Twitter : Bucking The Trend Or Fooling Investors ?
These days they say everything is possible and the world has certainly witnessed a lot lately with the world economies and markets in what looks like a free fall, major financial scandals and bankruptcies, massive lay-offs and a record low consumer confidence index. But there are few glory stories out there that catch our the eyes and which, if they are to be believed, are indeed encouraging news amidst one of the gloomiest times most of us have ever experienced.
Twitter, the much acclaimed micro-blogging and social-networking platform which claims 6 million users and growing fast, has supposedly recently raised a new round of funding on the basis of a higher valuation (read : than in December 2008), which seems a major achievement considering the dire times.
Even more surprising is this fund raising from so far un-named venture capitalists, perhaps, in view of the fact that Twitter remains a website and business without any documented revenue streams.
How does that work ?
Small talk is now a very big deal. Twitter, the popular micro-blogging and social-networking site, has entered into an agreement with one or more venture capital firms, valuing the company at a staggering $250 million, according to TechCrunch. ComScore data shows that Twitter logged about 5.57 million users in September 2008, representing an impressive five-fold increase over the year-ago period.
Although the company has achieved mass adoption since it launched in March 2007, Twitter has yet to offer a viable business model; it still hasn’t shown how it will generate revenues and sustain profit growth. The company recently turned down a half-billion dollar acquisition offer from Facebook, although most of it would be paid with stock.
“Rumor is Twitter hit up more than a few venture firms to pitch the $250 million valuation, and got more than one ‘no’,” TechCrunch wrote. “But someone’s bit, perhaps encouraged by Twitter’s breakneck growth and the interest from Facebook. That means Twitter gets a new cash injection and time to figure out its business model at an even more leisurely pace.”
Paul Boutin of The Industry Standard does not get how this happen when Twitter does not have a viable business plan :
Relentless biz-blogger Kara Swisher is pushing againfor Facebook to acquire Twitter. Twitterwill never IPO on its own, she says, and Facebook is Twitter’s most natural fit as a parent company.
But there’s an important number missing from Swisher’s post and all other Twitter punditry: How much does it actually cost to run Twitter, and how will that number grow ever more rapidly as more customers sign up?
Twitter’s PR team hasn’t responded to my email, so I’m stuck with guesses. First, how many employees does Twitter have? Wikipedia says 31. Using a West Coast average of $125,000 per year in salary, benefits and overhead for staff, that’s just under $4 million per year for staff.
More importantly, how many tweets per month is Twitter sending to customers, and how much does it cost them?
Twitter doesn’t charge its users anything. The company pays for all messages sent to cellphones through Twitter. That’s the burn that no one’s been able to estimate with any certainty.
Mr Boutin goes on to speculate how Twitter could be a victim of their own huge success when considering what he calls the out-of-control and escalating cost basis of Twitter’s service :
Last year, the company’s blog claimed costs of $1,000 per user per year to send SMS messages to Europe — which is why Twitter stopped sending them. But there are no numbers for what its U.S. customers cost. To calculate that, we’d need to know the total number of tweets sent through the system in, say, a month, plus the per-message price that Twitter has (hopefully) negotiated with cellphone carriers. I can’t even find a good guess anywhere on either of those.
Finally, the biggest problem of all is the network effect of Twitter’s popularity. As the number of people using a network goes up, the number of connections between them rises much, much faster. Most Twitter users now have several times more followers than they did a year ago. As a result, every update sent to all of a user’s followers costs the company more to send to everyone who’s subscribed by phone.
It’s an exponential function: The more people use Twitter, the faster the number of messages grows. Twitter’s SMS bill is not only climbing, it’s accelerating, and each new customer costs more than the last one. Any company looking to acquire Twitter has done calculations to estimate the future cost of the service, which could grow from a reasonable expense to a profit-destroying nightmare if Twitter’s acquirer were successful at marketing the service without charging for it.
Some analysts speculate that the end game of Twitter is to sell out before having to engage in commercializing their offering, much like YouTube did it, and Google and FaceBook are the two obvious names that pop up in that discussion.
Others note that people from Google AdSense division have recently left Google only to join Twitter so perhaps there is a revenue plan for Twitter after all !?
This blog will continue to follow the success of twitter and see whether it will in fact bury them because of their escalating costs and lack of revenue streams or instead make their founder and owners the next dot.com millionaires.
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