how-does-twitter-make-money

How Does Twitter Make Money? Twitter Business Model Analysis

Twitter makes money in two ways: advertising and data licensing. In 2021, Twitter generated $4.5 billion from advertising and $570 million from data licensing. While Twitter generated $5 billion in total revenues, it lost 221 million. In April 2022, Elon Musk tried to take over Twitter for about $44 billion. 

Origin story

Odeo was a directory and search destination website for podcast publishing and aggregation.

It was 2006, and the company felt the pressures of other giants at the time (Apple) were competing for the same space. 

Therefore, the founders of Odeo decided it was time to “reboot” the company to move in a new direction.

Back in 2000, inspired by early blogging pioneer LiveJournal, Jack Dorsey thought about a service in which posts appeared in real-time and “from the road.” 

As they broke the company into teams to brainstorm new ideas and figure out what to do next.

In a brainstorming session, Jack Dorsey represented his idea to the other team members about “a service that uses SMS to tell small groups what you are doing.”

That idea made sense so much that by March 2006, a first test started.  

It was March 2006; Jack Dorsey was just setting up the idea he had brainstormed, which would initially be called twttr.

As the story goesEvan Williams, Jack Dorsey, and Biz Stone, who co-founded the company at the time, knew they “wanted to have this instant mobile, SMS, tech-space thing,” and Twitter (which referenced nature, as Twitter is the sound that birds make) was the perfect name they had in mind.

However, a bird enthusiast already had registered the name twitter.com. So they had to initially use twttr.com.

After six months after the project launch, they finally managed to get the domain twitter.com which would stick to these days.

The group could not easily explain the value of this new project to Odeo’s board, as the company was losing ground.

Thus, eventually, a new corporation was set up just to manage the twttr project.

As the project launched, six months in, Jack Dorsey was one of the engineers working on what would be finally rebranded as Twitter.com.

The interesting part, though, is that people could not still get the value of a platform that enabled those SMSs when they still paid for them.

In short, at the time, tweeting something meant having the phone billed for messages that conveyed what one was doing at that moment.

For how entertaining it might be, it was not convenient.

To make things worse, there was no character limit. Thus, a long message would be split into multiple messages, which would only increase the phone bill.

So the team figured they needed to change the anatomy of the message. Indeed, to fit into what, at the time, was the character limit for a message (160), the Twitter.com team set the limit at 140 characters, so users had “room for the username and the colon in front of the message.”

From there, the official tweet was born (the character limit would be expanded only a decade later, from 140 to 280).

Twitter’s team was the main advocate of the platform, and Jack Dorsey would show the power of the tweet as a way to express opinions about the world, is a powerful way:

twitter-first-140-character-tweet

By 2007 Twitter had gained traction, and Jack Dorsey would become the company’s CEO.

By December 2008, Twitter grew quickly, reaching 4.43 million unique visitors (a 752% growth over the previous year).

While Twitter was snowballing, its platform wasn’t stable, and Jack Dorsey wasn’t considered able to stay in the CEO’s position.

And by 2008, Dorsey had to leave the CEO position (kicked out from Twitter, in 2009, Dorsey would found Square).

Nonetheless, Twitter kept growing in 2009. That was also the year when Facebook had passed Myspace in traffic.

By 2009, Twitter’s popularity grew so that celebrities like Ashton Kutcher, Britney Spears, Ellen DeGeneres, Barack Obama, and Oprah Winfrey joined the platform.

By the end of 2010, the platform had more than 160 million users, and it started to monetize through ads.

This model would stick, even though Twitter would become profitable only by 2017-18.

In 2015 Jack Dorsey would return as Twitter’s CEO, splitting his time between Twitter and Square.

Twitter revenue model explained

Twitter generates revenues via Advertising and data licensing.

Twitter Advertising Services

Twitter generates most of its advertising revenue by selling Promoted Products that consist of the following:

Labeled as “promoted,” it appears within a user’s timeline, search results, or profile pages just like an ordinary Tweet regardless of device, whether desktop or mobile.

