Opinion

Felix Salmon

Understanding Twitter’s valuation

Felix Salmon
Feb 10, 2011 15:48 UTC

Count me in with Paul Kedrosky: there’s something extremely irritating about Shira Ovide’s Deal Journal blog post this morning kvetching about how high the mooted valuation of Twitter is.

The valuation — somewhere between $8 billion and $10 billion — is explicitly not based on Twitter’s current revenues. Yet Ovide insists on calculating silly ratios designed to make the valuation look as outlandish as possible:

Twitter’s revenue last year was $45 million, our Journal colleagues reported. So a $10 billion valuation would be more than 200 times the company’s revenue, or nearly 100 times its estimated 2011 revenue of $100 million to $110 million. Help me out here, folks: has any real business ever been slapped with such a high multiple?

Or, let’s pick another valuation metric. At $10 billion, Twitter is valued at $105 for each of the 95 million tweets its users write every day. (I’ll wait for my share of the check for those Twitter messages.)

I’m sorry, Shira, but “capitalization per tweet per day” is not a “valuation metric.” And in any case, your share of the check is likely to be pretty small: you’re averaging 0.4 tweets per day yourself, so far this month.

And valuing Twitter based on its revenues is exactly what Twitter’s suitors aren’t doing:

“Are these prices justifiable based on financial multiples? No,” said Ethan Kurzweil of venture capital firm Bessemer Venture Partners. But these start-ups are building social services and have lots of data about their users and “the market is valuing that mightily right now.”

In fact, the value of Twitter’s user data is just a part of what’s making it attractive right now. The interesting question about Twitter’s valuation is not how high it is, but rather the way in which it can be justified. People are putting real cash money into Twitter at massive valuations — the company just raised $200 million at a $3.7 billion valuation, and Andreessen Horowitz just bought $80 million of stock in the secondary market at levels which might well be higher than that. These investors aren’t stupid, so what’s their reasoning?

Ovide actually provides a hint, early on in her post, although she doesn’t realize it:

Twitter has swaths of devoted users, but it still requires repeated explanation to my mom –- and to many regular Joe Web users. Of the people who use the Internet, just 12% use Twitter, according to a recent survey by Pew Research Center. Compare that to Facebook (used by 62% of Internet users), and text messaging (used by 74% of cell phone owners), Pew found.

If you take Ovide’s own comparisons, Twitter’s valuation makes pretty good sense. If Twitter is 20% the size of Facebook, and Facebook is worth $50 billion, then Twitter can be worth $10 billion, no? And the proportion of the market capitalization of all the telcos around the world which can be attributed to text messaging is so mind-bogglingly enormous as to make $10 billion seem like a rounding error.

The point here is that Twitter is becoming central to how people communicate with each other — a key part of the new social architecture. Maybe not for Ovide’s mom, to be sure. But Twitter serves a very important purpose in the lives of the people who have adopted it, and it’s likely to serve the same purpose for ever more people as its user base grows and people start feeling left out if they’re not on it. Take a look at Owen Thomas’s wonderful essay on how he used social networking to lose weight, making important distinctions between various different networks:

When I went to the gym, I also checked in on Foursquare, announcing my location to friends and eventually winning the rank of “mayor” of my local gym. When I completed my food and exercise diary, the computer informed my Facebook friends; when I lost weight, it broadcast the news to the world on Twitter…

I post my exercise calories and announce the completion of my daily food diary on Facebook, while limiting Twitter posts to weight-loss milestones. I share the details only with other MyFitnessPal users.

Or, more powerfully still, listen to Louisa Lim’s story on how microblogging is reuniting families of abducted children in China.

Twitter has already, to a very large degree, supplanted blogging for millions of people; even people like me who cling loyally to the old-school blog format tend to find ourselves doing ever more of our job on Twitter. Twitter is the ultimate democratization of the commons: never has it been easier to publish material online, for all the world to see and respond to. And at the same time it’s also intensely social: it’s fantastic at strengthening bonds between individuals. I’ve befriended people I never knew before thanks to Twitter, and at the opposite end of the spectrum I’ve learned a substantial amount about my wife just from the material she posts on her Twitter account. (Go follow her! She’s great!)

How exactly will crucial social infrastructure get monetized in the future? Nobody knows for sure — but everybody knows that it’s not simply going to happen by scaling up current-day revenues from promoted tweets and the like. Twitter’s on track to make $100 million this year without even breaking a sweat, but the one thing all of its investors understand is that priority number one for the company is to become an indispensable service for millions of people around the world.

