Fail Whale? Why Twitter Is Looking More and More Like MySpace

Last Updated Dec 17, 2010 3:26 PM EST

Twitter took another $200 million in venture capital investment and the company is now "valued" at $3.7 billion. Which is odd because if it needs new money it's reasonable to assume it must not be making a decent profit from ads, its only revenue source.

Why would a money-losing company be worth so much? Especially as certain trends indicate that Twitter may be more of a fad than an integral part of web users' lives -- it could easily face the same fate as MySpace, the witness-protection program of social media sites.*

MediaPost's Erik Sass thinks Twitter's venture captalization -- $360 million in total -- is a sign that social media is in a bubble. Here are his numbers:

  • Projected ad revenues for 2010: $50 million
  • Total server costs for 175 million users: $25 million
  • Estimated total server costs by the end of 2010: $75 million
  • Personnel costs: tripled from 130 to 350
  • Twitter's 2013 revenue projection: $1.53 billion
How is Twitter going to go from $50 million to $1.53 billion in just three years when its costs are outstripping its ad revenues? No one knows.

Bizarrely, Twitter is against one of the few things that would actually work well on the service: banner advertising. Founder Biz Stone said in 2009:

The idea of taking money to run traditional banner ads on has always been low on our list of interesting ways to generate revenue.
There is some urgency to the Twitter/ads/revenue question for two reasons:
  1. Twitter is an extremely limited social media platform: It does one thing, tweets. OK, there's a bit of search and some interesting trending information and other bits and bobs, but Facebook has all those, and Facebook's are all much better. And compared to Google's vast array of services, Twitter looks like a bicycle sitting next to a cruise ship. As such it is vulnerable to being abandoned. After all, is a Facebook status update any less satisfying than a tweet?
  2. Three percent of all Tweets are Justin Bieber related: This astonishing fact tells you that as soon as these kids grow up, or as soon as Bieber becomes uncool, Twitter will lose 3 percent of its traffic. Now add to that all the similarly vulnerable traffic generated by the various Kardashians and Kutchers, and you can see that Twitter is highly fad-based rather than use-based, like Facebook.
Given that Twitter is still a non-profit organization, might banners not be a little more interesting right now? Sure, no one likes them -- but they could sit harmlessly at the top of the page (or between tweets), bothering no one, and raking in cost-free cash.

*Joke courtesy of Rusty Ward.

Image by Flickr user mykl roventine, CC.