Twitter Will Make Money (Just Not That Much)

This is the last part of a three-part post series, trying to analyze the future of social media and the web. In part I, we examined what tools Facebook has to make it a dominant force on the internet and in our lives. In part II, we analyzed the battle over the architecture of the Internet. In part III, we make some predictions about Twitter’s future.

The Thing Everybody Is Talking About Right Now

There’s always something everybody’s going bananas over. In 2000 it was the entire Dot Com. In 2007 it was the iPhone. The end of 2009 belonged to Twitter. Everywhere you turn headlines are buzzing: X Radically Changes Our Lives, 10 Things You Must Know About X To Stay Relevant and Whatever-Came-Before-X Is Dead – Long Live The King.

Once the excitement cools down a bit, we realize that very little has actually changed in our lives. It usually takes another five to ten years for us to notice how dramatic the effects actually are. I’ve come to expect this, so I’ve learned to ride the hype out and look into the future with clearer eyes. And I’m going to teach you the model by which I’m working.

Every year, Gartner publishes a summarized state-of-technology graph called The Hype Cycle. The Hype Cycle is a model of expectations over time for technologies. In general there are five stages to the Hype Cycle (from Wikipedia):

  1. Technology Trigger — The first phase of a hype cycle is the “technology trigger” or breakthrough, product launch or other event that generates significant press and interest.
  2. Peak of Inflated Expectations — In the next phase, a frenzy of publicity typically generates over-enthusiasm and unrealistic expectations. There may be some successful applications of a technology, but there are typically more failures.
  3. Trough of Disillusionment — Technologies enter the “trough of disillusionment” because they fail to meet expectations and quickly become unfashionable. Consequently, the press usually abandons the topic and the technology.
  4. Slope of Enlightenment — Although the press may have stopped covering the technology, some businesses continue through the “slope of enlightenment” and experiment to understand the benefits and practical application of the technology.
  5. Plateau of Productivity — A technology reaches the “plateau of productivity” as the benefits of it become widely demonstrated and accepted. The technology becomes increasingly stable and evolves in second and third generations. The final height of the plateau varies according to whether the technology is broadly applicable or benefits only a niche market.

Here’s what the Hype Cycle for 2009 looked like:

The Dot Com Bubble

The Dot Com provides excellent proof-by-example and insight into the Hype Cycle. For example, let’s examine Amazon’s stock between 1998 and 2005. Amazon is the poster child of the first Dot Com bubble. Notice how it’s stock (thus, expectations for success) follows the model. The unsubstantiated rise in 1999, the realization it’s actually losing bucket-loads of money in 2000 and the gradual rise as the model proves itself after a long period of time. It took Amazon 10 years to pass the peak of the hype, only doing so this year:

Oops I Did It Again (Bubble 2.0)

Web 2.0 went through the same cycle. Two examples:

YouTube exploded into our lives so fast it’s almost hard to believe how we could live without free online video. It launched in February 2005, and was acquired by Google less than two years later, in November 2006 for a hefty $1.65B. That was the peak of YouTube’s hype. Three years later, Eric Shmidt, Google’s CEO, admits: We’ve paid a $1B premium on YouTube. Free online video is yet to be sustainable.

Facebook’s valuation is harder to analyze as it is still a private company, but here are some key numbers (mostly from CruchBase):

  • 2004 – $10M – FriendFeed tries to buy Facebook.
  • 2004 – $100M – Round of funding.
  • 2005 – $525M – Round of funding.
  • 2006 – $1,000M – Yahoo tries to buy Facebook.
  • 2007 – $15B- Microsoft acquires ~1.5%. This is the peak of the hype.
  • Feb 2009 – $3.7B – Facebook values itself. This is probably too low (this valuation was given by Facebook in trial, where it had incentive to lower the number).
  • May 2009 – $6.5B-$10B – Round of funding.

So, as you can see, there was hype around 2007. Then the economy collapsed, forcing Facebook to spend less (as funding was harder to come by), and revealing a much lower yet more substantiated valuation based on revenues. From here, I predict, Facebook will continue to rise.

Third Time A Charm (A Bubble In Real Time)

Ashton Kutcher has 1 million followers! Twitter was on Oprah (or, perhaps, Oprah is on twitter). Everyone is so excited! Twitter raises $100M, valuated at $1B! Twitter’s new offices are shagadelic! Facebook is dead, long live the king!

