without growing the traffic:
54,000,000 visits at $20 CPM => $1,080,000

A small minded biz model with just ONE ad would bring now $12.96 million dollars a year minest $4M in costs and then effing taxes, would leave them with abour $4M cash in their pockets. Some people would settle for $4M a year, but this is petty cash for what it can make, and you could argue that it’s a very high CPM with this economy, but even with a lower CPM still it’d make enough to make the founders a decent living with a couple million dollars a year, my point is it can be monetized and run profitably without doing anything out of the ordinary. But of course, Twitter is not a million dollar business, it’s a billion dollar business.

Since they don’t show any obvious business model to the public now, there’s a lot of morons out there thinking the site can’t make money, or that Twitter “doesn’t know how it’s going to monetize…” YEAH RIGHT.

Still thinking on Ad-Revenue based business models, let your mind fly now, and think how much money they could make if they slowly showed us that they’re building a more powerful search engine (before Google deploys a Twitter search) and they had targeted ads on their search results just like Google’s #1 income source.

As they have more users sending updates, they’ll have more and more information about everything happening in the world, url recommendations from all over the world for the content that matters, from respectable twitter users, showing us the latest and most relevant content. If they could manage to index all of this information this information and searches would yield results as good as Google’s we have in our hands a billion dollar business with sponsored ads, just like Google’s #1 source of income.

I personally do a lot of searches every day on Twitter as it is and find a lot of stuff that’s more up to date than Google’s results, plus you find related people that know about the subjects you are looking for. That’s gotta have tremendous value for the company given that Search Traffic is the traffic that it’s monetized the best today on the web since it’s the one with the highest conversion rates for advertisers.

With it’s API alone, there’s already an ecosystem around it building companies, some may even be monetizing already and keeping it quiet. Twitter also, in another non-creative way, could charge for use of its API, but I think this would cripple their grow and deter companies away from using it. However it’s possible in the future they will have enterprise access to their API for large amounts of transactions per second and they could make a fortune on this alone, without even altering one bit the current user experience.

Another way it could be making a lot of money without ever changing the user experience would be to have data mining services for marketers. Subdivisions of Nielsen make hundreds of millions a year on data analysis services that big corporations pay for every month. Twitter has an awesome potential to analyze what people love, hate, want, bought, sold, go, read, do… only doing this I think it has one hell of a business model. It just needs to focus on growing enough so that they can have enough data to make it a really valuable source for analysis. And they’re focused on growing, growing, growing, that’s all that matters at this point.

Then, there’s other business ideas I won’t mention because I might pursue them myself, and there’s also the obvious exit strategy of getting bought by bigger companies when you have a billion dollar valuation. Potential buyers… Yahoo! for example is looking to grow it’s search by getting into social networks, I think Twitter is both an amazing social network and the next tool for searching the most up to date information. I’d even dare to call Twitter “a human powered search engine index of the most current information in the world”, and that also has to be appealing to @Google which only a week ago has created a few Twitter accounts and it’s a little scary to see Google for the first time interacting live with people, doing replies, and even RTs (Re-Tweets, a name for forwarding what others have twittered).

I hope that after doing this very simple analysis you also find it funny when you read or hear people saying that “Twitter doesn’t know how it’s going to make money”. No VCs in their right mind, in this economy, would drop $55 million dollars on a company that didn’t have their shit straight.

When I hear these kinds of comments, I feel glad there’s very naive or short sighted people in this world.

I feel better now, I just wish I could invest money in it. For now I’ll be glad to have a few more followers

3 Comments

  1. Good post. Interesting analysis on their business model. I’d like to see how well these guys can pull it off.

    Cheers

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