Twitter's Business Model

I woke up this morning and found a twitter message on my phone from chris herbert pointing me to this discussion of twitter’s business model on techmeme

That’s the tiny url that chris sent me. I hope it works. I’m still limited to my blackberry for internet here on the great barrier reef

I love that my twitter friends keep me posted on stuff that matters to me and I love it even more to see so many friends discussing something that is near and dear to my heart – the question of how twitter will make money.

I left a comment on Alan Stern’s post that set this whole thing off. I don’t think freemium is where the big money is, at least for Twitter.That doesn’t mean that freemium offering isn’t a smart move, but I think are smarter ones.

And I also noted that some of the best web companies of our time; Google, YouTube, Skype, and Facebook all launched without a business model and too their sweet time getting to one.

To me its really simple. You can’t monetize web services very well until you have an audience of scale. Jason Calacanis suggests that 10mm monthly uniques is where you have scale. I think it can be less in some cases (highly targeted services) and more in some cases (social nets). But every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the goal of getting to scale. Because if you don’t get to scale, you don’t have a business anyway.

So I agree with Jason and Dave’s posts on this topic.

Marc Cantor’s post is interesting because he suggests that Twitter needs to signal its business model so that developers are comfortable building on top of its api. I think there is some truth to that, but actions speak louder than words. If Twitter behaves well towards its developer community and keeps giving them what they need, I think they’ll be patient too.

I think you have to look no farther than facebook to see where all of this is headed. They are the Google of social media. They are going to figure it out When they do something that works (becoming a platform for third party apps) others will follow in their wake. When they make a mistake (beacon version one) others will learn from that mistake. I am not saying that twitter is going to monetize exactly the way facebook is going, but I think that’s a good place to look for inspiration right now. If twitter does things right, developers will be as excited to build on top of its platform as they are right now about the facebook platform.

#VC & Technology

Comments (Archived):

  1. Douglas Karr

    I’m not being sarcastic, I’m actually here to learn… We have a business here in town that has less than 100,000 uniques per month and is already profitable. What ‘scale’ are we speaking of? Targeted websites with small volumes can (and often are) more profitable per visitor than grandly scaled sites. And often, it doesn’t require the supporting infrastructure to get there.Why would the push be for 10MM uniques if I can have 100 sites with 100,000 uniques?

    1. Stephen L. McKay

      To the Douglaskarr,Your missing it. Fred is not saying that you can’t build a successful, very profitable “mom and pop” web business, especially if you use and understand the tools at your avail. It’s just that these models are not what private (VC) funds are looking at, as far as an investment that will provide the returns limited partners, and the fund managers are interested in.No offence to you Douglaskarr, but it’s apples and oranges. Your 100 profitable sites are great, and may make you a bundle, but your not going public, or going to be bought out by a larger player on the scale that counts in the private equity (includes VC) world.On the positive side; Stick around! Fred is a good guy, very smart, and if you’re here to learn a little, or just wet your beak, this is the place!Steve

    2. fredwilson

      The scale I was talking about is the audience size you need to generate returns on venture investmentsI think staying small, getting profitable, avoiding vc investment, and keeping the cash flow to yourself is a very wise approach and is probably best for 90pcnt+ of all web businessesFred

      1. Stephen L. McKay

        Fred,My point exactly.There is so much, and so very many oportunities out here right now, and it is all do-able!It’s where we want to go, and what we want to do.Steve

  2. greenskeptic

    Thanks for the explanation, Fred, been wondering this for many moons now!10MM uniques…is that mining a niche?Love Twitter, but still trying to understand where it’s going…

  3. johndodds

    Call me naive but just as much as it’s not about assuming revenues will follow users, it’s equally not about understanding where it’s going – it’s about something new that people love, not like but love. Having a service that elicits that reaction is a huge competitive advantage in my book.

    1. fredwilson

      I am with you. I love twitter. As a user first and foremostFred

  4. Michael Lewkowitz

    I think listening to users and observing how it’s being used and sharing that with the development community is a big opportunity. That patience and ‘unknowing’ of how it will unfold I think is what will lead to the biggest success with system/platform level plays. If they can keep that focus I’m sure the overwhelmingly clear strategies will emerge based on what the users and developers ask for en-masse. Wesabe’s going to be another interesting one to follow.

