When reports of Twitter's profitability came out, it seemed like a great underdog story. Social media critics have long blasted the microblogging platform for its lack of a revenue model. In October, real-time search deals with Google (GOOG) and Microsoft (MSFT) generated $25 million in revenue -- more than Twitter's annual expenses of between $20 million and $25 million. That would indicate a profit -- never mind the $155 million that's been invested in the company -- but are the Champagne corks flying too soon?In all the excitement, nobody seems to be looking closely at Twitter's deals. Its pact with Google is good for $15 million, and with Microsoft for $10 million, according to BusinessWeek. But that's where the analysis breaks down. In a multiyear deal, it wouldn't make sense to recognize all $25 million now -- and let's not forget that the deals closed in October, which constrainsTwitter's ability to recognize all that revenue this year.
%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% But it wouldn't make sense to recognize all that revenue in 2009, which changes things. Twitter may be cash-flow positive as a result of the deal, but profitability seems unlikely. (An e-mail inquiry to Twitter has not been returned.)
Years of Obligation
And profitability doesn't seem likely next year, either. Twitter's annual expenses are estimated at greater than $20 million by several entrepreneurs, as cited by BusinessWeek, but the deals entail several years of obligation. Twitter is said to have slashed expenses, especially for text messaging, but there's no indication of whether it's cutting costs to operate at a rate commensurate with the recognition of its new revenue over the life of the deals.
Twitter's future revenue streams involve more than real-time search. Today, 70% of users access Twitter through smartphones and third-party applications. Next year the site plans to place ads and develop and roll out applicaitons to draw more traffic to Twitter.com.
A new Twitter feature, Contributor, lets several users Tweet on behalf of an organization, speaks to its interest in corporate users. And there's still talk of corporate accounts, an additional revenue stream that would come from brand managers and marketers who want metrics and analytics.
Threatened Revenue Stream
The rise of analytical tools in the Twitter ecosystem may threaten this revenue stream: applications like TweetStats, Twitterholic and bit.ly, among other services, can aggregate data for marketers. By the time Twitter gets around to this business model, it may not be as potent as it was when speculation on this line of business began this year.
The revenue stream that made Twitter "profitable" is under assault as well. Shortly after Google and Microsoft struck their deals, Yahoo (YHOO) said it would pursue real-time search using publicly available access to Twitter's data. Even if that doesn't destroy Twitter's paid data model with Google and Microsoft, it's sure to put some pressure on the price.
It felt great for a moment, at least, to celebrate the profitability of social media. But the adrenaline surge was premature. Not only is Twitter most likely not profitable, it continues to face significant revenue challenges for 2010 and beyond. Advertising, the least sexy of the alternatives before the company, is most likely to deliver for the company, even if it has to throw text links in the right rail or in the Tweet stream.
Is Twitter Really Profitable? Do the Math