First, a confession. I made the decision recently that when I start an internet company it will not be dependent on advertising for revenue. As an aficionado of the lean startup model and customer development process, I believe it imperative to have paying customers from the get-go. When I developed the Customer Ecosystem model, I explicitly included a revenue component that was independent of advertising. The simple fact being that as VC funding becomes more tight and companies need to show their worth more quickly, advertising as a revenue model is going to become a relic… a bubble throwback that we will all talk about, but probably not think about employing.
Recently, Twitter co-founder Biz Stone and COO Dick Cost0lo have made comments about the first substantial real revenue stream that we’re going to see from the über-hyped microblog company. And if you chose chose advertising (really cool, non-traditional advertising) in the pool…. prepare to collect your winnings.
Who has succeeded, and I mean “knocked it out of the park” succeeded in using an advertising model? Google…and that’s about it.
The internet is strewn with the living dead of companies that have tried to become internet kingmakers and failed using an advertising revenue model: AOL, Yahoo, MySpace, MSN Digg, and countless others.
Many of the businesses that are reliant upon advertising are getting CRUSHED. Look at the the New York Times, NBC Universal, Clear Channel etc… the simple fact of the matter is that it’s becoming very hard to be a business that matters with advertising as a revenue model.
Sure, Facebook may be able to pull it off, but like Google they are also turning the advertising world on it’s head and there’s still no promises of success. Consider:
Google: Changed the advertising world on its head by making ads relevant, practical and contextual. And of course, they executing the living bejeezus out of their biz model. Anyone with any doubt about about their ability to execute should try to advertise on MSN or whatever the hell they call it now.
Facebook: In the process of changing the advertising world through massive amount of demographic/psychographic data that allows for targeting via affinity. We still don’t know if they will be able to pull it off. Smartly though, Facebook is hedging its bets and looking seriously at other business models.
I’m not saying that Twitter is in trouble, far from it. I’m just saying that an advertising model, no matter how innovative, will have a hard time succeeding.
So let’s look at what Twitter does have:
- Loyal, active (not to mention affluent) users
- The attention of the corporate world
- A core technology that would be difficult for competitor to supplant/replace
If this doesn’t spell subscription model, I don’t know what does.
It’s too bad. Because Twitter could have a very strong customer ecosystem:
Acquisition: (Good) Despite somewhat stagnating growth compared to Facebook, and an unremarkable viral coefficient in the truest internet business sense, Twitter spends virtually nothing on acquisition, gets tons of free press and is promoted actively by many corporations and individuals.
Conversion: (Fair) More than half of twitter registrants never follow anyone, tweet or get followed. This is not so bad considering their acquisition numbers, but it speaks to and underlying weakness in conversion to a mass market.
Upsell: (Good) Obviously, we’re in pure speculation territory here, but I see huge potential in multiple subscription levels on both an individual and corporate basis. I can imagine a $5.99 a month subscription for individuals who for the following features:
- Ability to send direct message
- Ability to send more than 25@ replies per month
- Backup/storage/offline accessibility to tweets
- Support for more than 500 followers
Obviously the corporate subscription would have some similar features, but would focus on marketing/support and would have robust analytic tools.
Retention: (Good) If there was a ever a trapped customer it would be the Twitter customer. Sine Google killed Jaiku (and I’ll never understand that one) there has only been one microblogging platform. Additionally Twitter users love the service and promote it heavily. Eventually, a new technology may come and replace Twitter, but not in the near future.
Twitter is a great company with a world-changing product… let’s just hope that their revenue model (when it eventually comes) won’t consign them to the garbage heap.
UPDATE: Twitter testing enterprise tools. Looks like a good first step.