    1. fredwilson

      That’s what my partner brad burnham always says. And I think he’s right. And so are you igniterFred

      1. Keith Teare

        I only wish you and Brad had been the investors in edgeio fred. We had gotton to 20m ad units in 15 months, had rolled out the first part of our publisher platform, and learned a ton from driving $350 cpm’s on CrunchBoard. BUT, we had a lead investor who had no patience for building a platform through all of the twists and turns that takes. Very frustrating :-(Oh well, onto the next big thing! I’ll be calling when I figure it out :-)Keith Teareceo/edgeio

  5. lux

    Building a 10MM/monthly user service may be necessary if your goal is to build a successful consumer Web service, but that’s hardly the only model for building a successful business.

    1. fredwilson

      I totally agreeFred

    2. fredwilson

      And I think that we’ll have many successes that will never attain 10mm monthly uniquesThat was jason’s number, not mine. But I do think some businesses, particularly social nets, require a lot of scale to succeed as a stand alone businessFred

  6. Chris O'Donnell

    Can we call Facebook one of the best yet? I know you are a big fan and are assuming that they will figure out how to build a profitable company, but IMO the jury is still out. In fact, I blogged yesterday about shutting down my Facebook account (among a few others) in an effort to reduce my web footprint and gain better control of my personal data. I can easily see social net fatigue becoming a trend this year, with people getting tired of it all. I just don’t need to know about it every time a friend rents a movie. Too much data is just as big a problem as not enough, and the overflow of data spit out by the social networks could create a backlash.

    1. fredwilson

      I am not much of a facebook user, but I think they’ve got a core audience that’s fanatic and won’t leave any time soonFred

  7. Jared M. Spool

    Interesting post.I still don’t see the business models behind YouTube, Skype, and Facebook. (Well, I see the biz model behind Skype, but never saw it at the scale that eBay saw it — at least initially.)I’m still dubious about this “get everyone to use the service for free then figure out the business model later” approach. I think Google struck it lucky (and they are still basically a one-trick pony). Nobody else has really pulled it off.

    1. fredwilson

      I’ll take the opposite side of that bet. In fact I haveFred

  8. terrycojones

    Hi Fred> And I also noted that some of the best web companies of our time; Google, YouTube, Skype, and Facebook all launched without> a business model and too their sweet time getting to one.Is there a lesson there? :-)> every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the> goal of getting to scale. Because if you don’t get to scale, you don’t have a business anyway.I agree, but unfortunately one is _forced_ to think about how to monetize in order to get funded. If you can’t get funded, you don’thave a business anyway (or at least you have one that necessarily lives on a shoestring). Believe me, I’d _much_ rather beworking on getting to scale than trying to pin down how what we’re doing will be monetizable.Finally, I think there’s a distinction you should be drawing here. When an app is 100% user facing, you can talk about visit numbers, uniques,and monetization in a consistent way. But when some fraction of the traffic comes from API usage by 3rd parties, I think you need toconsider that traffic differently. How do you monetize it – without pissing off your devoted programmer API users who have grown usedto a free API? That’s particularly relevant to Twitter, given that they apparently have 90% of their traffic arriving through the API. Do theyneed 100M uniques to be at scale?This all gets back to the question I posted here months ago (and which went unanswered): Where is the value in having an API that’s heavily used (and free)? I agree there’s many ways to monetize the human web eyeball traffic – but the API traffic is another question.All deeply relevant to me, as you know :-)Terry

  9. Mark Evans

    Maybe I’m missing something but I don’t see the “killer” way that Twitter is going to make money. As Jason Calacanis suggests maybe it will be from mobile advertising. Or perhaps it will come from licensing deals with third-parties that use Twitter’s API. For example, what if TwitterFeed started offering a premium version of its service, and cut Twitter in on any sales. The biggest difference between Google and YouTube is that Twitter isn’t really an online property where you can leverage traffic with some low-hanging AdSense ads. Time will tell, I guess, whether Twitter is just a cool service of a business.

