Microsoft or Google Will Buy Twitter in 2010

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 (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 (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,

or…

- 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.

Comments

[steve_dodd]

Yes, it's too bad that "the obsession is with monetizing Twitter with advertising". And, that this may drive and acquisition to ultimately kill it. But, I personally believe there are smarter players watching this who 's sun doesn't rise and set on advertising. These players also have monetizing plans far past basic advertising. Like Social Media in general, advertising and marketing is only a small part of the overall value proposition. Unfortunately, these two disiplines have very loud voices. Twitter is way more than an "eyeball capturing advertising vehicle" like search is. It would be a shame to see two behemouths like Google and Microsoft buy Twitter to kill it, all for the wrong reasons. But, many great innovations have been bought by old school competitors strictly for the purpose of killing them to eliminate competition. At the same time though, these other initiatives many be too far along and possibly it is too late for a Google and Microsoft to do anything to stop them (I hope).

2009 Nov 23 08:50 AM

[Carlos Navarro]

Thanks for distilling this down to the essence of Twitter's long term viability: revenue generation. At the end of the day, Twitter can only burn through other peoples' money for so long; at some point it has to convert into a true profit-generating machine which it has clear potential to do. I'm curious, however, whether another media company might have interest in Twitter; perhaps an old media company trying for one last "Hail Mary" try at reviving its media interests? Not sure -- but would enjoy hearing someone's response? Thanks. Carlos Navarro

2009 Nov 23 09:52 AM

[James Beswick]

Great piece - many interesting points. I'd be really surprised if Google steps in here though, since it wouldn't jive well with Google Wave and they probably don't want to disturb the Justice Department monopoly people while they're busy sleeping over the banking situation.

2009 Nov 23 10:01 AM

[StockData.org]

Microsoft already blew it's wad on Yahoo....

As for Google... sure why not, they're assimilating companies faster than Microsoft ever did in it's heyday..

Is Google the Borg? yes, I think so

2009 Nov 23 12:59 PM

[Ashkan Karbasfrooshan]

Carlos, anything is possile but old media really lacks a) the stomach and b) the financial wherewithal to come up with the cash and their stock (as currency) isn't enticing to most of the backers here, I think.

On Nov 23 09:52 AM Carlos Navarro wrote:

> Thanks for distilling this down to the essence of Twitter's long
> term viability: revenue generation. At the end of the day, Twitter
> can only burn through other peoples' money for so long; at some point
> it has to convert into a true profit-generating machine which it
> has clear potential to do. I'm curious, however, whether another
> media company might have interest in Twitter; perhaps an old media
> company trying for one last "Hail Mary" try at reviving its media
> interests? Not sure -- but would enjoy hearing someone's response?
> Thanks. Carlos Navarro

2009 Nov 23 01:06 PM

[Ashkan Karbasfrooshan]

Thanks James. Re: Wave, Google also invested a lot in Google Video but didn't hesitate to buy YouTube for $1.65B in stock. If you hear Sergey Brin, he is pretty open is saying "if someone comes to us re: M&A, we will consider it" so considering that both Evan Williams sold Blogger.com and Dick Costolo sold Feedburner to Google, I am sure thay know how to connect ;) - the question is, whether or not either had a good taste in their mouth after the sale and implementation to consider this.

Sure, the money would be nice, but I doubt either has a massive stake in the company, most of the proceeds would probably go to the money folks so maybe Evan, Dick and Biz really want to go big. Problem is, at their valuation, they need a massive AdSense like success... not sure "Premium accounts" will do the trick.


On Nov 23 10:01 AM James Beswick wrote:

> Great piece - many interesting points. I'd be really surprised if
> Google steps in here though, since it wouldn't jive well with Google
> Wave and they probably don't want to disturb the Justice Department
> monopoly people while they're busy sleeping over the banking situation.

2009 Nov 23 01:09 PM

[William M. Wright]

You said, "Honestly, I think Twitter needs to grow up and start to experiment with commercial methods, fast."...Yes there once was a time when companies needed to have a proven path-to-profits business model. But today you just need a Web 2.0 path-to-hype to get VC money. The two Twitter founders had no plan other then addict people to mindless texting. ? If Steve Jobs and Bill Gates talked like the twitter kids in 1980 I doubt any VC firm would have given them money. Jobs was lucky to hook-up with Mike Markkula for a 1/4 Million.

2009 Nov 23 10:19 PM

[James Beswick]

Ashkan, that's very true. My only thoughts about Wave is that, to some extent, I think it's trying to be Twitter killer (Twiller?) with the concept of introducting real time into email. But actually, you're completely right about YouTube versus GV - at the time it seemed bizarre that they bought it, but they quickly took on the subscribers and replaced their own product.