Twitter has a couple of hundred million dollars of cash in the bank: it’s not like it’s running out of money. And the chances are that as Twitter succeeds in cementing itself into the way that people live their lives each day, it will be bombarded with opportunities to monetize its position. In the history of humanity, everybody who owns the means by which people communicate and socialize with each other has been very rich and powerful. That might be less true going forwards than it was in the past, but it’s unlikely to disappear entirely.

On top of that, the putative $8 billion to $10 billion valuation is for the company as a whole: it surely includes a substantial control premium. If Google and Facebook are fighting over Twitter, a large part of its value to each company is that the other one won’t own it.

Twitter is a highly speculative investment, of course, and in fact only a very select group of carefully-qualified and extremely rich investors can invest in the company at all. Everybody putting money into the company right now is well aware that they’re taking a calculated risk: in order to capture the potential upside, they’re willing to accept a lot of downside as well.

The news yesterday from Andreessen Horowitz that it has bought an $80 million stake in the company is particularly interesting, because the shareholding was acquired on the secondary market. The idea behind VC firms like Andreessen Horowitz is that they provide expertise and guidance along with their money, and that they generate alpha by acting as real owners, rather than simply as passive shareholders. But in this case, their stake is much more speculative.

Why would Andreessen Horowitz invest this way? Kara Swisher I think hints at the answer:

Sources said that the firm made the move because it is already deeply invested in other key companies in the social space, including gaming giant Zynga, location-focused Foursquare, local discounting phenom Groupon and general social networking behemoth Facebook.

The idea here, I think, is that it’s hard to pick individual winners in this space, even if you’re convinced that the space itself is going to be extremely valuable. The last thing that Andreessen Horowitz wants, after making an enormous bet on social media, is to find that it isn’t invested in one of the handful of companies which will generate massive returns. And so it’s spreading its money around all the possible winners, trying to buy every ticket in the lottery.

Looked at this way, the valuation of Twitter makes sense even if it will probably go down. That’s the way of lottery tickets: their value is nearly always higher than their payout. And people looking to buy into Twitter at a $5 billion or $10 billion valuation aren’t doing so because they’ve discounted a bunch of predictable cashflows and decided that the present value is that ginormous. Instead, the investment is more in the form of a hedge. Twitter just might turn out to be one of the most important and valuable companies in the world. And if it does, then everybody will have wanted to get in around now. If you have that opportunity, it’s a hard one to turn down.

COMMENT

@TurtleBay: Many companies, including Apple, don’t pay a dividend. Because of this, people buy stock in Apple or some other non-dividend paying stock because they expect the value of the company to increase in the future, and at a high enough rate to compensate for the lack of income (ignoring the tax impact).

The price for a stock of mature companies is usually (but not always) based on recent earnings. If Apple’s profits grew at, say, 4%, its stock price would plunge, but are all stock movements rational? What happened in 2008 to cut the value of Apple in half (especially considering its record earnings during that period)?

So the question of Twitter’s valuation is not what it is earning today or even next year, but how quickly it’s valuation will grow over, say, the next 5-10 years. But no one can project that. If I were to invest in Twitter, for example, I might agree to buy it at a $1B valuation but not a $10B valuation.

What makes Twitter attractive at $1B is that in 5 years it could be valued at $20B or $0. Even if it had a 2/3 chance of failing in the next 5 years and a 1/3 chance of major growth, it would still be an easy buy. At a $10B valuation, it’s not so easy but still results in a projected return of 6%. What is the right number? I have no idea and that’s why the range in its valuation is so large. The valuation has to account for risk in some way.

The major problem facing Twitter is the ease of entry into its market. So far, with the help of corporate america, the entertainment industry and the media, Twitter gets a lot of free publicity. While a lot of people don’t know what the point of Twitter is, most people have at least heard of it while they couldn’t name a single competitor.

Yahoo’s problem is somewhat different as it hasn’t kept pace with its competitors, which include Google and Microsoft. I think we can ignore the valuations from 2000 as they didn’t include any sort of rational benchmarks. Will Facebook be able to fend off competition from Google?

Interesting times to say the least, but it is (in my opinion) in no way similar to the dot com era of 2000. Back then, changing the name of a company to include a dot com could increase its valuation by over 50%.

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Twitter datapoint of the day

Felix Salmon
Nov 17, 2010 22:17 UTC

I work for a global information company which makes billions of dollars a year selling valuable data to banks, hedge funds, and other people in the financial markets, often at very high prices: $2,000 a month or even more.