  10. john

    Facebook will succeed because they can easily monitor all of their apps (by other developers). When they find one that is monetizing well, they can just clone it . . . Asymmetrical information . . .

  11. slowblogger

    I agree with douglaskarr. It is a hopless world if any web business should reach 10MM to be profitable. I personally am writing about mass niche (it will be at, which is further study of longtail. In Korea, we are seeing emerging entrepreneurs who run online clothing shops (alone or with 1-2 colleagues) who make a few hundred dollars dollars a year personally. There I see the sign of new economy and new kind of success.Success1.0 was one superstar exiting with a billion dollars, aided by venture capitalists. Success2.0 will be smaller (and more practical) bets in niche markets, making 1/1000 of success1.0 but still be rich and happy.

    1. fredwilson

      I agree that there’s a lot of money to be made in smaller web services with low costs and ad revenue from third party networksFred

  12. Paul Walsh

    Trackbacks don’t seem to be working so here’s my post explaining why I disagree with Jason’s opinion regarding scale coming before business model.

  13. chris herbert

    Fred- glad the tweet found you and the link used Dave Winer’s URL shortening service ( because the TinyURL version of the Techmeme URL put me over 140 chars.Seems like most agree that there is a fundamental difference between the mom-and-pop companies (and I don’t mean that in a negative way, you can be quite successful in that area) and the type of scale involved with the companies being discussed by this meme (Google, YouTube, Facebook, Twitter, etc.). So if we focus on the large scale companies right now, I think johndodds has the best sentiment here, that having a passionate user base is your best competitive advantage.I think this discussion outside of the blogosphere, however, would yield a typical reaction: we’re talking about New Economy, techie Dot-Com mumbo-jumbo. I don’t believe we are (some commenters might think otherwise) but I think we should think about ways to explain these things to mainstream world that aren’t involved in this discussion everyday. Not that we have to justify Twitter to the corporate world because it might never apply to that world but we’d help the tech world by helping to explain these phenomenon and why the implications of these platforms/services are far-reaching.This business model discussion here, on blogs like Fred’s, are pushing these ideas outside of the traditional tech/web world and I think that’s one of the most important things we can do. When we talk with our colleagues, friends, or family outside of this world, we can start knocking down the Dot-Com, New Economy stereotypes that still jade the web world.

  14. GraemeThickins

    hooray for Chris Herbert’s comment, “think about ways to explain these things to mainstream world that aren’t involved in this discussion everyday” …. he’s right: communication is just so criticalremember to repeat this refrain regularly: “We are not a market”

  15. CoryS

    Some random, “freemium” thoughts…1. Enterprise and sponsored consumer portal-access versions (pay for gated/hosted version) – Swarm-It is already doing this (and generating revenues) in other parts of the world (….2. Consumer ethnographic marketing tools (think a real world, real time thesaurus) – any copy-focused firm on Madison Ave should be developing in-house API tools (and be willing to pay for access to the core data over time) to understand the right words/phrases for targeted audiences.3. Peer survey and interactive short/fast response tools – anywhere, anyone set up4. Fee based enterprise/consumer global peer communication tool using dynamic translation services

  16. Aruni S. Gunasegaram

    Now that I’m a twitter user I have been wondering about the busines model as well. Right now twitterers often use their profile page to ‘advertise’ their companies or themselves with unique graphics/text. I have already had several people comment on the breast pump/rattle/mobile/laptop image I have on my page. Many more have clicked through to my blog. Would people pay for that visibility? A good question to ask.I have a facebook account too but found that I have not been there as much as I have been on twitter. Twitter is like this friend’s email group I’ve had since 1995 but on speed and with mostly people I don’t really know…yet. It’s fun and it’s interesting to respond to and see people’s responses to tweets. It’s interesting to see the speed of action on certain items on twitter (e.g., Some of the facebook apps are interesting but many just seem to add extra stuff to an increasingly crowded page. But I have limited experience with both facebook and twitter.As far as developers needing to see a business model (if you are defining business model as revenue generation). I’m not sure. There are many developers who code for free for openware apps. Personally, I think you have to have some inkling of an idea of how you might make money because that has some bearing on how you choose to increase traffic and scale.As you mentioned in one of your comments 90%+ of web businesses avoiding VC money is a good one. That’s why I’m looking for angel investors. Who knows maybe one of those VC backed companies will take an interest in us when they see what we accomplish in our niche…

