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In an article in yesterday's Sunday Times, reporter Dominic Rushe asks "What makes Twitter worth a billion dollars?", reacting to the news that the current darling of the media had attracted a $100m (£62m) investment, giving the business as a whole the astronomic theoretical price-tag.
The reporter goes on to say that “at $1 billion, Twitter is worth as much as General Motors before it went bust, or twice the value of Domino’s Pizza — a company with 10,500 employees and actual sales of $1.4 billion last year.” To my knowledge Twitter has no sales at all and has given no indication of how it plans to generate any.
Of course, Amazon is also famous for making huge losses for years but it retained its credibility during that start-up period because it was working to a business plan; a plan that would result in profitability, if successful. Amazon’s financial results for the second quarter of this year, show sales of $4.65 billion and profits of $142 million.
We have to assume that the investors who put up the $100 million investment were told the “secret sauce” that Twitter plans to employ to convert massive user numbers and media coverage into sustainable profits, like Amazon did. However, my understanding is that the technology used is not particularly clever or unique, meaning that the Twitter service can be easily copied – which has happened already at sites such as Presently.
So, if the value is not in the technology, it must be in the users, right? Well, maybe. The user base of a social network is of great interest to advertisers but, long-term, only if those users actually make purchases. There is evidence to suggest that a significant number of registered Twitterers may be “zombie users”, purchased by those eager to increase the number of people “following” their tweets, from sites such as uSocial. Seen any zombies flashing their credit cards recently?
Other than advertising, the other way to make money from users is blatantly obvious – charge them for using the service. The Twitter network has always been free though, so it would be interesting to see how many users would be prepared to pay a subscription for the service. This leads us to the elephant in the room – Facebook.
Facebook has a business model, is expected to generate sales topping $500 million in its current financial year and is now profitable, earlier than expected. Facebook has 300 million users (including “zombies” it seems), compared with estimates for Twitter of somewhere south of 50 million. Facebook is free to use, like Twitter, and is increasingly moving to take over Twitter’s space and it seems that the people at Twitter know this all to well. So, Twitter has to try to survive the copying of its functionality by Facebook and worry about mass defections if it moves to a paid-for model whilst Facebook remains free (which of course it may not).
I have nothing against Twitter, although I am still not minded to use it, but I do have to wonder at the billion dollar valuation given the challenges it faces.