Now you've got me thinking... :-)


On Nov 23 01:09 PM Ashkan Karbasfrooshan wrote:

> Thanks James. Re: Wave, Google also invested a lot in Google Video
> but didn't hesitate to buy YouTube for $1.65B in stock. If you hear
> Sergey Brin, he is pretty open is saying "if someone comes to us
> re: M&A, we will consider it" so considering that both Evan Williams
> sold Blogger.com and Dick Costolo sold Feedburner to Google, I am
> sure thay know how to connect ;) - the question is, whether or not
> either had a good taste in their mouth after the sale and implementation
> to consider this.
>
> Sure, the money would be nice, but I doubt either has a massive stake
> in the company, most of the proceeds would probably go to the money
> folks so maybe Evan, Dick and Biz really want to go big. Problem
> is, at their valuation, they need a massive AdSense like success...
> not sure "Premium accounts" will do the trick.

2009 Nov 24 10:33 AM

[Troy Jensen]

William, just to point one flaw in your reasoning (I actually agree with it for the most part), there are a few exceptions to the rule of having a clear revenue generation model. One such example would be Google. Google was founded and funded based solely on their Intellectual Property - the algorithm those two famous students came up with. They continued taking small private rounds while working out a monetization strategy. It's interesting to see how Google's advertising offerings evolved early on. They started with no advertising-based monetization, then moved initially to a traditional CPM (cost-per-thousand) model, then shifted to a CPC (cost-per-click) after a year. Then they started syndicating their advertising, which became a giant revenue channel. As a side note, the origination of that syndication model came from several other search sites. Google simply perfected it, and when matched with their vastly superior search engine, created the monster that Google is today. So, and it definitely isn't the rule but rather the exception, a truly revolutionary IP emerges like Twitter and changes the paradigm.

There is a widely held assumption that new business models will continue to emerge online – that statements like “how will Twitter ever make money?” will look as silly in 10 years as similar statements made 10 years ago about Google look now.

There is no question that, if they wanted to, Twitter could make tens of millions of dollars tomorrow, by, say, running ads or by licensing data feeds. The big question is whether Twitter and other social media sites will figure out how to make Google-scale money and not just Facebook-scale money. And furthermore, Google-scale margins. Google and Facebook get (ballpark) the same number of monthly visits to their sites. Facebook made hundreds of millions of dollars last year and reportedly lost money. Google made over $22B last year with huge profit margins.

The optimistic view (which I tend to hold myself) says that where people spend time, money will follow. If people are spending all their time on Facebook and Twitter, the Proctor and Gamble’s of the world will eventually find an effective way to shift the bulk of their ad spending online. The tacit assumption in this view is that the next 15 years will see as much business model innovation as the last 15 years.

On the other hand, what if we are mostly done creating big new business models for the web? History suggests that business model innovation is rapid right after the advent of a new medium and then slows down considerably. If indeed it is slowing down, social media could end up like instant messaging – incredibly popular but basically lousy at monetizing.

One last thought - I have always thought Twitter would be an ideal purchase for Apple, and their $34+ billion in cash and cash equivelents. Integrating Twitter as a core component of both OSX and the iPhone operating system could be a huge coup for Apple. There are many reasons against this strategy, but I strongly believe a Twitter acquisition by Apple would have some tremendous benefits:

1. An offensive "Consumer Acquisition" strategic move - Integration into all of Apples products - OSX and their computer division, the iPhone and iPod lineups, the upcoming Apple Tablet product, even Apple TV.

2. A defensive "Retention" strategic move - Keeping Twitter out of Google or Microsoft's hands would be a strong tactical maneuver.

3. Apple's proven innovative engineering team could potentially quickly take Twitter to the next evolutionary level in terms of their offerings.

4. Integration with Apple's entertainment offerings, such as iTunes. Lots of possibilities there.

This is all wishful thinking - I have no information that Apple has any thoughts on Twitter. But I truly think the match could have some incredible possibilities! It would be a shame for Microsoft to even touch Twitter, and Google would most likely utilize it as another avenue for their ad syndication revenue model, potentially hurting the Twitter brand (I would not want to see "relevant" ads based on my Tweets, there is already some uncomfortable feelings associated with the ads on Gmail, for example).

Just some thoughts, fantastic article!


On Nov 23 10:19 PM William M. Wright wrote:

> You said, "Honestly, I think Twitter needs to grow up and start to
> experiment with commercial methods, fast."...Yes there once was a
> time when companies needed to have a proven path-to-profits business
> model. But today you just need a Web 2.0 path-to-hype to get VC money.
> The two Twitter founders had no plan other then addict people to
> mindless texting. ? If Steve Jobs and Bill Gates talked like the
> twitter kids in 1980 I doubt any VC firm would have given them money.
> Jobs was lucky to hook-up with Mike Markkula for a 1/4 Million.

2009 Nov 24 10:45 AM

[JAMES CARLINI]

The Social Media "revolution" has tools and toys. You don't buy a toy for a $1 Billion.

Until there are some really good sound applications for Twitter - anyone doing the due diligence on it better be pretty astute before they bet someone else's money on it.

Can't happen? Remember Iridium? Who did the technology due diligence on that disaster? How many LOST on placing their bets (funding) on a $3,600 satellite phone that could only be used outdoors?

2009 Nov 24 02:32 PM