INNOBLOG

Note: This article first appeared in the Jan. 28 issue of Strategy & Innovation.

Distributing software free or making a web application for free as a means of building an audience that can then be monetized has its roots in the time-honored tradition of freely distributed print publications that make their money from ad sales. Google, MySpace, and Facebook all make money in this way. Twitter, the micro-blogging service that looks like a standalone version of Facebook’s “status update,” is another such company. Started in 2006, Twitter has managed to gather around 6 million users (a smaller percentage of them regular “twitterers”) to its free service.

Twitter hasn’t developed any revenue streams or a business model to date, though that is reportedly going to change this year. Twitter’s founders have so far been running the company on $22 million in venture capital. Despite co-founder Evan Williams’ comments last November that he did not want to take more funding in 2009 in the face of an economy that has venture firms requesting larger amounts of equity in response to declining start-up values, the company made a deal for another $20 million in funding last week, which brings its total valuation to $250 billion.

So, we wonder, is Twitter well-positioned to drive disruptive success?

Likely Outcome: Potentially disruptive, though if Twitter doesn’t develop revenue streams soon, may simply be purchased by another company

One thing Twitter cannot do is maintain its status quo. There are no large direct competitors for Twitter, and it seems unlikely that another large company would build a Twitter competitor rather than just buy Twitter. However, Twitter now has a host of me-too imitators, and first-mover status isn’t always an advantage. For example, neither Google nor Facebook nor LinkedIn was first in its respective space, nor was the iPod the first MP3 player. The first Twitter-like company – Yammer, for instance, which charges companies for closed employee networks – to actually figure out what service they could offer that customers would value enough to pay for could potentially kill Twitter.

So Twitter essentially has two potential outcomes: be acquired as a sustaining application for another company looking to build engagement, or develop a compelling, possibly disruptive business model on its own.

Considering the first outcome, potential suitors might include Google, Yahoo, or Facebook. A Facebook/Twitter merger has been discussed, and makes sense, since Twitter is essentially Facebook’s “status updates” feature, untethered from Facebook and available by SMS text message (there is a free Facebook application that allows Facebook users to populate their Facebook status updates with their Twitter “stream”). Last fall Twitter reportedly turned down a purchase offer from Facebook for $500 million, although the sticking point wasn’t necessarily the idea itself but the valuation of the Facebook stock that was being offered in return.

The second outcome offers much more interesting possibilities. Just two weeks ago, Twitter filled its first-ever business development position. Where should that person begin in developing revenue streams?

The most obvious answer for a Twitter revenue stream is Google AdWords-like ad sales on Twitter users’ profile pages and against search results. However, founder Evan Williams has said he’s averse to an advertising model.

If non-advertising-based revenue streams are indeed desired, the place to begin is with an understanding of the value Twitter holds for its customers. In other words, what jobs is Twitter fulfilling for its users? Back in December, I conducted a highly unofficial online poll of just over 100 Twitter users to ask them what Twitter was displacing for them. Facebook, isolation, email, and news media were all among the top results, although “Other” also ranked high. Reading into the open-ended comments, “Other” included “Craigslist, real conversation, sleep, PR, media gatekeepers, eating, and writing my dissertation.” Twitter could create a pay-for-service offering that specifically solves any of these.

Twitter could explore ways of charging companies to reach its users or use the site to gather feedback on their products. Twitter could also charge companies that use Twitter as a channel to advertise deals via “tweets” – Dell has said it made $1 million in revenue in 2008 through its Twitter channel.

Twitter is just now beginning a process of integrating search on the home pages of some of its users, a move that could lead directly into an advertising model.

There has been some speculation as to why Google and Yahoo have not attempted to set up a specific Twitter search (currently the only way to search Twitter is at search.twitter.com).

Conceptually, Twitter search amounts to a real-time news search, which is quite powerful and would be attractive for advertisers. It’s hard to imagine that Google would not want the opportunity to add Twitter searches to its AdSense network. It’s also hard to imagine how, if you had a web property with valuable content not already indexed by Google, you would not want to sell advertising there.

Meanwhile, the number of things my informal survey suggests that twitter might potentially displace, and the very breadth of revenue ideas being kicked around in the blogosphere and on Twitter itself, indicates real disruptive opportunities to develop a compelling business model. The discussion includes a large variety of features and analytics that Twitter could add and charge for, and two different “come up with a business plan for Twitter” contests. In fact, the most disruptive ideas may be somewhere down in the comments on one of those blog posts.