Twitter - 144 characters but little money

I finally started to play around with Twitter in recent weeks and am.no more convinced there is a viable business model there than before I signed up. Three simple reasons for this, the infrastructure required to provide the service costs more than the value it provides; advertising based revenue models are inherently difficult to sustain and; there are two many competing methods for users to get the same value.

Sending a tweet out to each follower when you send out an alert in a rapid time scale is no simple thing. There is a lot of database activity required and the requests from the twitter web pages and from the 3rd party twitter applications. For all this activity the overwhelming majority of these twitter posts though they will never be read by a large proportion of the people that receive them. Even the ones that are read are usually of limited value. There are a number of high profile people that can increase their connection to their audience which are the minority. Consider for yourself how much you would be willing to pay for any of the twitter messages you receive. If Twitter were to go to a paid service I would predict that there would be very few people that would be willing to pay.

I have made no secret that I am not a fan of sdvertising based revenue models. The theory that the value of a company can be calculated by the number of users, and therefore the potential advertising exposure, is fataly flawed. There is a large gap between the number of users and getting advertising revenue. Firstly the company needs to have a method to get advertising to the users in a method that will get seen. The company then needs to convince advertisers that they offer value. After all this, advertising on the service must not compromise the service it offers or alienate the users.

For information based services, which Twitter essentially is, then advertising becomes a more unlikely proposition. For people to actually use an information source they must trust it. In this environment advertising must be very carefully implemented, fully disclosed and never confused with actual content. As soon as the line between content and information becomes blurred trust is lost and the service loses users. Loss of users is particularly dangerous for Twitter given its social connection status. Having to be careful with ads not only makes the process difficult but also limits the number of advertisers that Twitter could attract. Some advertisers would only be interested in the medium if it was possible to blur the line between information and ads. A smaller pool of buyers will directly result in lower price and therefore revenue.

And with the service that Twitter offers there are many other ways that the same ends could be acheived. Most of the other social networks offer this type of functionality and to completely compete with Twitter would only need to add a "light" client that would allow announcements only subscribers to a feed. More of a threat however is the instant messaging services. Twitter is really very similar to these services but in a broadcast rather than directed mode. I would expect to see the IM cliects start to add this type of functionality at some point. These services can offer greater value as they also connect to email services as well. Using MS messenger as an example, it already has grouping functionality which would allow users to set up specific groups for notifications rather than regular IM. Adding a broadcast function would allow Twitter like posts to be sent to those broadcast groups. There is a lot more power and functionality with this model, and the service has already proven it can support advertising.

While I can see what some people like about the service I cannot say that I see a bright future for the product as it stands. I believe it will be very hard for them to turn this into a revenue generator. The most likely scenario is that one of the IM vendors will buy them so they can roll the user base over time into their IM community where they can actually derive some value from them.