Solving the Twitter Business Model Problem – Your Guess is Probably Better than Mine

I’ve been fascinated by the blogosphere’s musings on Twitter’s downtime. I, for one, am relatively sympathetic toward their plight – there’s nothing tougher than trying to scale a system that’s growing quickly and has a very unpredictable, bursty traffic profile. And as much as I like and enjoy Twitter, it’s not a life-or-death kind of service for me.

While most people seem to be making off-hand remarks along the lines of “aside from uptime, they need to figure out the whole business model thing” I think it’s more complex than that.

*Twitter users have an expectation that the service will be free. My favorite article on this point is this one from Dan Farber at CNet.
*According to most estimates, a large volume of Twitter traffic comes from 3rd party services (I’ve heard estimates as high as 90%)

Combining these two points, I think the real challenge for Twitter will be that whatever business model they look to deploy will have to accept these two realities. Once you’ve set a service expectation with users, it’s hard to change it. For a non-technology example, look at the hue and cry over American Airlines assessing a baggage fee to fliers who want to check a bag. People who travel view the ability to check a bag as part of the service. Regardless of whether the $15 fee is fair, it feels like a violation of the contract between fliers and airlines. Similarly, I think Twitter can’t do too much to impoverish the free service. I can think of a laundry list of possible business models for Twitter and I’ve listed them below:

Freemium / Paid Subscriptions – I’m not sure what premium services Twitter could provide. I don’t believe that you can make guaranteed uptime or higher uptime a premium service until the free service has acceptable levels of uptime. This isn’t web hosting, where there is a willingness to pay for more uptime. If you’re going to provide a service, free or paid, users have some expectation about regular uptime. Also, having a service where “free” users don’t get good quality service doesn’t help Twitter grow.

Advertising – The challenge here is that people Tweet from all places – mobile phones, IM clients, 3rd party clients, browser plug-ins, etc. If the stats on the amount of twitter traffic that happens off the core website, a real revenue opportunity around advertising would require that the ads live with the tweets. I’m not sure how you would accomplish such a thing. Perhaps Twitter will come up with some clever way to attach an ad to the end of each tweet and 3rd party services will be required to serve / show those ads to continue getting access to the API. There are a million difficulties with this approach, so I’m not sure how they’d actually make such a thing work.

“Tweetmining” – For lack of a better term, I’ll lump all approaches that focus on evaluating the content found in tweets to provide some kind of intelligence (market research, trends, brand feedback, etc) into a meta-term that I’ll call tweetmining. I don’t think there’s much of a business model here because the very same data that Twitter would want to mine is generally available to anyone else who’d want to search it. There are already Twitter search engines and other Twitter analysis services that take advantage of this information to give people insight into what’s happening on Twitter. Unless Twitter has access to relevant and valuable information that the general Internet does not, I’m not sure there’s much of a business here.

Licensing – I could see a model where Twitter partners with other companies, social networks in particular, to provide the ability for those services to have some kind of mobile update capability. They already have a plug-in that works for Facebook. But with most of the major social networks opening up their platforms, that negates the opportunity to do a revenue-producing licensing deal for the most part. This would also boost the need for increased attention to uptime.

Those are, as far as I can tell, the major business model opportunities. And, as far as I can tell, none of them are terribly attractive if Twitter’s goal is to build a large, revenue generating service. What do you think?

  • I think there's a lot of potential for a freemium model, actually. For one, a paid account could have access to keyword tracking, while free accounts would not. (Or maybe would be limited to tracking just a couple terms.) Tracking is a huge bonus for me, as it's great for everything from finding neighbors to clients to blog readers to people with common interests.

    I would happily pay a monthly fee to use Twitter, and many other people have expressed a similar willingness. Overall adoption would decrease, of course, but on the flipside, they'd actually be generating revenue sans advertising.

    Speaking of advertising, there's always the good ol' “ad-free paid version.”

