Why is Facebook worth ten Twitters?

November 18, 2010

Twitter is reportedly in talks with private investors for another round of investment, one that would value the company at $3 billion. My first thought was: Only $3 billion? In this time of irrational web 2.0 valuations?

After all, Facebook’s reported value is $41 billion, according to Bloomberg. As fast as even Facebook is growing, that figure—up from $30 billion a few weeks ago—is hard to justify, given that the company’s revenue will be between $1.5 billion and $2 billion this year. But even so, at Facebook’s $30 billion valuation, it’s ten times bigger than Twitter. So why would Facebook be worth ten Twitters?

For one thing, Facebook has worked out a solid business model, targeting ads to its members in an effective way. Twitter is at an earlier stage in the process of developing a business plan. It recently hired a new CEO, Dick Costolo, to ramp things up. Since then, it’s announced a few initiatives aimed at exploring new revenue streams.

Twitter has stumbled in its efforts to monetize its popular information network. The company has close to 200 million accounts pumping out a 100 million tweets a day. But it’s had mixed results in making all that traffic pay. New features like sponsored tweets and trends are generating revenue without alienating users. But other endeavors are rubbing software developers the wrong way.

Twitter co-founder Evan Williams acknowledged the company’s sometimes ham-fisted actions with developers at the Web 2.0 conference. Developers of apps that allow people to access Twitter feeds on smartphones were unhappy with Twitter’s move this spring to buy the maker of Tweetie, allowing Twitter to offer its own app. “We’ve learned a lot about having an ecosystem and working with third-party developers and we’ve screwed up a lot of that,” Williams said, even as Twitter announced a couple of new changes that may not sit well with developers.

On Tuesday, Twitter said it would open up for sale its great firehose of tweets. In partnership with Gnip, a social-data streaming service, Twitter will grant access to half of its tweets for $360,000 a year or 5 percent for $60,000 a year. The updates can’t be displayed, only used for research. But some wondered if the cost would cut out smaller startups. Twitter is also testing a free analytics product, a move that Mashable called “a blow to the third-party vendors that are already providing similar tools.”

Williams told the Web 2.0 audience that the company initially opened its API to developers because other companies were and because “we thought it would be neat.” Now the company sees it has a chance to be a platform the way the web’s biggest successes—like Apple and Facebook—are. But not all platforms are the same.

Apple’s iOS platform is designed to cater to developers, who sell apps through iTunes if they share 30 percent of the revenue and abide by Apple’s rules. Facebook’s platform is geared less toward supporting developers and more toward selling ads. Aside from Zynga, few developers have found a profitable business developing for Facebook. Twitter will need to decide which model it wants to follow. As long as it continues to pursue both, it’s going to find itself screwing thing up even more.

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Ultimately, people consume a product or service if they believe it adds value to their life. And ultimately, the purpose of business is to MAKE MONEY!

I predict twitter will ultimately fail on both of these counts. Users will eventually figure out that knowing where Paris Hilton ate lunch doesn’t add value to their lives and advertisers will not be willing to pay much for demographic information on those remaining twits who do care where Paris Hilton ate lunch.

Like so many other web-related services, Twitter is neat from a technological standpoint, but it will eventually be absorbed into some larger organization that actually makes money.

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