  17. Kirill Bolgarov

    IMHO, Twitter’s is a basement, its about social data syndication or whatever buzzword you can invent ;)It has really really wide prospect of monetization. For example – Twitter fits perfectly with a mobile phone – because its basic and simple. And this is the holy grail of social networking tools, I mean merging online and “offline” social networks into one.Fred, I’ve always been sort of your fan, and the more I think of Twitter the more I get there 🙂

    1. fredwilson

      Wow. Thanks for the support and encouragement. Believe it or not, it really helps to have people who like what we are doing and share that with usFred

  18. zaid

    “But every ounce of time, energy, money, and brainpower you spend on thinking about how to monetize will take you away from the goal of getting to scale. Because if you don’t get to scale, you don’t have a business anyway.”That is a big point you make that many VCs still cannot understand.I was at a local web2.0 meetup about a year ago hosted by one of the two tech VCs in the area. The discussion about monetization came up. When it was my turn to speak I said for most web2.0 ventures, monetization is a distraction. The real focus should be on growth. And like Calacanis and you say, it is almost impossible for an early stage startup to be doing both *well* Most folks in the room were shocked by the idea that trying to make money can be a distraction – these same people are probably still confused about why YouTube was acquired and Facebook’s valution.

  19. Goto Ao

    Sorry Fred! I’m not belittling Twitter. But, how on earth can you monitize – which amounts to a TinyURL. What is required to build the bubble you apparently want is a UNIFORM AND COHERENT network with hundreds of Interchangeable Master Channels (IMCs) that basically allow anybody to in effect built their OWN private Internet, in the dot-com name space. In other words a Web-based platform that mimics the dot-com name space itself with hundreds of IMCs that are themselves layered across the public Internet. This then allows persons with marketable business ideas and who want to OWN their own Internet to layer their own applications from Facebook, Ning, or wherever inside the IMCs themselves – which for practical purposes are independent from ICANN and nonethelesss perfectly resolve in the DNS root. Persons with marketable business plans can thereby build their iown nnovations in what amounts to their own private Internet(s) and, thus, accept advertising dollars world wide BECAUSE the IMC network itself can accommodate almost every conceivable brand name product or service anywhere in the world, in a proprietary level three brand channel, but without the garbage and the security and privacy hassles that are killing the public Web. If you don’t yet know about IMCs, you are (very respectfully) behind of, and not in front of, the curve.

  20. chadrussell

    I think this really points out the difference in startups and deals during the 1.0 days as opposed to the 2.0 ones where you had the idea and model but no actual live product, audience, or scale. You would get funding (or try) and build from there and hope to gain an audience to profit from. Now days building your product, and getting to scale is where it seems the deals are happening and seems to be the approach that woks best for most. Maybe it is just me though. I definitely agree for these types of businesses, it is really the best way to go. Once you get good momentum going, that alone can take your business where it probably would have never gone doing the reverse approach. Even if no business model is ever hatched, there is still value in terms of the audience you have created. That alone is worth something to someone.

  21. Nathan Snell

    Lots of interesting stuff to consider. The biggest question I have is:Given what you propose of the “build the business and figure out how to monetize later” how exactly are entrepreneur’s who aren’t well connected supposed to secure funding money? Do they do the biz plan and go into the presentation and when financials come up say “This is how much money we expect to lose each year. We haven’t figured out how to break even yet. But given our team we’re confident we’ll figure out a way. Google did, after all.”The above is not intended to be a disrespectful sarcasm so much as a to the point, no bull quote that gets my question across.At the point of the end of the quote, do you just bank on the investor loving your business idea? Not to mention, unless I am mistaken, realistically if you can’t project future sales (ala no business model) how are you supposed to do a proper valuation of the company?