And then there’s Twitter, which jealously guards access to its full stream of tweets (roughly 1,000 per second, these days). As of now, however, it’s signed a deal with Gnip whereby you can get a randomly-selected 50% of those tweets for $360,000 a year, which works out at $30,000 a month. You’re not allowed to republish them, but that’s OK—the people willing to spend that kind of money are likely to be high-frequency trading shops who want to keep the data as private as possible in any case.

I don’t have a problem with Twitter monetizing my public tweets in this manner; as I understand it, DMs aren’t included, and neither are any tweets from protected accounts. But it’s quite astonishing how much those tweets are worth, when they’re aggregated into a fat pipe. And it’s also interesting to me how much more 50% of the full stream is worth than 5%, which you can get for just $5,000 a month. Given the rapidly-diminishing marginal returns of each additional Twitter stream, I wonder where the added value comes from. I’d imagine that if a topic starts trending on the 50% feed, it will almost certainly be trending on the 5% feed as well.

I do, on the other hand, have a problem with other sites—Facebook in particular—monetizing my private information. I worried that Mint might be doing that kind of thing back in March, and in general if any website wants to sell any information of mine which isn’t public, I want them to ask my permission first. As Twitter shows, aggregated user data can be very valuable indeed. And with that kind of money on the table, there’s a lot of incentive to be ethically flexible.

COMMENT

You are in fact incorrect in claiming that 5% of the stream is roughly equivalent to 100% of the stream for capturing trends.

Secondly, trends are just one facet of all the interesting things that can be accomplished with the Twitter. For example, if you wanted to – given an arbitrary Twitter id – find out their topics of interest, good luck doing that with 5% of the stream.

Similarly, if you want to build a social media monitoring service (of the kind that Sysomos built and sold successfully last year) and then sell the service to large brands, once again, good luck doing that with 5% of the overall stream.

Lastly, the folks who license the firehose – and that list of companies is easily available via a google search – are inherently uninterested in being a reseller. They are not high-frequency trading shops but are mostly Silicon Valley companies trying to build innovative apps and services on top of this mass volume of data.

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Holding corporate tweets to a higher standard

Felix Salmon
Jun 28, 2010 16:48 UTC

“NO,” shouts Joe Weisenthal today at Clusterstock, “The Supreme Court Did Not Just Strike Down Sarbanes-Oxley.” Well, of course it didn’t: it’s just an obscure auditing board which was deemed unconstitutional. So why would anybody think otherwise? Maybe because of this:


BREAKING: Supreme Court strikes down Sarbanes-Oxley, the landmark anti-fraud law. Much more to come at http://wsj.comless than a minute ago via TweetDeck

The WSJ’s Twitter feed has 326,000 followers: it’s an important news source for a very large number of highly influential people who want reliable news in fast, easily-digestible form. Twitter is a fantastic way of forcing news organizations to get straight to the point, and it’s great that the WSJ has embraced it. But at the same time, and for exactly the same reason, it’s crucial that a flagship Twitter feed like @WSJ be accurate on matters of important breaking news.

There’s also an important distinction to be made, I think, between corporate accounts like @WSJ or @Reuters, on the one hand, and personal accounts like @davidmwessel, @preetatweets, or @felixsalmon. Twitter’s personal accounts are a great equalizer, and a way for individuals to communicate with each other. Corporate accounts are different: they explicitly speak for the corporation and exemplify its standards.

A lot of companies, including Reuters, have social media policies, but I haven’t seen any of them draw this distinction. Maybe they should. To err is human, and I have gotten things wrong on my Twitter feed just as I have on my blog. That’s OK: if you’re having a conversation (and blogs, too, are conversations), you don’t have the time or the ability to fact-check everything you say, and when you find out you were wrong you can simply say so. The flagship twitter feed of a big media company, by contrast, is a different animal entirely: it’s a broadcasting mechanism more than it is an attempt to engage in conversation. The @WSJ account only ever links to WSJ.com stories: as far as it’s concerned, if something isn’t on the WSJ website, it hasn’t happened. As the Twitter face of the company, even if it has a human voice, it’s natural to hold that account to a higher standard than one would the personal account of a company employee.

I don’t want to strip the humanity from corporate Twitter accounts, which can be dry and boring if their owners second-guess themselves too much. But in the case of big media organizations’ news feeds, I think it’s probably a good idea to err on the side of excess conservatism. Especially if creating a distinction between corporate and personal accounts takes some of the pressure off employees with respect to their own personal feeds.

