What makes Twitter worth a billion dollars?

The Silicon Valley start-up has a huge following but its huge valuation prompts parallels with the dotcom bubble

TWITTER can be a tough crowd. When news broke last week that the profit-free internet phenomenon had attracted a $100m (£62m) investment and was now “worth” $1 billion, the reaction was almost as swift and harsh as that handed out to Kanye West after his unsolicited intervention at the MTV Music Awards.

“Twitter valued at $100 billion? (SIC) I heard $1 trillion and gets their own representatives at the UN,” Twittered milepetrone. “If twitter is worth a $ billion I must be worth twice that. I have a job and incoming revenues,” wrote gopevangelist. “Nutty,” was among the kinder comments.

In these straitened times the reaction was perhaps no surprise. Even Silicon Valley hasn’t seen anything like this since Google bought YouTube in 2006, and certainly not since the credit crunch knocked the froth off the world’s economy.

In just three-and-a-half years, San Francisco-based Twitter has achieved the Silicon Valley dream, going from an obscure start-up to global sensation. Everyone from Barack Obama to MC Hammer is Twittering, sending out messages of 140 characters or fewer to friends and followers.

The site has made history as a forum for protesters in Iran and is increasingly attracting the interest of big business. Facebook, Google, Microsoft and others have all reportedly been on the phone to Twitter’s founders hoping to buy the business. Now they have a price.

On Friday, Twitter confirmed it had received “significant” financing from firms including T Rowe Price, Insight Venture Partners, Institutional Venture Partners, Spark Capital and Benchmark Capital. The investment is believed to be about $100m. It follows previous investments totalling about $50m and leaves Twitter with a nominal $1 billion value — not bad for a firm that has yet to make a penny and has shown little appetite to do so.

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.

For some analysts, the idea of a $1 billion company with no revenues is spookily familiar. Jeffrey Lindsay, analyst at Sanford C Bernstein in New York, said the fuss was “a throwback to the 1990s fantasy era of internet start-ups”. He said the investment represented smart money waiting for dumb money to come in and bail it out.

For others, though, Twitter is something far more exciting. The valuation is not out of line with its peers. Facebook, the online social-networking service that claims 300m active users, announced in May it had received another $100m investment from Russia’s Digital Sky Technologies, valuing it at $6.5 billion. Twitter attracts 54m visitors a month, said comScore, the web tracking firm.

For their fans, Twitter and Facebook are redefining the way people communicate. Charlene Li, founder of Altimeter, a tech consultancy, said it was important to focus not just on the technology Twitter had developed but its relationship with the customer.

Li noted that people all around the world are now addicted to sharing their thoughts on Twitter, even their negative thoughts about Twitter itself — that’s a relationship that could be worth a billion, she said. “It took Google four years to make any money,” said Li. “Look at it now.”

Beyond a brief statement, Twitter’s founders have yet to talk about the investment, but their ambitions are nothing if not grand. The firm’s aim is to reach a billion users and become “the pulse of the planet”, according to internal documents published on the blog TechCrunch earlier this year. Another $100m might get them closer to that goal. How much is the planet’s pulse worth?

TWITTER’s offices are everything you would expect from a dotcom start-up. A cavernous warehouse space in a still industrial stretch of San Francisco, the reception has the inevitable bike rack and a trestle table stacked with the tech world’s two main food groups — cereal and fizzy drinks. A huge flatscreen TV, plus video games, dominates one end of the room, and wacky sculpture in the form of two lime green plastic deer are parked in the corner.

Most dotcom companies never get beyond this stage. Nobody makes any money, the space proves too expensive, the company folds. Someone gets to keep the deer, the TV goes on eBay. Twitter has the opposite problem — its offices were too small almost as soon as it moved in and it has been searching for new digs.

Twitter founder, Jack Dorsey, started out with the simple idea of developing something that would let him know what his friends were doing.

It wasn’t a new idea — status updates were already part of instant messaging services like Yahoo’s. Anyone used to texting was used to keeping messages short. Perhaps because of its familiarity, Twitter took off at a sensational pace.

Last year, Twitter usage grew 422%. In February this year, it hit the frankly ridiculous growth rate of 1,382%, according to Nielsen Online. There is some suggestion that growth has peaked recently, but no matter which way you cut it, Twitter is huge.

However, all this buzz will be of little use if Twitter never makes a cent. The bet its new investors are making is that Twitter can turn all this chatter into a must-have marketing tool and an invaluable source of intelligence for businesses, while engaging potential consumers in a way that seems to have become increasingly tricky for traditional media.