    1. fredwilson

      The right investor will understand the various monetization opportunities that you’ll have in front of you. If they don’t, they aren’t right for youFred

  22. Stephen Rockman

    Come on, this is just the latest version of ‘the emperor’s new clothes’ … as in ‘lets all pretend that zero revenues and millions of uniques equals a real business and hopefully no-one will find us out.’ i find this deeply depressing and only exacerbated by the fact that , as a VC you’re on a streak. Seven or eight years back we all learned what it meant to talk up businesses that had no viable commercial future and as far as i know the fundamentals have not changed since then. A land grab at any cost , which is what you are advocating, does not in itself generate a business that is capable of throwing off cash; size only matters in terms of underpinning the multiple and supports, not replaces, a real business model. Of course your view will work for the handful of businesses for whom Google, Cisco et al will provide the exit but for all the other entrepreneurs and investors who are capable of building interesting and valuable businesses this is just a cruel and ridiculous illusion dressed up as unassailable cant.

    1. fredwilson

      I think you misunderstand my point. Every business needs a business model at some point. The question is when you start to execute it. Our portfolio company waited two years, got to scale, then executed its business model and is everything you look for in a business nowFred

  23. Tinymeat

    I guess they all can’t be as gloriously brilliant as Etsy eh Fred?

    1. fredwilson

      Etsy is gloriously brilliant but so are several other of our portfoliocompaniesI don’t like to play favorites so they’ll have to show the world themselvesfred

      1. Tinymeat

        I’m intrigued with Threadless’ crowdsourcing/social networking business model. Many of the illustrators we work with found us by our artist series wallets being posted on in Threadless user’s blogs. It’s frustrating at times to see this all happen for us organically rather than at the rocket speed of a site like Etsy but I am grateful for all of the technology and tools available to business owners today. I am so pleased to be growing a small business today rather than 20 years ago.

  24. George Scott

    My philosophy is when you make people money they will pay you. If twitter can make people money then people will pay something.

  25. Curt Monash

    I think it’s grow huge or die, because Twitter is fated to be integrated with instant messaging (and IRC-style chat, for those few who care). But scaling will require a total reinvention of the technology, and Twitter doesn’t have much in the way of barriers to switching, so it’s not at all obvious Twitter-the-company will be the winner here.http://www.texttechnologies… spells out what’s needed (warning: 1500 words).CAM

  26. Prokofy

    But what has Facebook done *lately*? It has scale, it learned from the mistake, but that was awhile ago. People are migrating to FriendFeed.

    1. Prokofy

      Elvis is channelling Dylan and Randy Newman there, it’s a good tune.

      1. Kurt

        Brass tacks. When will the ads start?

  27. fredwilson

    What ads?

  28. blacksonville

    I think you are on it about Facebook. The new Facebook Connect featuring the best of dataportability is where the industry will slow down a bit as users try to catch up with how to aggregate their personal audience.

    1. Clayton

      Obviously they can sell their personal information and thoughts like facebook does.

  29. oscar

    It’s going to be interesting to see where it develops. But from the get go I have said it’s pointless and stupid. It’s an RSS feed for people.

    1. fredwilson

      And how is an rss feed for people pointless and stupid?

  30. Mark Essel

    First off, while out wallking and reading I got this crappy news jingle in my head “Fred’s vacation on location”, trust me it sounds better than it reads. Ok past the momentary morning madness.Copycat systems are fine as long as they aren’t patented right so Twitter following facebook could work. I can say from experience that while banging my face into the keyboard for 17hours yesterday, I really really hope both fiendfeed and Google App Engine survive for at least a few years. Learning and developing on platforms can feel like iteratively leaning ancient Greek and then flushing it down the tubes. For developers, if you choose the right platform/language now you can potentially have a fantastic income for years to come. Pick the wrong one, and you just wasted Xyears of your life. For programmers it’s all or nothing with platforms.It’d be fantastic to have VC like development, where you back several platforms and at least a few are home runs. Buts that’s not the way it works :()