Twitter (NYSE:TWTR) makes money in two ways. While the majority of Twitter's revenue comes from advertising, about 11% of the microblogging social network's revenue comes from Twitter's data-licensing business, often referred to as the firehose. Though it may be a small business for Twitter, it is important enough to get Apple (NASDAQ:AAPL) interested. In Apple's recently confirmed acquisition of Topsy, Apple has effectively bought access to Twitter's firehose.
The Topsy acquisition
Though Apple isn't required to disclose all acquisitions, Topsy is the second of two large acquisitions in just the last few weeks. In November, Apple bought PrimeSense, the Israeli company behind the motion-sensing technology in Microsoft's Xbox video game consoles for $350 million. Now Apple just dropped another $200 million on the Topsy acquisition.
While the PrimeSense acquisition had obvious implications on how Apple might make use of the company's technology (adopting its motion-sensing technology in its own products), the applications Topsy may be used for are less clear. With access to Twitter's firehose, Topsy analyzes Twitter's data to provide meaningful and instant insights. The technology could be applied in many different areas. A few examples include bolstering that data available for advertisers on its iAds platform, or improving search results in the App Store and Siri. It could also be used to improve suggestions in the App Store, iTunes, and iTunes Radio.
AppleInsider's Neil Hughes points out one of the most important implications from the acquisition: It gives Apple data Google (NASDAQ:GOOGL) doesn't have. "The agreement to purchase Topsy is key because Apple's chief rival in the mobile software space, Google, does not have access to such data from Twitter," writes Hughes. Google's partnership with Twitter to get access to the data was severed in 2012.
Apple would be joining Microsoft's Bing as one of the few companies with access to the data. With just five clients making up 73% of Twitter's data-licensing revenue, Apple would be joining a very exclusive club, one that Google isn't in. This would be an important win for Apple, especially considering the advantage would likely be gained in an area in which Google is typically always far ahead of Apple: search.
The implications for Twitter are also meaningful. With a well-established company like Apple as one of its clients, the firehose revenue looks more sustainable than ever before. As I've discussed before, Twitter could be underestimating the potential of its data-licensing business -- and this move by Apple supports this thesis.
Fool contributor Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.