Twitter: the Revenue “Problem” Solved

I was disappointed when Twitter announced their @anywhere platform a few weeks back. Not that it’s not a good idea. I think it’s logical to want to compete with Facebook Connect. But it doesn’t solve their number one core problem – they are spending gobs of money and still don’t have a business model. When I heard there was going to be a big announcement, I was one of the many people who figured it would finally be an advertising platform. I mean, it’s silly to think that a company might want to someday turn a profit right?

Here’s the thing that frustrates me. It’s so simple and seemingly so obvious that it hurts to think about. They have a revenue model right under their nose that will make them a lot of money right off the bat AND improve the user experience: charge for commercial accounts.

The #1 thing that sucks on Twitter as a user is that there are all sorts of spammers everywhere. That goes for legit businesses and personal users alike. Charge $9.99/month to be allowed to Tweet commercially. Put a “report as commercial” button to report anyone who posts commercially without one of these paid accounts. Anyone who is reported could be reviewed by a Twitter moderator and then warned/removed, or they could crowd source it (3 strikes and you’re out)…or maybe build an algorithm to investigate the nature of the Tweets and what they’re linking to. The resources to make this happen would be minimal compared to the resources they have at their disposal.

Within a month you’d weed out the majority of the crap. As a business owner who only has a few hundred followers (@DetailedImage), we wouldn’t think twice about paying that. It easily makes that back, plus it’s a great way to intimately connect with some of our most loyal customers. Most businesses that really apply themselves have far more followers and would probably pay $99/month without blinking. New businesses would gladly pay it because of the huge opportunity that Twitter presents.

If you really wanted to get fancy, you could also charge for the right to display a specific ad to a specific user, or the right to direct message someone who isn’t following you. This isn’t rocket science here. If done even reasonably well Twitter becomes a better business and improves the user experience.

Question then: with the $160M in funding they’ve received and the 140+ employees that they have, why hasn’t their team even attempted to build a profitable business?

15 comments on Twitter: the Revenue “Problem” Solved

  1. tim says:

    I scratch my head and wonder the very same thing, things have to change eventually for Twitter, the money suck can go on for only so long. What bothers me is, as an entrepreneur I see all of the VC funding being, IMO, wasted on Twitter with all of them hoping it’ll be the next Google or Facebook. Meanwhile there are literally thousands of sound models out there that will offer good returns that are being ignored because of the trophy hunting/greed of the VC firms. I know there has been a shift in recent years with how things are funded, but my suspicion is this will go down in the history books as a big loss that no one saw coming.

    • Adam McFarland says:

      Agreed. It’ll be interesting to watch. If they do collapse, you wonder what it’ll do to the models of these firms. I mean, if they can’t succeed with freaking Twitter it’ll be hard to justify investing in another potential Twitter.

  2. While I agree wholeheartedly with the sentiment behind this post, which is that Twitter needs to find a way to make money in some capacity, I don’t think the solution is clear cut.

    The problem with charging for commercial accounts is that it creates a culture of censorship – what constitutes commercial vs. personal? If you tweet only about Detailed Image products, you are most definitely commercial. But what if I am a Detailed Image customer that likes your brand so much that a large portion of my tweets are about your products? Is that commercial? What if I own a personal blog 😉 that consists of mostly professional content – but I don’t make any *direct* revenue off of it? I think you see where this is going…

    This is not to say these decisions can’t be made. But turning grey areas into black & white inherently creates a culture that doesn’t feel open so much as censored and scrutinized – the exact opposite of what Twitter’s brand is all about. Facebook knows this, which is why they do not charge for grey areas, such as fan pages, but rather choose to charge only for the “value adds”, like, well, the ads.

    Until Twitter can find a way to create unobtrusive value-adds to their core service, I fear they face extinction either by way of bankruptcy, or by way of abandoning the massive user base that believes in the openness Twitter has always promoted.

    • Adam McFarland says:

      Valid points Anthony. So maybe then you don’t kick people off who post commercially, but you incentivize companies to pay the $10/month because they get some other value added benefit. Maybe a badge next to their name like “Twitter verified company” plus maybe a way to send special offers to their followers or show ads on their followers pages. To your point, it will remain an interesting story to follow until they either go bankrupt or attempt to infuse a business model that may or may not alienate the core user base.

  3. tim says:

    Anthony, you do raise a lot of good points. I think Adam is on the right track with his theory, I think creating an automated twitter directory for paid accounts would solve the problem and paid accounts would be “opt in” rather then getting turned in. Have the directory available by industry, alphabetical, location or even keywords – that would be worth paying for.

  4. Rob says:

    Adam,

    great idea! I wonder if they’ll think of something so logical..

    I find it absolutely disgusting what Twitter is doing to the mindsets of potential entrepreneurs, perpetuating this idea that it’s okay not to have a proper business model and that “users” or some mythical buyout is the get-rich-quick answer. Most companies are built upon years of hard work, trial-and-error and sound business models. To have Twitter continuing to survive in this marketplace flies in the face of good business sense (for them.. for business users it’s great!!) and is unhealthy for furthering entrepreneurial teaching and education.

