Twitter Does What It Must, and That Pisses Off the Privacy World

(MoneyWatch)  The problem that Twitter has faced and continues to face is how it can make revenue. No surprise, as this would be the central issue for any company that was started on the premise of "scale up with a bunch of customers and then maybe we can figure out how to make some cash." So of course Twitter management looks at different ways to create revenue. However, the current plan to record and analyze every link users click, whether on the company's web site or using one of the popular third-party applications, is a big mistake in a number of ways.

Granted that the company has to make money, but it and its backers, including the venture capitalists who usually brag about how they offer guidance and consulting to their investments, should have started far sooner. As in, immediately in the conception of the service. Amazon (AMZN) ran at a deficit for years, but understood that it would make money through selling a growing range of products, all leveraging the single order taking and logistics infrastructure it would build. FedEx (FDX) had to build an entire infrastructure before starting business, but it, too, knew how scaling operations and sales would eventually let it make money.

Twitter, on the other hand, wanted to scale its business and then figure out how to make money. The strategy might still work spectacularly, but the founders put themselves into a difficult position, because they had to graft a revenue model onto the structure of the business. That made them inherently more open to anything that promised to work than entrepreneurs otherwise might be. It seems clear that advertising and selling insights based on customer data will be the ticket (because the money they brought in by selling data access to Google (GOOG) and Microsoft (MSFT) won't be enough to keep the company going.

Data on what people do and want is valuable, and so Twitter rightly figured that someone would pay to know what happened. Unfortunately, that's bad for Twitter in X ways:

• Although other companies track what people click on, they have done so long enough that consumers accept it as normal. Because it just started, Twitter stands out.
• People will assume that Twitter will spy on them and keep a dossier. (And they're probably right.)
• Advertisers want the data, and Twitter doesn't have the broad advertising base to keep people at arm's length and will have trouble preserving privacy. At least, that's what it will seem like, and perception is what eventually rules, not reality.
• Such a small percentage of people click on links, that data may have limited value and commercial worth.

The privacy issues are big. The FTC slapped Twitter over data security, and one government after another seems bound on a privacy witch hunt. Just look at such companies as Google and Apple.

But I think the last point may in practice be the biggest. In fact, I can image advertisers' jaws dropping when they realize how little pull Twitter might have as an advertising vehicle. I know someone will likely point to how Dell (DELL) has sold a few million dollars worth of machines on Twitter, but think about Dell's size and name. The results have been comparatively nothing. What happens when advertisers see how little their ads pull? They pull their ads. Say goodbye to the nice money, guys.

Related:

• Google and Microsoft Fight for Search Future -- Whatever It May Be
• 7 Ways Companies Like Foursquare Can Hold Off Giants Like Facebook
• FTC Teaches Twitter that Regulators Have Sharp Teeth
• Facebook's Biggest Obstacle: No One Trusts It
• Twitter Makes Money, Hell Freezes Over. Maybe.

Image: RGBStock.com user hamma, site standard license.