Using its proprietary algorithms, Twitter tries to understand the interests of each user and deliver Promoted Tweets that are intended to be relevant to a particular user.

Promoted Tweets are pay-for-performance or pay-for-impression, priced through an auction.

Promoted Accounts, labeled as “promoted,” provide a way for advertisers to grow a community based on pay-for-performance advertising priced through an auction.

Promoted Trends, labeled as “promoted,” appear at the top of the list of trending topics or timelines for an entire day in a particular country or globally.

Promoted Trends are sold on a fixed-fee-per-day basis.

Data Licensing and Other

Data licensing and other revenues comprise:

Data licensing revenue stream

That allows data partners to access, search and analyze historical and real-time data on the platform consisting of public Tweets and their content.

Twitter MoPub exchange revenue stream

This is a mobile ad exchange where Twitter receives service fees from transactions completed on the exchange.

In short, this is a marketplace where buyers and sellers purchase and sell advertising inventory. Thus, it matches buyers and sellers.

Twitter Blue

That is an opt-in, paid monthly subscription, which, before Elon Musk took over the company, comprised a set of minor additional features compared to regular Tweet.

It was then re-labeled as a subscription service, enabling users to get the blue checkmark on the account that had been verified. 

In the past, the blue checkmark was assigned to active, notable, and authentic accounts of public interest. 

With Twitter Blue, accounts could get the blue checkmark for $7.99/month in the US. 

How big is Twitter’s advertising business?

In 2021 the company made over $4.5 billion from advertising services alone.

Also, if we compare those numbers with Google and Facebook advertising revenues, we can understand the proportion of Twitter digital advertising cake back in 2021.

amazon-advertising-business
In 2021 Amazon generated around $31 billion in advertising revenues. Becoming one of the key competitors of the Google and Facebook duopoly.

What are the Twitter key metrics? The factors that affect Twitter’s growth

Each company has a few critical metrics to monitor daily, weekly, and monthly.

Those are the metrics Twitter looks at for the success of its business:

twitter-kpis

The change in metrics, such as monthly and daily active users and change in ad engagement, can cause the business.

User growth trends reflected in the MAUs, changes in DAUs and monetization trends reflected in advertising engagements are vital factors that affect Twitter revenues.

How does Twitter spend its money?

To keep the technical infrastructure up and running, the company spends money in data centers for co-located facilities, lease and hosting costs, and traffic acquisition expenses (to enable the advertisement placed on Twitter to be shown on third-party publishers’ websites).

The company spent over $1.1 billion in 2019 (33% of its revenues).

Twitter also spends money on product development, engineering, and research to keep the whole infrastructure and company evolving.

In 2019, Twitter spent $680 million on R&D.

Twitter also spent over $900 million (26% of its revenues) on sales and marketing. And in sales and marketing activities.

Twitter: from platform to publisher?

In May 2020, Twitter fact-checked a tweet from President Trump, thus opening Pandora’s box.

twitter-fact-checking

Twitter explaining the reasons for fact-checking President Trump’s tweet. 

For years, companies like Facebook and Twitter have been treated as communication platforms (at least in the US).

That means that as they act as companies enabling communication but not the ones officially publishing it, it gives them wide space to let their platforms develop freely.

As the recent debate showed, if Twitter were treated as a publisher, thus the one liable for all the offensive content published, this would also completely change its business model and the potential liabilities.

A new chapter: Elon Musk taking over Twitter

In April 2022, Elon Musk almost finalized the acquisition of Twitter in one of the most controversial deals in business history.

Let’s review the timeline.

Musk placed a bet to take over the whole company out of the blue. It was April 14th, 2022:

elon-musk-twitter-offer

The public records show the whole conversation of the offer Musk made to take over Twitter.

Below is the main extract, of the conversation, between Musk and Twitter’s board; as per SEC Filings, Musk had sent a message to Bret Taylor, Chairman of Twitter’s board:

I invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy.  

However, since making my investment I now realize the company will neither thrive nor serve this societal imperative in its current form. Twitter needs to be transformed as a private company.