Update: The person behind the @WSJ account, Zach Seward, has an excellent response in the comments, and points out that the account does indeed link to non-WSJ sites, and even retweets me on occasion. Do the WSJ’s follow-up tweets constitute a correction? Not in the sense that they explicitly say that the intial tweet was wrong — but they do clarify matters. (I’m torn on whether or not the WSJ should have deleted the initial tweet when they found out it was wrong: my gut feeling is that it did the right thing by leaving it up, but it’s a very tough call to make.)

Ultimately, Seward and I agree: a corporate Twitter account should have a human voice and be held to a higher standard. The WSJ fell short of that standard in this instance, but its aspirations are in the right place.

COMMENT

I hadn’t given this topic much thought until I read through this post. I agree with Felix that corporate accounts do represent the corporation and as such need to stay within the boundaries of truth. Zach’s response above says much about the fact that @WSJ recognized and corrected the error. We are human even if representing corporate and accepting errors should be a part of the process.
I admire both writing styles here and look forward to continued correspondence between the two!

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Why companies will stick with Twitter

Felix Salmon
Jun 21, 2010 04:45 UTC

I was offline for much of Friday for various reasons, with the World Cup not even being the main one. Instead, I was across the street from Reuters, at the Nasdaq, sitting on one panel and giving a keynote speech to a group of financial PR professionals interested in social media in general, and Twitter in particular.

The main thrust of my speech was that if blogs started to blur the distinction between journalists and the public at large, then Twitter has made things even fuzzier: everybody (companies, executives, PRs, hacks, flacks, bloggers, individuals) is interacting on a very level playing field. And insofar as there are certain people on Twitter who are very influential, there’s a good chance that they’re not the journalists at large media outlets whom PR people have historically spent most of their time trying to cultivate.

What’s more, Twitter gives companies the ability to speak directly to the public without going via journalists (or even mere bloggers); and it also allows them to keep tab on what the public thinks without using journalists and media commentators as an imperfect proxy. Public relations is, after all, the art of relating with the public: journalists are just a means to an end. And the public has never been as easy to relate with as it is now, in the age of Twitter.

Which is why I think that Simon Dumenco is wrong. He’s convinced that corporate presence on Twitter is going to end up feeling much more like those toll-free customer service lines, sooner rather than later:

Social-media as a corporate meme is still pretty interesting and exciting and attractive… a lot of the smart, ambitious, college-educated, well-socialized people in corporate environments are getting sucked into social media. Some of these bright young folks can say things like, “Oh, I manage social media for X Corp.” or “I monitor social media for Y Industries” — and it sounds pretty cool. But what they’re really doing is slaving away at a virtual call center. (If Mom and Dad, who helped pay for college, really understood that, they’d weep.)

Which ain’t gonna last. Old-school customer-service phone lines tend to be staffed by not-so-helpful, not-particularly-well-educated, not-so-patient workers because, let’s be honest, talking to cranky, pissy customers is shit work. (Or the call center employees are well-educated, but non-native speakers of English squeezed into cubicles on another continent. Either way, they’re probably biding time.)

But the difference with Twitter is that it’s public. Every so often, some enterprising blogger will put a customer-service call online, to one company’s embarrassment and everybody else’s general merriment. But most of the time, companies can get away with shabby service because they can’t be seen behaving unhelpfully.

A company with a large number of Twitter followers, and which engages helpfully with its customers on Twitter, in full view of the world, is a company which is doing wonders for its reputation and which is well placed to be able to deal nimbly with any reputational problems that might arise. Whereas a company which doesn’t have that infrastructure in place is likely to end up like Eurostar. (Let’s not even get started on BP.)

More generally, Twitter is growing so fast that the executive ranks of most companies are increasingly full of people who use Twitter regularly. Just as corporate flacks try to get interviews with executives into the WSJ because that’s the paper the executives read, they’re also going to try to keep the company’s presence on Twitter high-profile and shiny because that’s something the executives are likely keeping a close eye on themselves.

So expect a lot more pressure, both top-down and bottom-up, on companies to embrace the Twittersphere. Meanwhile, the people being squeezed will be those in the middle, who have to actually implement the corporate response. If the delegates at the conference on Friday are any indication, they’re still a bit slow to engage. But they’ll get there soon. They have no choice.

COMMENT

Twitter has very low recall value. Companies will need to constantly update and will need to be interesting.

http://www.digitalpost.org/2010/06/seo-g uide-to-twitter-user-psychology.html

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