No one knows how the microblogging site and similar online social networks will make money, but investors see a new Web revolution
John Borthwick speaks softly, but he can't hide his excitement. Co-founder and chief executive of the New York Internet media incubator betaworks, Borthwick is an investor in the microblogging phenomenon Twitter, where people exchange short public messages called tweets. Betaworks is also building or investing in at least 21 other companies mining the "real-time Web." That's the term coined to describe the exploding number of live social activities online, from tweets to status updates on Facebook to the sharing of news, Web links, and videos on myriad other sites. "It's a whole new layer of innovation that's opening up on the Web," he says.
It's also a whole new field of dreams for entrepreneurs and investors. Amid the downsized remains of Web 2.0, with online advertising and e-commerce in a drought, they're viewing the real-time Web as the Internet's Next Big Thing—maybe even the source of the next Google (GOOG). The emerging sector is so new, and its boundaries so fuzzy, that it's difficult to know how much money has been sunk into how many firms. But many dozens of startups are staking claims and drawing interest from investors.
"People are realizing this is a huge opportunity," says angel investor Ron Conway, an early backer of Google and Twitter. Ticking off a series of startups with dutifully silly names—TweetDeck, Aardvark, Topsy Labs—that he thinks could be big successes, he says he aims to invest in 40 to 50 real-time companies in the next 18 months. He thinks there is at least $5 billion to be made on the real-time Web, from retailers providing instant discounts on Twitter to marketers targeting ads to people based on products or services they mention in tweets.
The investment frenzy for all things real-time began earlier this year when Twitter raised its fourth funding round, a $35 million investment that valued the company at $250 million. During a two-day Twitter conference in May, a speaker asked the audience how many people thought Twitter's valuation in 5 to 10 years would be higher than Facebook's, now about $6.5 billion. Most raised their hands.
Are people getting ahead of themselves? Possibly. Twitter has just started exploring ways to generate revenue, and its prospects are unclear. Facebook, with its blend of social networking and real-time activity, has struggled to turn rising popularity into profits. Even Borthwick, perhaps the real-time Web's key articulator, concedes he hasn't yet identified a blockbuster business model for any of betaworks' firms.
But there's a method behind the mania. In just the past couple of years, several developments have come together to make the Web more of a real-time experience: ubiquitous high-speed Internet connections; a growing number of mobile devices such as the iPhone with full Web browsers; and new Web technologies that enable instant transmission of messages and data. That mix has made always-on, real-time communications easy and addictive. The iconic example, Twitter, attracted 44.5 million people to its Web site in June, plus perhaps an equivalent number who gain access to its services via other sites and software. Facebook's 250 million active users, whose instant status updates are a key part of its appeal, share more than 1 billion videos, photos, and other content each week.
"Real-time" is actually a bit of a misnomer. Most of this activity doesn't truly occur in real time, the way talking on the phone does, and social gestures such as sharing links with friends are just as important a part of the appeal as immediacy. These gestures—often accompanied by data from people's profiles on social networks, such as where they live or their age—hold the key to the real-time Web's moneymaking potential. What people are tweeting and sharing could be a potent indicator of their interests and intentions: When people type in a response to Twitter's home-page question "What are you doing?" their answers also may reveal what they want to buy—right now.
This is an entirely new body of data from sources outside the search engines and more static sites that have dominated the Web. That's why the real-time Web presents a big challenge to some Internet leaders—especially Google. Real-time streams are slippery for its computers to track. Google algorithms favor sites that attract many links from other sites, a proxy for importance. But such links can take days or weeks to build. Google has increased how often it indexes leading real-time sites, and Twitter activity is showing up more often in search results. But because Facebook and Twitter keep much of the data on this activity private, search engines can't index it all.
NEW TRAFFIC DRIVERS
Real-time services also may soon give advertisers another way to reach prospective customers besides search engines. Already, Google is no longer quite as dominant a driver of traffic to some Web sites. Twitter has become the second-largest source of outside traffic to the TechCrunch blog, behind Google, for instance. For now, ad agencies say they have no plans to slow spending on Google. But if real-time sites start generating significant audiences and data that advertisers can use to target them, ad dollars will follow.
One of the hottest areas in real-time is search, thanks to its proven business model of matching ads to queries. Boulder (Colo.)-based OneRiot, one of more than a dozen real-time search services, mines not just what people are saying but what links they're sharing on Twitter, the news-sharing site Digg.com, and other social sites. Chief Executive Kimbal Musk notes hot topics such as "Michael Jackson" or "G-Force" should provide many more opportunities to show ads because people often repeatedly search them in a short period of time. "Traditional search is like going to a library," he says. "Real-time is the right search, right now."
Established search engines have no intention of falling behind. Udi Manber, Google's vice-president of engineering for core search, says the company is now indexing the Web, or at least the most important parts of it, in as little as minutes today vs. every few months five years ago. Google plans to move even faster in the future, says Manber. "If something is written on the Web that's important to you, we should bring it back in seconds," he says.
The man trying the hardest to realize the disruptive potential of real-time is Borthwick. The 43-year-old West London native early this year wrote a blog post titled "Google Next Victim of Creative Destruction?" in which he suggested Twitter could turn the search giant into an also-ran if the upstart can become the go-to place for searching breaking news and conversations. A former Time Warner (TWX) executive, Borthwick co-founded betaworks two and a half years ago with onetime AOL colleague and venture capitalist Andrew Weissman. They raised $10 million that they're using to create and build a few companies and co-invest in many others with angel and venture investors.
Besides Twitter, betaworks' portfolio is a who's who of nascent real-time stars. Betaworks sold Summize, a search engine just for Twitter, to Twitter itself last year. Current companies include bit.ly, which shortens Web addresses to fit into Twitter's 140-character tweet limit, and StockTwits, a real-time stock discussion site. Borthwick aims to create an ecosystem in which real-time and social data can move freely among the services, compounding the data's value.
It's not yet clear where that value will emerge. With Twitter still working out how it will make money, the startups around it haven't been able to cement their own business models—besides selling to Twitter or another firm. The uncertainty is keeping some investors on the sidelines. Jeffrey M. Crowe, general partner at Norwest Venture Partners, says his firm has looked at several real-time companies but hasn't pulled the trigger on funding. "The jury is still out on how much value gets delivered beyond Twitter itself," he says.
Many investors, however, are happy to take the risk. "There will be too much investment," says Peter Hershberg, co-CEO of online marketing firm Reprise Media (IPG). "But there will also be a handful of winners."
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Twitter vs. Google
Google towers over all its competitors in Internet search. But John Borthwick, CEO of the Internet media incubator betaworks, makes the case in a blog post earlier this year that Google could be the next victim of "creative destruction." He contends Twitter's search service, which lets others search for what people are saying on Twitter in real time, could be the catalyst for Google's eventual decline.
To view the blog post and a slide show of real-time startups, go to http://bx.businessweek.com/real-time-web/