Twitter should sell — if it can
NEW YORK, July 14 (Reuters) – Big media appears to have learned its lesson. At last week’s Allen & Co media conference in Idaho, Twitter was the belle of the ball. But big media barons, the types who might be expected to give Twitter and its venture backers a big exit, sounded distinctly uninterested in an acquisition. They’ve learned, once again, that big traffic doesn’t necessarily mean big revenue.
In a Reuters interview, News Corp CEO Rupert Murdoch ruled out buying the company. According to the Wall Street Journal, Chairman Barry Diller and Liberty Media Chairman John Malone each expressed skepticism about Twitter’s potential for generating revenue. They would know. All have huge interests in Internet businesses. Murdoch knows better than anyone that it’s tough to turn web traffic into revenue.
In 2005, he paid $580 million for MySpace, thought to be pennies on the dollar for the Internet’s then most promising bucket of traffic. He was even able to squeeze a huge amount of guaranteed revenue out of Google. But that deal was a one-off. Since then, Google has learned that user-generated content and advertising don’t mix. When the deal expires in 2010, MySpace’s revenue will crater. Meanwhile it’s been displaced by Facebook as the hottest social network.
The lesson is clear. Overpaying for traffic is foolish.
Not that Twitter’s founders are looking for a quick, lucrative exit. They say the company isn’t for sale, that building more traffic, not generating revenue, remains the company’s focus. Assuming big media players really aren’t interested in a high-priced acquisition, that their chatter isn’t simply posturing, then they’ve really no other choice.
The only barrier to entry in the social networking game, not that it’s a tough one to climb (see again: Facebook displacing MySpace) is a huge network. Trying for revenue, either with intrusive advertising or subscription fees, risks driving users to a free copy-cat. The moment Twitter tries that, its network will implode.
But the founders and their venture capitalists would be smarter to offload the business as quickly as possible, even if that means accepting a less-than-stellar return on investment.
Social networks, if they survive, are never likely to be profitable, unless they can convince users to pay a subscription fee to maintain a profile. That doesn’t seem likely in the near future.
As long as VCs are willing to eat each other’s lunch, and the cost to build a social network remains negligible, it will be impossible to charge a fee without driving users to the next free social networking fad.