As appropriate to a real time service, the hype around Twitter was fast to rise and fast to fall. It didn’t take long for the following to appear:

No big surprise there, I can tell you. Here’s what I believe is going to happen. Twitter has a lot to do with real time sharing of information and very fast propagation of data. Media junkies – i.e., anyone who’s job depends on identifying and reacting trends – will find it very useful. In the third world, Twitter’s open architecture is better suited to pass through governmental firewalls, as the API and third-party applications make it much harder to block, so it will be a “force for good” there. Lastly, it is a publication platform, allowing businesses to put a widget on their website to strengthen communications with users.

The general population doesn’t need real-time. Real-time is too fast, unprocessed, unsummarized information. The early adopters that hyped Twitter in the news miss this point. Early adopters have to be fast to be early, so real-time is important to them. Most of us? We want someone to filter things for us.

From this, I conclude that ads on Twitter will fail. There just won’t be enough people there for ads to work. So, I predict a premium model for businesses and heavy users will probably prevail. I think Twitter will be profitable, just not as much as people expect. It will be a niche player, and its profit will grow slowly over a very long period of time.

‘Nough Said

Our expectations of the currently hyped technology will take longer than expected to come into fruition. 3D took a long time to reach the cinemas and it’ll be a very long time before it’s mainstream in our homes. News papers are dead for more than a decade, and I still read them, in print, whenever I stop at the coffee shop on my way to work. Facebook is only now reaching maturity and Twitter is so young it’s almost irresponsible to have any expectations from it. And don’t get me started about the flying cars.

Innovators and early adopters have to remember that most people take longer to accept for change. This means the effects of any technology are most interesting when the technology has become boring. And, boy oh boy, I can hardly wait.

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  • http://zfranciscus.wordpress.com Zainul Franciscus

    Nice observation on where twitter is going. Real time information is indeed to much for people to handle. People are sharing information at a very alarming rate. It makes it too difficult to filter and scan information effectively.

    Where there is a problem to solve, there are always innovative people who seek to seize the opportunity to create a niche product to make a profit in the market. I would predict that we will be seeing better and more sophisticated application that organizes real time information in a useful manner for people from different background

  • privman

    Some petty comments:
    1- Facebook was not valued at $15B by Microsoft: they bought ~1.5% and exclusivity on ad serving. Which part of that do you think is more highly valued?
    2- Twitter isn’t all about real time. I think the main value is being able to easily control incoming information streams (turn them on/off, which is harder to do with mailing lists). In that sense they are in somewhat of a competition with Facebook, but not really, since they take a very different approach. I think you underestimate their appeal. Also, there are other ways to make money from web traffic – see bit.ly’s business model.
    3- You don’t pay for you newspaper though, do you? Would you be going to that coffee shop if they didn’t have the papers?

  • http://omergertel.com Omer Gertel

    Privman, thanks for the comments.
    1 – You are correct, of course, and this point has been made a few times. A lot of people claimed that the $15B valuation is preposterous, so the hype really wasn’t making everybody blind.
    2 – I don’t think Twitter can win the feed war if they go directly against Facebook. Not in the long run. I think customer-relationship in Twitter will yield some interesting revenue streams yet unexpected. Some of this is already in the pipeline, I think (multiple users on a single stream and the @anywhere feature are two examples).
    I still think ads won’t be a major revenue stream for Twitter.
    3 – No, I don’t. Again, you make a fine point. Please notice, though, that the free printed newspaper is a growing (and profitable) market.

  • http://innovationimitation.com Mike

    Twitter is quite different from Facebook. Facebook is an island, Twitter is a bridge. Facebook is a sink, Twitter is a pipe. Facebook is…well, you get my point.
    So while it’s hard for me to say how successful Twitter is going to be, it has some undeniably attractive characteristics:
    – It’s the ideal disseminator of information – light, fast, ubiquitous
    – It gives businesses a human voice

    I agree with you that raw twitter stream might be somewhat inconvenient to digest. But being an open platform allows third party applications to offer filtration, categorization, recommendation. Maybe even our friend Itamar (http://www.briox.com/) will be able to help with this :)
    So while I agree with you that Tweeter probably won’t reach the size of Facebook anytime soon, in my opinion it has a better chance to survive in the long run, because it plays so well with other services.

  • http://happyrain.org/ Emily

    Some petty comments:
    1- Facebook was not valued at $15B by Microsoft: they bought ~1.5% and exclusivity on ad serving. Which part of that do you think is more highly valued?
    2- Twitter isn’t all about real time. I think the main value is being able to easily control incoming information streams (turn them on/off, which is harder to do with mailing lists). In that sense they are in somewhat of a competition with Facebook, but not really, since they take a very different approach. I think you underestimate their appeal. Also, there are other ways to make money from web traffic – see bit.ly’s business model.
    3- You don’t pay for you newspaper though, do you? Would you be going to that coffee shop if they didn’t have the papers?