Set against that potential is the risk that Twitter is just another fad. Not a new Google, but a new Second Life, whose 3D virtual empire rose and fell on a similar wave of buzz-fuelled hype a short cab ride from Twitter’s offices.

“If you think about what is there in terms of technology, it’s not much,” said Li. “In and of themselves each little Tweet doesn’t mean a lot.” But in aggregate, Twitter allows people — and, importantly, companies — to create and follow a dialogue in an entirely new way.

“It’s very quick, very easy, you opt in, I’m not bothering anybody with e-mails or text messages, you choose when you do it. That could be very, very valuable — especially when it comes to brands who want to develop a deeper relationship with customers.”

FOR many people, advertising has increasingly come to be seen as an irritating interruption. Consumers, once a captive audience, now fast-forward ads on their digital TVs, complain about pop-ups on the internet and treat e-mails from firms they are otherwise happy to do business with as spam.

“On Twitter you choose to hear from me and more importantly interact with me in a two-way dialogue,” said Li.

Companies, including Starbucks, already use Twitter to pump out their latest offers to those customers who sign up. Much of the mainstream media is using it to promote their content, offering links to articles in newspapers, magazines or promoting films and TV shows.

“Twitter is a great platform to push out those messages. I don’t mind Starbucks making announcements on my Twitter page but I don’t want them in my inbox,” said Li.

Twitter’s service has been the cause of much complaint. A graphic called the “fail whale” appears when the site crashes, which it often has during global news events such as the death of Michael Jackson.

Analysts expect that some of Twitter’s new cash will be used to harpoon the whale but the rest will go to Twitter’s all-important next phase. Last year, Twitter bought internet search firm Surmize, to build up its own real-time search engine. More add-on purchases are likely from marketing services and advertising software to photo sharing software and desktop applications.

The cash-rich company needs to build a more solid service as it moves toward a sale — which the founders have so far fought against — or float. Critics such as Lindsay compares the situation with YouTube, bought for $1.65 billion in 2006 and a money loser ever since, or Skype, the online telecoms firm bought by eBay for $2.6 billion in 2005. The auction giant struggled to find any use for Skype and is now being sued by its founders as it tries to spin off the business at a loss.

It’s still too early to say who is right. The Tweet looks set to stay even if Twitter fails — just as Second Life’s woes do not mean we will never have a 3D internet. Facebook, which is still growing fast, may well become the new Twitter. Or some other start-up may steal Twitter’s place as the hottest new internet firm. Alternatively, Google, Microsoft or some other group will make Twitter an offer it can’t refuse. One thing seems certain: whatever happens, Twitter’s users will have some very strong opinions about it.

Success in 140 characters

TWITTER is a free online service that enables its users to send and read messages known as Tweets. Each Tweet can be no more than 140 characters long.

Twitter attracts about 54m visitors a month. In February, Nielsen, the media consultancy, ranked it the fastest-growing of its “member communities” category, with a monthly growth of 1,382%.

The microblogging and networking site was dreamed up in 2006 by Jack Dorsey, 32, a computer programmer from St Louis, Missouri. Evan Williams, a former Google employee credited with inventing the term “blogger”, was an early investor and now runs the company with Biz Stone, a long-time colleague, and Dorsey. There are about 70 staff at the headquarters in San Francisco.

Barack Obama, Ashton Kutcher, Britney Spears and Stephen Fry are among the high-profile followers of Twitter.

Pear Analytics, the data researcher, surveyed 2,000 Tweets and described the top topics as: news, spam, self-promotion, pointless babble and conversational.

Perhaps not surprisingly, critics have condemned the site for its triviality. However, during the Iranian election Twitter became a sounding board for angry voters. It was also credited with helping to save lives during the recent Californian bushfires by spreading information about the path of the flames.

The average Twitter user is 31, according to the Pew Internet & American Life Project. Just 11% are aged 12 to 17, according to comScore, a research company.

Neilsen says Twitter has a user retention rate of 40%. Many followers drop the service after a month or so.

The privately held company received a new round of investment last week, believed to be $100m (£62.4m), valuing it at $1 billion.

Hitwise, an online research firm, believes Twitter’s growth may have hit a wall early this year. The site is often accessed via third-party applications, making it difficult to track. (Dominic Rushe, The Sunday Times) http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article6850779.ece

Advertisements

Leave a comment

No comments yet.

Comments RSS TrackBack Identifier URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s