Twitter is a river… and the levees may burst

by David on October 6, 2009

There have been myriad articles written recently about why Twitter is or is not worth the $1,000,000,000 valuation it just received in its latest round of funding (10% for $100,000,000 in case you missed it).

[Note: As a Twitter neophyte I wrote about my first impressions upon tweeting and why I think you should try Twitter for two weeks.]

Vinny Lingham thought it was a sound investment if the investors have a liquidation preference. Of course, that assumes liquidation value of at least $100 million. Chris Dixon reminds us not to forget that the VCs take home $2 million per year in carry and describes the destruction of VC funding.

I’ve read tweets from people concerned that we are in the middle of Bubble 2.0. To them I say that bubbles are a necessary part of the business cycle. Just make sure you are well positioned for the inevitable bust.

I haven’t decided if this will look like a sound investment in the end but am leaning toward Twitter not being worth $1 billion today. Twitter definitely has taken off this year and might even be in the mainstream (limited user base but exposure on every news network and every store just like Facebook). Take a look at this graph:


Courtesy of Getting Awesome – Rishi’s Blog

My addition to the debate: An analogy

I liken Twitter the service to a river and Twitter Inc. to the Army Corp of Engineers… without the support of the US taxpayers.

Twitter is a river in the middle of a hurricane. The levees that the Engineers are putting up are servers, lots and lots of servers. The Fail Whale is the sign of weak levees. Fortunately, we haven’t seen a Hurricane Katrina yet on Twitter (even MJ didn’t do that).

You’d think it would be great to have control of this river and this abundant water supply (I live in a coastal desert so I appreciate rivers and water). But, alas, Twitter has no control of the river, just the responsibility to keep it flowing. Anyone with a bucket can dip in and take water. Farmers regularly stick pumps in and take water. They also put water in. In other words, with the API, there are mobile apps, desktop apps, websites, etc. that have users’ attention when they are tweeting. If there is an advertising opportunity, it goes to the app provider, not Twitter.

We don’t need no stinking business model

Can Twitter start charging users. No way… at least not for the basic service. This is an easy service to replicate.

Can Twitter become a freemium service where it lets everyone join for free and then charges for extras? Hmmm, there could be some services but how many users would be willing to pay for them? I know that there are a lot of tweeps out there but it takes a lot of revenue to justify a $1 billion valuation… and that needs to grow for investors to be satisfied. [Please suggest ideas in the comment section for services that Twitter can charge for.]

Can Twitter start charging the apps? Doubtful but it may be possible.

So what is Twitters business model? Ya got me. As the Citywide Change Bank said in its SNL commercial, The answer is simple: Volume.

#fail-ure to innovate

Why have third party Twitter apps taken off? This isn’t like Facebook where the possibilities are endless. On Twitter, only the content flow is endless. The apps are successful because Twitter has to spend all of its resources on keeping up with the flow.

How long has retweeting (RT) been a standard on Twitter? Yeah, that long. Now show me where on twitter.com I can hit a simple retweet link/icon. I can’t find it. I can reply or make a tweet a favorite. #fail

How about official Twitter iPhone, Android, Bluetooth, et al apps?!? Isn’t there a rumor of an iPhone app from Twitter? I think my mother wrote a Twitter app for her iPhone. (OK, that’s a slight exaggeration but you get my point.)

Evan’s latest announcement

Last week, Evan Williams, CEO and co-founder of Twitter, was interviewed by CBS News. He is quoted as saying “We’re focused on building the value for awhile. When it comes to prioritization, we value the things that best secure twitter and the things twitter does best.”

Again, this is great news for everyone dipping into the River Twitter. The water is going to be purified. That means that everyone but Twitter might be able to charge more for the water and, better yet, Twitter has no plans to compete at the monetization!

Yesterday Evan tweeted Wow, TBUZZ is pretty hot: http://bit.ly/VT1sI. TBUZZ is a new service by arc90 for Twitter users. If anyone makes money off of it, it will be arc90 and not Twitter.

It is good that the investors, such as T. Rowe Price, have long horizons for their investments. Traditional tech VCs would force out the execs if they heard this.

The good news is that with more than $100 million in the bank, if Evan and the other execs spend wisely, they will be able to reinvent Twitter multiple times before they find a revenue model.

Where’s the beef

So if I understand this correctly, Twitter has huge infrastructure costs and no revenue for the foreseeable future. How does that work?

Back in 1999 when I was working at GoTo.com (recently killed by Carol Bartz), my Uncle Rick asked me about all of these Web companies that made no money and why they had such massive valuations. He was Old Skool. He thought that companies should have real revenue. I should have listened more and shorted a lot of companies.

Playing with other people’s money

If it turns out that being the caretaker of a massive river has (enormous?) value, then more power to Twitter’s investors. I’m putting my money elsewhere. If you ask me, this $100 million investment is The Flop and we’ll have to wait until The River to see if the investors win the pot.

{ 6 comments… read them below or add one }

ryan douglas October 6, 2009 at 11:41 am

buyers and sellers make markets – - you are a seller….i am betting on them coming up with a way to monetize real time information….

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David October 6, 2009 at 12:30 pm

Ryan, I can get real-time information from many more sites using Google. This feature was announced last month so I would assume that Google is improving this feature. Try it: http://www.google.com/search?q=twitter&tbs=qdr:n

I hope that Evan and gang have plans on how to generate revenue. I hope that T. Rowe Price and the 4 VC firms have seen these plans and didn’t invest in traffic numbers. I just heard the promise of finding monetization later and finding ways to monetize this type of information for too many years. I enjoy Twitter and am rooting for its success. I’d just like to know where that financial success (in the form of revenue, not equity) will come from.

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Kevin Ackerman October 6, 2009 at 12:50 pm

Good analysis, David, and like your Uncle Rick, I too am always confused as to how these popular companies, what with there attractive and fluffy bun platforms and presentations, become the shizz-nit end-all, attracting capital from all sorts of places, when there isn’t a burger inside to be found…

Is there really so much I can do with Twitter that I cannot do off most other platforms or an iPhone?

QuAckerman

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Andy N October 6, 2009 at 8:06 pm

I’m with you. Twitter the medium seems analogous to email. Imagine it was invented by Email Inc. and they carry all traffic. Now here come commercial email apps, ad-carrying webmail sites, etc– all making money on Email Inc’s back. If Email Inc decides they must charge per email, what happens? Probably not a new free competitor, since the outcome of that is already known. More like a standard protocol, so email becomes peer-to-peer, everybody shares the load, nobody owns it. As is The Way Of The Internet (it’s how email really works, for example). I can imagine Twitter the company ultimately losing to twitter the protocol.

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Alex October 7, 2009 at 4:38 am

I think Twitter is overvaluated but the market correction is coming soon. If I were the CEO, I’d do anything to go for those multimillion bonuses already, to make sure I am ok when this whole thing is going down the tubes.

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David October 7, 2009 at 11:12 am

Alex, if Evan, Biz & gang were out to make a quick buck, they would have accepted the rumored $500 million offered by Google and Facebook earlier this year. They turned it down which means they believe in the long-term viability of Twitter as an independent company (or Twitter as a more expensive acquisition target). I just don’t get why.

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