Twitter's new credo: Follow the money
There are a lot of people waiting in line to see their Twitter investment pay off. They are typically a patient bunch, willing to wait for a big payoff on their bet.
As bets go, with more than $1 billion in venture capital invested, Twitter has been considered one of the more sure things, with an IPO expected within the next two years that would shower wealthy investors in new riches.
Investors include a number of blue-chip VCs and angel investors, among them Ron Conway, Marc Andreessen, Jeff Bezos, Benchmark Capital, and Union Square Ventures. In December 2011, billionaire Prince Alwaleed of Saudi Arabia bought $300 million worth of Twitter shares on the secondary market, at a valuation of around $8.4 billion for the six-year-old company.
But after the Facebook IPO fiasco and Zynga's slide into the abyss, the Twitter board is more keenly aware that the huge payoff is at risk if the service --which has made @ and # as universally recognizable as Facebook's "Like" -- can't transform itself into a financial juggernaut. That means growing the user base and figuring out how to make lots of money per international and mobile user.
When Facebook went public, it had revenues of about $4 billion and a projected post-IPO valuation of an astounding $100 billion. With slowed user growth and challenges in obtaining a higher revenue per user for its mobile and international population, Facebook's stock is now about half the IPO price and its market cap is just north of $40 billion.
Early investors still made out well with their investments, but far less well than they expected, and the many who bought into the IPO are seriously underwater. In the wake of Facebook's fall, Twitter's private-company valuation could take a hit.
Twitter CEO Dick Costolo has maintained that the company isn't focused on an IPO. "We are not in a hurry to jam revenue into the company," Costolo told the Los Angeles Times in an interview last month. "We are going to remain private as long as we want."
Despite Costolo's declaration about not being in a hurry to make money, Twitter is making aggressive moves to build a better revenue story for an IPO and avoid Facebook's IPO follies.
Earlier this month Twitter clamped down hard on developers. The message issued was that Twitter's days of being a utility that serves the planet altruistically are over. It's a business, with shareholders expecting a very healthy return on their investment. Twitter set a goal to get to 2 billion users over the next few years, and it doesn't want to share them with developers competing to be an entry point and content holder for the Twitter experience.
In a blog post about changes to the rules governing use of the Twitter API, Michael Sippey wrote:
With our new API guidelines, we're trying to encourage activity in the upper-left, lower-left, and lower right quadrants, and limit certain use cases that occupy the upper-right quadrant.
Twitter is fine with developers working on business and enterprise applications that use the Twitter API but don't tread on Twitter client interface, syndication, or social influence ranking. This move followed Twitter announcing that it wouldn't renew its syndication deal to display tweets on LinkedIn.
For some, Twitter's clampdown is shortsighted. Though Twitter's move will fuel the revenue engine more quickly, the company could still provide developers with broader opportunities to apply its social graph and advertising services. Twitter also enables the opportunity for others to come up with an alternative open messaging "utility" and social graph that could become an integral part of the social Web fabric for developers. App.net is attempting, with a paid service, to fill the gap left by Twitter's changing the rules of the game. The popular blogging platform, Tumblr responded to Twitter's new API policy as follows:
To our dismay, Twitter has restricted our users' ability to "Find Twitter Friends" on Tumblr. Given our history of embracing their platform, this is especially upsetting. Our syndication feature is responsible for hundreds of millions of tweets, and we eagerly enabled Twitter Cards across 70 million blogs and 30 billion posts as one of Twitter's first partners. While we're delighted by the response to our integrations with Facebook and Gmail, we are truly disappointed by Twitter's decision.
Twitter has also been revving up its ad sales engine, with Promoted and Sponsored Tweets, as well as targeted tweets and a self-service ad platform.
"We have an ad platform that is already inherently suited to mobile. Even though we launched the ad platform on the Web already, a couple of weeks ago we saw mobile revenue in a day greater than nonmobile," Costolo said in June. The company stated that 60 percent of its 140 million active users access the service on mobile devices.
eMarketer estimated that Twitter ad revenue was $139.5 million in 2011 and will reach $259.9 million in 2012. The research firm predicted $540 million in revenue by 2014, and Bloomberg reported that Twitter could reach $1 billion in sales that same year.
For comparison, 57 percent of Facebook's mobile population, 543 million, access the social network on a mobile device. In its second-quarter earnings call last month, Facebook claimed that it was generating $1 million a day from those mobile users.
No doubt, as Costolo says, Twitter will take its time to unleash an IPO. The company has hundreds of millions in the bank and can wait for more-friendly market conditions while still going public before its growth trajectory peaks, if that's possible. Twitter has a lot of untapped market. According to a Pew Internet survey, only 15 percent of U.S. adults online used Twitter in February 2012.
In the meantime, it's clear that Twitter is now fully engaged in becoming a company that Wall Street will admire for more than its free flow of tweets and hashtags.