    • Adam McFarland says:

      Totally agree with every word you said Rob. That’s exactly how I feel.

      When I come up with an idea for a new website or web service, one of the very first things I think about is how we’re going to generate enough revenue and profits to make it worthwhile. If I seriously bring an idea to my partners (as with LockerPulse), that’s the #1 thing they’re going to grill me about. If we can’t make money from it, then it can be a tiny side project but nothing that takes too much of my time. That’s just how business works. You have to be profitable.

      So when I really start to think about Twitter, I’m just amazed that all of these smart people with tons of money don’t ask “how are we going to become a profitable company?” And it’s not like they have some magical strategy that’s going to blow our doors off. I read all of the leaked documents that surfaced on TechCrunch last year and as of that time they were a total mess. Anyone could have come up with that in a short brainstorm. They do mention commercial accounts and essentially admit they’re a good idea…so where are they?

  5. Rob says:

    On the one hand, it may have been difficult for them to grow as much as they have if they had charged from the get-go, but what’s the point of that growth if it can’t be monetised? With their 140 employees and $160m debt, it’d take 1.6 million customer-years at $10/mo just to clear the debt, without interest, profit, overheads or paying the staff. So let’s say 4 million customer-years at $10/mo as a ballpark figure. If it becomes a paid for-service do we really think that’s achievable before the “next big thing” comes along and steals all the users?

    Another point – given that they’re not even “ramen-profitable”, I wonder what kind of lifestyles the founders have and if they feel successful.

    • Adam McFarland says:

      That’s a great question. I feel like success can be defined in a lot of different ways. If I were them I’d feel successful in the sense that Twitter has changed the web and how we interact with each other on the web. That’s an amazing accomplishment. On the other hand, the business numbers are horrid so I wouldn’t feel like a good business owner.

  6. nethy says:

    Adam,

    I think this has to do, largely, with the institutions and structure financing something like Twitter. Twitter’s already valued $1b. That means that investors have bought pieces of it at that price. These are risk loving investors who are looking for a high risk-reward investments, probably invested under the implicit assumption of say, a 1/3 chance at a $10b+ (an “expected return” of 333%) valuation when they sell their piece.

    Twitter may be able to pay 140 employees (they could also probably operate with fewer if necessary) on a paid membership plan like you suggest. What they couldn’t do is reach a revenue which justifies $10b (or a $1b) value for the company with it.*

    Twitter are obligated to aim for a high valuation. This is risky. Maybe there isn’t a business model that justifies that kind of price to “discover”. Maybe it’s hard to do and they’ll fail. Nevertheless, they have to actually try for it because that’s the reason the investors gave them money, even if it means risking that whole thing going to hell.

    It has its own sort of finance logic to it but from a distance it seems nuts. It is kind of nuts because this sort of thing can (actually it should) actually kill companies.

    So, ironically, they choose not to implement business model and keep their value speculative for now.

    *Quick back of an envelope for an hopeful scenario: approx 5m 2+ person businesses in the US X 5% X $10 = $2.5m p/m = $30m p/y = less than $500m IPO valuation if everything goes well.
    ^ I think Twitter already make enough money to live (not to justify their value) from deals with search engines.

    • Adam McFarland says:

      Good stuff Nethy. Yes, I failed to mention that they do have revenue coming in from search engine deals. Although I don’t know how much, it might come close to paying their actual business expenses.

      The logic behind not “turning on” revenue to keep a high valuation does seem nuts to me. I understand why, but it’s still nuts. Some investors may make a ton of money, but in the end someone is going to get totally screwed and lose a ton of money unless there is some revenue and profit to justify the valuation. It’s a super huge bubble waiting to burst.

  7. Rob says:

    Oh it’s all very confusing and not really very real-world at all, is it?

    Back in the big dot-com bubble a lot of people became “paper millionaires” – their companies had high valuations and they owned a lot of shares. What if they’d sold those shares (or options) to investors, shielding them from the risk (but passing it all to the investor) or simply making money from the options? (I think the sensible ones did..)

    Perhaps this is similar to what twitter is doing – as has been pointed out, there’s no way they’ll get to 10bn any time soon just selling $10/mo subscriptions, so the valuation is based on risk and potential rather than anything actually meaningful today, so you might as well make a bit of money from the valuation by selling some stock – yeah, the stock might go up in value, but it has a much higher chance of tanking.

    At the end of the day though, if those shares are sold or put into funds, and the valuation falls people will lose a lot of money. Likewise the original investors stand to lose a lot. It sounds like the only people who don’t stand to lose in this deal are the ones right in the middle of it themselves – twitter!

  8. Adam McFarland says:

    How very timely of them 🙂

    After a quick read, that sounds like a great idea. I hope it works…and I hope they open it up to the small guys like us. I’d bid on “auto detailing” in a heart beat. We have a ton of great educational content that I’d love to get in front of people.

  9. tim says:

    Here is a bit more of a detailed follow up about promoted tweets http://mashable.com/2010/04/14/twitter-coo-promoted-tweets-are-not-ads/ Even with this said it sounds like a very incomplete offering that will evolve as it charts it’s own direction. Very fascinating to watch this all unfold.

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