If a business wants to use Twitter's (NYSE:TWTR) data to gain insights on its users, it'll have to work directly with the social network come this summer. Twitter recently announced that it will stop licensing its data to third-party resellers like DataSift and NTT Data. The move follows Twitter's purchase of data reseller Gnip last spring.
While Twitter's data licensing business is small relative to its advertising business, the company still generated $147 million -- 10% of revenue -- from licensing its data in 2014. That's an increase of 109% from 2013. Cutting off third-party resellers should have a positive impact on Twitter's data licensing business.
When Twitter acquired Gnip last May, it was the company's first step to take control of its data distribution. Gnip was one of the biggest resellers of its data, and Twitter bought it to bring its data processing technology in-house. That technology allows it to compete with companies like DataSift and NTT Data to provide insights from the data.
Those insight are where resellers make the majority of their profit. Ninety-five percent of DataSift's revenue from reselling Twitter data goes directly back to Twitter. However, 80% of DataSift's revenue comes from its data processing services. That's the revenue Twitter is after.
The acquisition of Gnip is key to capturing that opportunity. In fact, Re/Code reports other resellers were informed of Twitter's plans to cut off the firehose around the same time the company acquired Gnip, so that seems to be an intention behind the purchase.
Twitter also believes that establishing more direct relationships with businesses will lead to more opportunities in the future. In a Gnip blog post, Head of Twitter Ecosystem Zach Hofer-Shall said:
Direct relationships help Twitter develop a deeper understanding of customer needs, get direct feedback for the product roadmap, and work more closely with data customers to enable the best possible solutions for the brands that rely on Twitter data to make better decisions.
More feedback from businesses will help Twitter establish new products around its raw data. That's especially important in light of concerns surrounding Twitter's user growth and advertising business.
Hedging the consumer-facing business
While Twitter continues to grow advertising revenue nearly as quickly as its data-licensing revenue, there are still concerns among investors, especially regarding user growth. Last quarter, Twitter added just 4 million monthly active users. The 288 million users Twitter ended the year with was just 20% higher than at the end of 2013.
At the same time, advertising revenue more than doubled. Twitter managed this largely by increasing its ad load on users' timelines. While Twitter claims its ad load is still well below its long-term goal of 5%, it seems like it's close in more valuable markets like the United States -- although Twitter doesn't give much insight on the matter.
Twitter is also working to monetize its audience outside of its core users. It updated its homepage for logged-out visitors with plans to eventually display "an ad or two" on the page visited by some 200 million unique viewers. Additionally, it's making deals with select content syndicators like FlipBoard to share ad revenue from tweets embedded on other people's websites.
The pattern seems to be that Twitter is looking for more ways to make money off of the audience it already has instead of worrying mostly about growing its active users. That philosophy has clearly extended to its data business, and cutting off resellers should enable it to make the most of its Gnip acquisition.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Twitter. The Motley Fool owns shares of Twitter. 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.