Please Explain!

Although I’ve written about Twitter before, the recent rumour that Google was looking at buying them—after they’d already rejected an offer of $500 million from Facebook—has prompted me to write another article about the apparently insane market evaluations of these web 2.0 companies.

Now Google was supposed to be interested in Twitter because of their search capabilities, which apparently was the main reason they bought YouTube—Google just wants to control all the different ways people can search for things on the internet, even if they don’t make money in themselves. I guess there’s a logic to that. But in the case of Facebook, we have a massively popular web 2.0 darling that still can’t make money, wanting to buy another massively popular web 2.0 darling that doesn’t have any source of revenue at all, to the tune of $500 million! Yet even though they have no revenue (or even an actual business model), Twitter not only rejected Facebook’s offer, they also managed to raise another $35 million in venture capital!

Surely I can’t be the only person who looks at this and wonders what the hell is going on here? Isn’t the massive investment in these web 2.0 companies that haven’t found a way to make money yet just like the dot.com bubble all over again? And all this at a time when it is so hard for people to get capital for longstanding, legitimate businesses? Something just doesn’t add up here. Is there some rule of doing business on the internet that I’m missing here? If so, I’d really like to know what it is!

Perhaps Twitter’s strategy—and perhaps the strategy of all these web 2.0 companies in fact—is simply to generate a lot of buzz, so they can get bought out at the best possible price. If so, Twitter obviously thinks it can get more than half a billion. But how many times will people keep buying out these companies that don’t make any money, before they realise it just isn’t a good deal any more?

The other alternative of course is that Twitter thinks it eventually will be able to find a way to make money. The only obvious way to do this would be through advertising and/or paid subscriptions. I can’t see any reason why the first will have any more success than other social networking sites—indeed, given the nature of Twitter, it would almost certainly be less successful. And if people have to pay to use it, you can watch its popularity fall through the floor, and get taken over by another, free alternative with yet more venture capital to burn behind it. They’ll likely adopt a “pay for no ads” model, and still not make any money. And who knows: it might just make people think about whether Twitter actually really is useful at all. I remain mystified as to what possible use it could be myself.

Perhaps what they’re hoping to do is sell information—e.g. we can tell you what people are thinking and saying right now. Now that does sound compelling for a political party or an advertising firm, but apart from the obvious potential privacy issues, is it really very useful information? After all, it can only tell them what Twitter users are thinking and saying—and I’m not sure I’d want to know that. ;-)

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I am not sure I can help you SAchiko. I saw an interesting session recently on uses of Twitter in education, at http://audio.edtechlive.com/cr20/twitterforteachers.mp3 , but I am not sure why it would be a hot stock.

I like to think that the reason I can’t help you is not because I am so ignorant, but because you are simply right about this one.

On the other hand, the answer may be synergy–some other social networking company like Facebook–or computer company that wants to move into this area, is hoping to consolidate its position in the market by gobbling up Twitter.

  
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It isn’t really a stock as such, as it’s a private company – if the stock market saw all the red ink it was bleeding, its stock would be worthless in no time! I can understand trying to control the social networking market, but AFAIK, nobody in this market has made any money so far, so it doesn’t seem like a very good market to be in! Perhaps the idea is that once somebody becomes the Microsoft of social networking, they’ll be able to dictate terms to their users. But then yet another free service will come along with yet more venture capital, and everyone will go to that – until they have to start making money. Then the cycle will repeat itself. None of this silliness makes any sense to me at all!

  
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The advertising/media marketplace is desperately looking for new, and hopefully inexpensive ways to saturate/infiltrate the online worlds’ and personalize their interaction with personalized connections regarding advertising and product placements.

Google has the underline function, and their public/private web search capacities.
Myspace & Facebook have their own coporate space and tie-ins included in general designed to sell preferences mentioned in the very media that they are providing to all of their consumers directly.
General internet capacities include the pop-up, the scroll over imbedded advertisement, side bars, built in hard to remove advertising video prior to the video you are trying to watch, and many other information gathering subroutines, browser history tie-ins, redirects etc.

Twitter – allows for instant feedback 144 characters at a time.

