Harvard Business Online

Twitter's Business Model


Posted on Conversation Starter: October 26, 2009 2:13 PM

It has become a popular game, even among investors who should know better, to dismiss Twitter based on lack of a business model. But there is a difference between not generating income and lack of a business model. I believe that, in just a few short months, Twitter will show the world that not only do they have a business model, but that theirs is the most sophisticated around. As the founders have admitted, they did not necessarily plan out their success. But the result of their outside funding and considerable valuation is that they have been free to watch and learn what might be possible.

Most publishers talk about the two common monetization streams—advertising and subscribers—as though there are no other options. As many have seen over the last year, dependence upon advertising is a slippery slope in a downturn. Even the incredibly successful Rupert Murdoch is struggling with the model and believes that subscription is the answer.

Last week, Microsoft's Bing and Google announced "search deals" with Twitter, with Bing also making a deal with Facebook, allowing the search engines to show results related to "what is going on right now". They tried to build this and still may, but paying Twitter and Facebook is logical for now as they are rapidly becoming major referral engines to many sites.

In fact, these are traffic deals. Until now Google has been the only company on the planet to make major money by driving traffic to other sites. These deals are Twitter's first steps toward doing the same.

Twitter has a number of experiments in progress that are likely to turn into revenue streams:

Search Twitter acquired search.twitter.com in the summer of 2008. Of the many applications built on top of the Twitter API, this had shown to be incredibly popular. In fact, it had the potential to overpower Twitter's servers to such a degree that for the first year, they did not put up a search box but hid the feature at the bottom of the results page along with "about us, contact", etc. This search is very powerful, as proven during the recent Iran upheaval when Twitter was one of the only ways to get word out. While Twitter has said that they will not run ads, their users would not object to the monetization of search through an adwords-type solution.

Ecommerce First Dell and then many other companies have sold millions of dollars worth of equipment through Twitter. If Dell only has, say, 45 of a product left, it does not pay to put up an eBay page. They post it on @DellOutlet, or another of their accounts, and the product sells immediately. I'm sure that if Twitter is not asking now, they will in the future charge a small commission for such direct sales. Who could object?

BTB consumer help This summer, Twitter and Best Buy started an experiment with @TwelpForce. They have over 13,000 followers and you can ask anything and a Best Buy employee will answer. They've even promoted this through TV. This is the future of customer/vendor communications.

Twitter 101 Twitter 101, another program that launched last summer, is a comprehensive tutorial for companies to do business via the help of Twitter. The more businesses use Twitter, the more ways the company will find to monetize their traffic.

Verified accounts Twitter is in beta test with verified accounts, enterprise subscriptions that confirm that customers are really doing business with the company they are looking for rather than an imposter or squatter. Twitter will charge businesses a small subscription fee for this service.

Applications Twitter co-founder Evan Williams has said that Twitter will not have ads. What I think he means by this is that there will not be a banner ad across the top of Twitter's website. However, he has said that applications will be featured on Twitter, and an adwords-type feature currently shows one application at a time on the results page. Applications are the graphical ad unit of the future and if done correctly, will be accepted by the Twitterati.

Thousands of applications have monetization potential. According to GigaOm after "TwitterGate," when somebody hacked Twitter servers, Twitter has considered buying a number of these. And why not? They can get others to do the development and just as they did with search.twitter.com, use the high Twitter valuation to cash in on applications that have proved to be profitable and leverage them against the large Twitter user base.

Network marketing The larger Twitter grows, the more the connectivity between users benefits all. But there is gold beyond the conversations that are going on. The pure connectivity in itself is valuable. While Twitter may not run advertising, many companies would love to license the right to target people using what is called "birds of a feather" targeting: identifying a group of people with a common interest and then expanding that target by finding others with similar interests. A number of companies are doing this right now, while honoring privacy; they don't have to know who the people are.

As I mentioned at the start of this blog post, most publishers have one or two ways to monetize their efforts. I have outlined at least eight which Twitter will probably use, and there certainly will be many more. That's why I think we all have a lot to learn from this company that "has no business model".
David L. Smith is the CEO of Mediasmith.

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