The Trouble with Twitter

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Theory aside, Twitter's communications could certainly be turned into money. We count four ways for Twitter to generate cash, though each has limits:

• Twitter could ask users to pay. It's been done before—competitor Pownce charges user fees for enhanced content—but is difficult to add fees once the service has been established as free.

• Twitter could get messages to pay. With millions of messages flying around, why not convince some to be "sold" as product placement? Blogger Steve Poland suggests that Twitter could insert text ads into every 10th or 50th tweet. But again, users would rebel.

• Twitter could extract money from user data. Millions of people now share intimate thoughts via Twitter. Think of the market research potential. Companies are already mining these huge swarms of data. Dell has enlisted Visible Technologies to learn what users are tweeting about its products. But if Twitter itself tried to monitor user data, privacy concerns could quickly alienate users.

• Twitter could sell ads. Twitter is already doing this in Japan.

Advertising is the most viable option, but the total potential pool is not huge. Social media sites are notorious for having low ad response rates, and advertisers will enter a new forum cautiously.

A simple way to calculate how much money advertisers would spend on Twitter ads is to ask, how much profit will advertisers get back? We arrived at our own figure using the following analysis:

A. Assume each of Twitter's 2.3 million users sees 10 ads each day. Twitter could thus serve 23 million ad "impressions"—a banner ad appearing on a Web page—each day.

B. For Internet banner ads, the average click-through rate is 0.14%. So Twitter's 23 million banner ad impressions would generate, at a 0.14% response, 32,200 users who click on the ad.

C. Clicking on a banner ad takes a user to the advertiser's site. Only about 8% of consumers who visit such a site continue further, turning 32,200 clicks into 2,576 serious shoppers.

D. And of course, not every shopper at a Web site buys. If 30% of shoppers actually ended up buying the product or service sold, Twitter ads would generate 772 sales a day.

E. Finally, let's assume each sale generates $100 in profit. Thus, 772 sales would create $77,200 in profit each day for advertisers—or (times 365) about $28.2 million in profit per year.

Advertisers would find Twitter ads generate $28.2 million in profits. So the maximum they logically would spend on such ads is $28.2 million.

Thus Twitter has a real value of $12.26 per user. Compare that with Facebook, which has a perceived value of $300 a user—or at least it did last year, when Microsoft purchased its 1.6% stake for $240 million and the site had 50 million users.

Now, this columnist must pause to explain: I'm not here to mock Twitter. I love Twitter, and as an avid user, I have connected with friends in Connecticut, marketing strategists in Australia, journalists in New York City, bloggers in Vancouver, and a UFO-car launch in London (don't ask). As an ad industry guy, I'd love advertising to work on Twitter. But as a user, I'd hate to see anything muck up the place.

Coming: Banner Ads

Yet, putting such personal conflicts aside, I predict Twitter will begin selling ads outside Japan, which is no doubt a usability test. American users will see banner ads soon, and don't be surprised if your message on dining out gets side-saddled with an ad for a local restaurant. And to be fair, Microsoft's deal valued Facebook at 100 times its then-$150 million in estimated revenues. Similar hyperbole could turn Twitter's $28 million revenue potential into a $2.8 billion valuation.

But response rates will be low, since other social media, such as Facebook and MySpace, have fared poorly selling stuff to their users. It seems social media users are too busy being social to pay much attention to ads. As marketers see poor results, they will move their ad budgets to other, more responsive ad media. The social media value bubble will be pricked by reality.

In the end, Twitter will most likely be sold and become a hood ornament to another service, like Gmail is to Google (GOOG) or Hotmail is to Microsoft (MSFT). The corporate buyer won't get much ad revenue, but it will pull millions of communicating consumers closer to its own business model.

Which is perhaps for the best, because I like Twitter the way it is. Here's hoping that eventual buyer keeps Twitter pure.

Ben Kunz is director of strategic planning at Mediassociates, a media planning, buying, and Internet agency. He is also author of the advertising strategy blog ThoughtGadgets.com.