The reality is, that now as an event is happening, the twitter world now archives all of the feedback comments realtime, that then can be sold directly to companies sponsoring – looking to sponsor, or to the people holding the event/broadcasting the news/putting out the movie/broadcasting the TV Show. No more paying pollsters, and relying on cherry picked Neilsen Rating households, no more need for direct marketing push/pull campaigns. This unleashes the marketers from all of the constraints and gives them unfettered access to the people who are freely commenting on whatever it is they are watching at the time.

Since Twitter has all of the archives of these responses in realtime, they get to set the price for specific feedback, and the datamining that is available from these comments.

Behold what skittles did with their website: http://www.skittles.com

In essence they made their site a twitter wall directly related to skittles, or anything barely related to the candy.

In fact that is what is driving Web 2.0. The fact that every marketing instrument can now become a personalized advertisement, that the consumer can even customize and become a part of with their own interaction. Tied into the burgeoning cellular communication structures and the billions of self-dedicated/self taught 1337 spk spd txtrs, all of those next generation trends and marketing niches literally feed the marketing consumption engine – once of course all of that disposable income comes back to the surface after this recession.

Of course, Twitter and the other sites mentioned above, may add to their selling propoganda/advertising the idea that with the demise of so much brick and mortar in this current recession/depression that their use of digital communication/marketing/social networking may produce Economy 2.0TM as well.

Welcome to the next generation of annoying advertising, specifically chosen by you the, the person being annoyed by the advertising!

Coming Soon!
h– he– here’s M- Ma- Max Headroom from Network 23!
The first artifically intelligent personality generated entirely from cached catchphrases/memes and advertisements passed through mainframes of the internet.
http://en.wikipedia.org/wiki/Max_Headroom_(character)
http://www.crazy4cartoons.com/about_maxheadroom.html
http://www.youtube.com/watch?v=ZEPq0FvFm3g

  
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Thanks for your comments Akacra! Frightening as they are, they do make a lot of sense. Basically, what you’re suggesting is a much more fully fleshed-out version of what I was getting at in my last paragraph. But what about all the privacy issues? Does Twitter’s end user licence allow them to use its data in this way? And if so, would people still use the service if they became aware of this? Then and again, perhaps this isn’t an issue at all, as all “tweets” are effectively public domain anyway. But then what can Twitter charge for? Search services to streamline finding the data companies want?

It frightens me that Twitter users would effectively determine the direction of media, advertising and more. Would the rest of us effectively become second class citizens, whose needs aren’t catered to by business, politicians or the media? Or perhaps we’ll be an elite, spared from all that annoyance. ;-)

  
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No privacy issues need to be taken into account.
All “Tweets” are freely given, on a private network domain.

Demographic data is not considered “private” unless specifically linked to a true users identity, and since most of the account names given are essentially “Anonymous” they are simply data points with responses attached to them.

You can still “vote” for products with your dollars – i.e. buying end products in the end is still the most important aspect of the advertising investment.
Also, if you have never participated in a product evaluation survey, service survey, or other survey process, then it would be exactly the same as it would be if you didn’t “twitter” about everything.

On the “good” side, if you can believe the capitalistic mantra; “Perfect information leads to perfect marketplaces full of efficient and effective transactions for products and services fulfilling needs in said marketplace.”, then this could produce products that people will need in ways that before were entirely “predictive” in the past.

This is what the truly “Value” added component is to these Web 2.0 companies. If the company sees that the marketplace needs x number of y products with z numbers of specific capabilities for demographic A, then the numbers can be crunched and further queries about the utility and value of that product can be easier calculated. If all of this ends up with a positive number, or if it can be attached to some secondary product/service that costs nothing to produce and that ends up making a huge positive number, then the product goes to market, and is consumed without much waste involved.

Of course, that is the perfect capitalistic model, but it would work for a socialist model as well. The difference would be that it would have to break even or serve the “public good” in a way that would “improve society”.

Information is valuable, and 1 billion datapoints per day, could provide valid information quite quickly, if it were truly moving in a detectable direction. So $500 million, may actually be a low bid, and it appears that Twitter, at least believes it is worth more, while at this time appearing to simply be “worthless” (no positive asset accumulation).