  • Marina,

    Thanks for the comment. You can already get keyword tracking from other 3rd party services for free already (tweetscan and summize for example) – I'm not sure how Twitter could get people to pay for that.

    I think there would have been a great opportunity for a freemium model had Twitter introduced it from the start. I'm not sure what they could introduce now that would get me to pay unless they degraded the free service.

  • amitav

    I think there might be an opportunity to have paid b2b sub-networks in corporate environments. For instance, lots of journalists use twitter to communicate breaking news internally to their organizations (and externally to their networks). If that capability is developed and has real value to information-dependent organizations, perhaps a company pays twitter to maintain their internal twitter networks (media, banks, consulting firms, etc). Not unlike paying Google for intranet search capabilities. This might depend on creating sub-groups within organizations so that there is some narrow-casting capability (which maybe defeats the point of twitter).

    In addition to revenue, the other advantage for twitter is that it automatically pulls new users into the free network (assuming they can use the same ID for both networks), thereby enhancing/entrenching twitter over competitors. Not sure how big this b2b model is or how you'd price it (per user/per twitter/per period?), but it might be something to explore.

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  • amitav

    Though I suppose if I'd read your earlier post on the enterprise and web 2.0, I'd already know how you feel about this…

  • Doug

    Charles – We've talked about this same subject in different words before and it comes back to the question as to weather or not Twitter and other Web 2.0 companies are really viable businesses. Perhaps we are, as we did with Web 1.0, overvaluing traffic and activity. The other element to this equation is that the cost of deploying this service is too high, perhaps by a factor of 10 or 100. Even if some revenue can come of this, it's not clear that it would be a home run vs just a nice little business. Facebook hasn't done it (yet), Meebo is getting traction. PatientsLikeMe is doing very well as they are in a rather lucrative market (health care marketing). Everyone else is pretty much living on venture cash. So it's not clear that Web 2.0 ever had any legs – just attention. And attention doesn't pay the bills the way Cash does.

  • Jason

    Seems like they need to find a way to charge the 3rd parties using their service. Couldn't they just charge anyone with a distribution list greater than 100 people? That would scale nicely with their infrastructure costs.

  • And yet conventional wisdom seems to persist that consumer Internet companies shouldn't bother to worry about a business model in the early days…

  • Jason,

    I generally think charging 3rd parties is a good way to go. The only problem is that most of the 3rd parties using their service don't seem to be making any money either. I'm not sure how much they'd be able to pay and for how long.

  • I think there's a marked difference between having a business model that needs scale to be effective and using the need to achieve scale as an excuse to punt on thinking through what model you'll employ once you've achieved scale. I see a lot of the latter and not enough of the former.

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  • james

    well done, good job writing this. There has been a lot of speculative gurgling about twitter and cloud computing lately. there is just one thing which they never talk about… the revenue generating capabilities of twitter. of course, the website receives a lot of traffic, but so what? twitter is free, at the moment it has zero ads (and adding ads will tend to drive traffic away and many people use ad-blocking services or do not pay any attention to it), and I like your point on the psychology of its users who will be turned off if it suddenly starts asking for money to use the service. if it has revenue generating possibilities, would it not be insignificant? how much money does facebook make through advertisements? how much does myspace make? not only that, but one would argue that twitter has fierce competition from other social networking websites (or that it is complementary to those websites).

  • james

    additionally, if twitter should ever offer any investment opportunity, it would likely be absurdly overvalued given the popularity of it. kind of like how in 1999 people would buy stock in starbucks because they enjoy the taste of the coffee (and paying about as much of a premium for the stock as for the coffee). I'd like to hear what you think of it's revenue generating capabilities, hudson, since you seem to be something of an expert on this. I know little about how online businesses and cloud computing generates cash.

  • Thanks for the great comment, James. I'm thinking of doing a post along those lines at some point. There are so many other people speculating on Twitter's business model that I am having more fun reading their posts than I would drafting a post of my own.