The Best-Kept Secret in Tech

How can a company with no known business model raise $100 million from respected investors such as T. Rowe Price (Nasdaq: TROW  ) ? That's the question I find myself asking, after a Wall Street Journal blog reported that Twitter is raising $100 million from as many as seven investors.

I see two possibilities. Either:

  1. Twitter's business model is the best-kept secret in tech.
  2. Investors are paying for Twitter's assets, the users and real-time search engine, in the hopes of the company being acquired. In short, there is no business model.

Many people work for, work with, or invest in Twitter (and that number is expanding). To date, no one has definitively said what the Twitter business model will be.

Internal documents released by a hacker to TechCrunch in July showed that Twitter expected 25 million users and $4.5 million in revenue this year. The revenue expectations follow a hockey-stick growth curve going forward, with $140 million in revenue projected for 2010. So what could the secret business model be?

The possibilities are endless?
The documents from a strategy meeting present such business options as verified commercial accounts, which Twitter identified as the "fastest way to make money without putting a whole organization behind it." Other possibilities included "Search/content ads, sponsored tweets, Adsense widgets." However, each of these was just a possible idea thrown out during a brainstorming meeting.

The closest thing we have to an insider account comes from Todd Chaffee, a Twitter board observer and general partner at Institutional Venture Partners, an investor in Twitter. In an interview with The New York Times, he speculated that e-commerce would play a role. Mr. Chaffee said, "As people use Twitter to get trusted recommendations from friends and followers on what to buy, e-commerce navigation and payments will certainly play a role in Twitter monetization."

While Twitter won't become the next eBay (Nasdaq: EBAY  ) or Amazon.com (Nasdaq: AMZN  ) overnight, this looks like the most likely road to widespread monetization at the moment.

Another possibility is the "freemium" model, in which basic free services are offered to all users, who then have the option to upgrade to paid premium accounts for more data and features. The problem with this model, though, is that most users are notoriously unwilling to pay for premium accounts. And Twitter documents show that the company expects as much, saying that the "majority of users [are] not monetizable."

Sellout?
The business model also could be irrelevant for the time being if Twitter were acquired by a Microsoft (Nasdaq: MSFT  ) or Google (Nasdaq: GOOG  ) and allowed to focus solely on increasing its dominance of the micro-blogging space.

I see this as the most likely option, and management's history would suggest this as well. Twitter co-founder Evan Williams sold his previous company, blogger.com, to Google in 2004.

Going forward, I think we will see an acquisition of Twitter before it comes out with a business model. If it can come up with a killer model, the price tag would easily rocket higher than the $1 billion figure at which the company is currently being valued. Any potential acquirer who believes in Twitter's possibilities would be smart to snap up the company before revenue takes off.

Enough of what I think -- what do you think? Is the Twitter business model the best-kept secret in tech, or is it simply raising money to give itself more time to find one? Let us know below.

Fool analyst Dan Dzombak believes there's no "I" in "nanobloggng". Google is a Motley Fool Rule Breakers selection. Amazon.com and eBay are Stock Advisor picks. Microsoft is an Inside Value recommendation. He has no position in any of the companies mentioned in this article. The Fool disclosure policy is an avid user of Flutter.


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  • Report this Comment On September 24, 2009, at 11:40 PM, SeekTheFire wrote:

    I vote for "no business model." There is a network effect at work for sure, but Twitter has no moat and no real need for one since they don't make any money. Hope Google doesn't buy it, since I own Google stock. Go Microsoft Go!

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