And from 20 minutes into the future (or 23 years in the past).
Max Headroom selling coca-cola products:
http://www.youtube.com/watch?v=IzxHDqUz8Sk
Max Headroom on Future Fashion Trends:
http://www.youtube.com/watch?v=1lKrnhafUKc&feature=related

Enjoy! (It was sad that he was quite prescient about these trends.) :)

Finally some bit of clever niche marketing, capturing and exploiting two distinct market niches, while insulting the other market niche, and getting the general marketplace of able bodied viewers confused at the same time.
Watch & Listen Carefully:
http://www.youtube.com/watch?v=DeA5mg18JWY&feature=related

  
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Thanks Akacra! I am starting to see why business (and politicians) would consider the information on Twitter to be so valuable now. However, the question remains as to how money can be made from it. Can’t anyone just monitor and/or search Twitter for the information they want anyway, all for free?

  
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Searching on twitter only generates most recent “walls” in the “channels” formatting. What the internal datamining software of Twitter, and most other archive searching protocols allows for is all of the trending data, behind the status reports. For example “#americanidol” hit #4 on twitter at x time spot. You could track this in real time, by constantly hitting F5, or you could let Twitter collect and track the data for you, and then allow all the pretty graphs and charts and “twitterer” data points become visible, by what is causing the up and downs in their response times and whether their remarks are positive/negative.

You basically have two choices:
You could work really hard, hire 100 people to track all of the gibberish that twitterer’s talk about 24 hours a day, daily, and then plot and graph, and do all of the stuff, that would still be incomplete and then you would still guess about what it all means.
or
You could pay several thousands of dollars a day to Twitter, which then provides you with customized trending information that was gathered in real time, with true trending due to usage, and full access to all datapoints broken down by region, locality, marketplace, demographic information, type of communication device delivery, network accessability type, reaction time to event triggers, positive/negative trending, full useful commentary, request, etc. without having to look once at the gibberish that twitterer’s talk about.

Which would you choose? What would your competitor’s choose?

  
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Yes, I guess “without having to look once at the gibberish that twitterer’s talk about” would be worth thousands of dollars. ;-) Thanks Akacra, I think I’m getting a pretty good handle on this now. So do you know if Twitter is actually doing this yet, or is it just their long term plan for world domination?

  
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According to their website:
http://twitter.com/about#money
FAQ:

“How do you make money from Twitter?
Twitter has many appealing opportunities for generating revenue but we are holding off on implementation for now because we don’t want to distract ourselves from the more important work at hand which is to create a compelling service and great user experience for millions of people around the world. While our business model is in a research phase, we spend more money than we make.”

It appears they are simply putting the parts together at this time, while testing out their software and control protocols. Apparently they are tweaking the system multiple times a day, and focussed on their sign-ups needs first, before doing the back end data collection to focus on their “commercial opportunities”.

Of course this is smart too, as simply having a huge subscriber base is enough to drive up valuation of a company in a buyout situation as well.

  
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Just came across this amusing quote regarding Twitter (not sure of the original source):

Twitter is for telling people what you are doing is more important than what they are doing.

:-D

  
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Hi guys… long time no see… life issues.

Anyway, I just wanted to comment on this one.

Given that Microsoft valued Facebook at around $15B in Oct 2007, it would seem very reasonable for Twitter to reject a purchase offer of $500mm. After all, accounting for the economic downturn, let’s assume Facebook currently has a valuation in the neighborhood of $5B. I’m fairly certain that Twitter has to be worth at least $2B by that basis, alone.

Also, it’s not unreasonable that if Facebook offered $500mm that Microsoft would offer $1.5B, “just because.” Then again, Microsoft doesn’t like buying companies that it doesn’t understand, so it’d probably just buy a part… to keep the current staffing in place. So, effectively, Twitter’s founders are banking on Microsoft offering at least $500mm for 33% of the business, whereby Facebook offered $500mm for the whole thing.

Assuming that Twitter is able to effectively data mine and has enough storage capacity and computing power to process the information, and they are able to capture at least 80% of the market share held by Facebook, a $1.5B valuation is not so far off. The funny part about this is that if Twitter does accomplish these things, they invariably will destroy the marketability of Facebook to potential advertisers and market research firms. After all, if Facebook can provide X information at Y dollars today, a price war with Twitter could demolish the value of said information by making it available at only Y/10 dollars.

So, effectively, assuming the information gathered by the two sites would generate $700mm of revenue for a single site providing it, the potential loss of revenue ($670mm) would be larger than simply throwing away $500mm to acquire the competition.

  
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