Microsoft or Google Will Buy Twitter in 2010

Nov.23.09 | About: Twitter, Inc. (TWTR)

Admittedly, that is not a major statement to make, as few companies have the firepower to make a $1 billion + purchase. But I do see this playing out in 2010.

Here’s why.

Social media is revolutionary, but it’s not the best canvas for advertising. We’ve seen various iterations of social media all belly-flop with advertising (UGC being the most notable).

These days, the obsession is with monetizing Twitter with advertising. I don’t think that is the way to proceed. We first made that case in Twitter’s 140 problems where we looked at e-commerce opportunities. Frankly, that was a couple of years ago. Today I see Twitter as a lean and stripped out “content and user management system” with a licensing model. Basically, follow WatchMojo’s latest videos here or my pontifications here. If this is a $1 billion company, so be it. It’s clearly not what you or I think; valuation is largely determined by the greater fool theory, where you just need someone to come along and bid $1 more.

When the recession hit and advertising retracted, I thought this was a good thing for the company, because it forced them to think outside of advertising.

The Twitter PR machine said “Well, we never really wanted to insert ads” but now that the economy has stabilized and advertising is flowing faster to online and wireless, advertising-as-the-model is back in vogue.

Of course, a lot of this is the media writing about it.

These days Twitter itself is hinting at commercial/premium accounts, which is vague.

Honestly, I think Twitter needs to grow up and start to experiment with commercial methods, fast. But since 99% of business models and business plans are DOA, they fear doing anything that shows just how hard monetization is.

Clearly, they wisely raised $100 million before growth slowed down, but now, it’s time to stop talking and build a business. The impression I get is that they keep moving the chairs around and it’s becoming a tad tedious. I don’t blame them at all for raising a massive round while they remained in spreadsheet-only-business-model mode.

How Will Users React to Twitter’s Business Model?

Trust me, whatever the model, the users won’t mind. Well, let me say that the bulk of users who don’t really use Twitter won’t even notice. The power users will just welcome the fact that Twitter is doing something. If it’s acceptable, the users will at least know how - if at all - it affects them. If it’s not, the users will go crazy and Twitter will adjust. That’s the beauty of web business models and their user ecosystem.

Developers, Developers, Developers…

Most importantly for Twitter, the developers who build Twitter-based apps need to know. Facebook seems like a dangerous platform to build apps for because of their track record of (naturally) changing the rules of engagement to maintain power in the ecosystem.

I Don’t Even Know What I Don’t Know…

I think the reason why Twitter has been a bit more liberal and open is that they themselves don’t know where the ship is headed and are willing to ride it out.

So Why Will MSFT or GOOG Buy Twitter?

Ultimately, I think they will offer for free something someone else charges for and that will encourage that someone else to just buy them for something like $1-2 billion.

From the above-linked NYT article:

Tuesday was another typical day for John Chow, blogger and Internet entrepreneur in Vancouver, British Columbia. Mr. Chow treated his 50,000 Twitter followers to a photograph of his lunch (barbecued chicken and French fries), discussed the weather in Vancouver and linked to a new post on his Internet business blog.

Then he earned $200 by telling his fans where they could buy M&M’s with customized faces, messages and colors.

So basically, instead of Google (NASDAQ:GOOG) managing leads and referrals for you through their organic and paid search database, Twitter will offer you referrals through their followers and advertisers database. Great. Glad we know the plan.

The thing is, Twitter, I think, won’t charge for any of this, at least not initially.

Recall that with the $25 million that Kleiner Perkins and Sequoia gave Google, it was enough to bankroll free-freaking-search to users. Don’t you think Evan Williams, Biz Stone, Fred Wilson et al. will be able to keep Twitter free long enough thanks to their $100M until Google realizes that Twitter is doing what Microsoft (NASDAQ:MSFT) threatened to do, which is make ads free so that Google loses revenue?

Once this materializes - and it’s possible to argue that it already has - then either:

- MSFT will buy Twitter so it can continue to keep referrals free, forcing Google to reduce their cost-per-click rates down, and thus lose revenue,


- Google will buy Twitter to do what it does best: shut it down and avoid this scenario from happening.

Sure, you can argue that Twitter doesn’t want to sell, blah-blah… but while Facebook resisted selling but has since raised revenues to $550M or so, I am not sure the same will happen with Twitter, for Twitter, we once argued, was Facebook but with less upside. I don’t know if these two companies are even worth comparing anymore as they do wildly different things, but all in all, while Facebook probably did the right thing by not selling, it remains to be seen if Twitter should hit the cash register in 2010 or not.