There’s no reason to rush in monetizing Twitter

Earlier today the news leaked that Twitter raised $100 million in funding at an eye-popping valuation of $1 billion. That’s a pretty significant investment in spite of the hefty price tag for a dot-com with soaring traffic but minimal revenue, and a significant increase over the $250 million valuation in its February financing round.

No doubt many will argue this valuation is insane for a company that has yet to monetize its service. Heck, a lot of people think that the Twitter phenomenon is a waste of time. (I hope I won’t summon the fail whale with those words of doubt.) I won’t spend any time discussing the merits of Twitter’s service; the traffic metric linked above addresses that. Nor will I get into the valuation relative to other startups; we’ll leave that to VCs to debate. But I will make a couple of observations about the valuation in light of the fact that Twitter is not a profitable company.

First, the fact that Twitter hasn’t monetized its user base is not an argument against the valuation. The company is still early in its life cycle, and it’s committed to building up its network before worrying about making money off those users. Critics too often mistake a dotcom that hasn’t monetized its membership yet with one that can’t, but don’t fall for this intellectual trap. If a website offers a valuable service, it’s likely that the service can be monetized. That’s especially true if that service benefits from a network effect the way that Twitter does. Just like telephones, faxes, and email in the 20th century, every new Twitter user makes the communication platform more valuable to the existing users. This increases lock-in and makes it less likely that users will go elsewhere when the company shifts toward generating revenue.

I’m not saying that it’s easy for a company to monetize its service, even if it has achieved a network effect. To the contrary, I know how difficult this process can be — I ran the team at PayPal that was tasked with turning our free service into a paying one. (See chapter 7 of my book, The PayPal Wars, for the inside story on how we did it.) But as our experience shows, it’s doable, and a well run company like Twitter will figure out what’s necessary to make this happen.

Second, Twitter is arguably already one of the most important companies on the web. Let me share with you a couple of recent charts from Silicon Alley Insider that will make what I mean more clear. The first one, which was published last week, shows how consumer usage of the internet has changed over time. The web is now primarily a content platform. Content consumption now dwarfs the #2 usage, communication, by over 2 hours per month.

The Internet Is Finally, Primarily A Content Platform

As the relative importance of content on the web has grown, the way we consume and share content has changed. Take a look at the second chart below. Email — which I suspect was the #1 way to share content back in 2003, when communication was the most popular usage for the web — is estimated to account for only 11.1% of all link sharing, a figure dwarfed by Facebook. But at 10.8%, Twitter isn’t far behind email, which is remarkable when you think about how young the company is. Even if AddToAny’s stats aren’t a random sample of all web users, they still capture the big picture trend that social networks have replaced email as a means of sharing information with friends, and Twitter is the second best network for this purpose.

Looking at the trends captured in both charts, it’s not far-fetched to say that Twitter is the second-best company at facilitating content-sharing, which is critical since consuming content is now the #1 activity on the web. If you bring search into the picture, you might reasonably make the claim that Twitter is the third most important website for disseminating information on the web, trailing only Google and Facebook. Which, by the way, have valuations of $157 billion and $10 billion, respectively.

1 thought on “There’s no reason to rush in monetizing Twitter

  1. Great points. I personally think Twitter can build upon its foundational service many-fold making it all the more valuable and place itself in a better position to monetize. Similar to what Facebook did with the addition of the news feed.

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