As a result, I am offering to buy 100% of Twitter for $54.20 per share in cash, a 54% premium over the day before I began investing in Twitter and a 38% premium over the day before my investment was publicly announced. My offer is my best and final offer and if it is not accepted, I would need to reconsider my position as a shareholder.

Twitter has extraordinary potential.  I will unlock it.

Elon Musk

In a follow-up text, Musk highlighted:

As I indicated this weekend, I believe that the company should be private to go through the changes that need to be made.

After the past several days of thinking this over, I have decided I want to acquire the company and take it private.

I am going to send you an offer letter tonight, it will be public in the morning.

Are you available to chat?

Elon Musk

As a final message to Twitter’s board, Musk highlighted:

1. Best and final

a. I’m not playing the back-and-forth game.

b. I have moved straight to the end.

c. It’s a high price and your shareholders will love it.

d. If the deal doesn’t work, given that I don’t have confidence in management nor do I believe I can drive the necessary change in the public market, I would need to reconsider my position as a shareholder.

i. This is not a threat, it’s simply not a good investment without the changes that need to be made.

ii. And those changes won’t happen without taking the company private.

2. My advisors and my team are available after you get the letter to answer any questions

a. There will be more detail in our public filings. After you receive the letter and review the public filings, your team can call my family office with any questions.

Elon Musk

In short, Musk had offered to purchase Twitter for $54.20 per share, a 54% premium, before Musk started to buy Twitter shares.

While the offer was good from a valuation standpoint, the board tried to fight it.

Also, influential business commentators were against it.

As Cramer highlighted:

This is one of those where they are literally not doing their job, there’s no fiduciary responsibility if they just say, ‘you know what, we take it, there are times when individual directors are opened up for a level of lack of fiduciary that I think crosses the line. This crosses the line.

Similar comments came from Galloway:

 
Throughout the deal, none expected it to go through so quickly.
 
Indeed, given the controversy around Twitter, most business people thought this would have turned into a few months’ fight over Twitter’s ownership.

Yet, things tumbled very quickly. And by April 25th, 2022, the deal was officially announced!

twitter-acquisition-deal-announcement

As explained in the official press release:

Under the terms of the agreement, Twitter stockholders will receive $54.20 in cash for each share of Twitter common stock that they own upon closing of the proposed transaction. The purchase price represents a 38% premium to Twitter’s closing stock price on April 1, 2022, which was the last trading day before Mr. Musk disclosed his approximately 9% stake in Twitter.

Bret Taylor, Twitter’s Independent Board Chair, highlighted:

 The Twitter Board conducted a thoughtful and comprehensive process to assess Elon’s proposal with a deliberate focus on value, certainty, and financing. The proposed transaction will deliver a substantial cash premium, and we believe it is the best path forward for Twitter’s stockholders.

Parag Agrawal, Twitter’s CEO, highlighted on Twitter

Twitter has a purpose and relevance that impacts the entire world. Deeply proud of our teams and inspired by the work that has never been more important.

How would Elon Musk have secured the funding to purchase the company?

Musk secured $25.5 billion of fully committed debt and margin loan financing and is providing an approximately $21.0 billion equity commitment.

Elon Musk becomes the new owner of Twitter

As the market further collapsed and the economy slew, the whole business context changed. 

A deal that seemed to be going through suddenly halted. 

Elon Musk tried to pull out from it, claiming that the number of bots (fake accounts) on the platform was well over the 5% declared by Twitter. 

Things got very ugly, and a fight in court ensued. 

However, by the end of October, probably because Musk could not pull out from the deal, it finally closed, with Elon Musk in charge. 

Below are some of the things Musk announced as he was taking over Twitter:

  • Take the company private: so he’ll be able to execute changes fast without getting into stock price wars. While this might be good in the short-term to implement changes that otherwise might never happen (the Twitter user base might be reduced substantially in the short-term if cleaned up from inactive accounts, spambots, and fake accounts), it would be great in the long run to have Twitter public, to make it as accountable as possible. 
  • Open-source the algorithm: in the early days, Twitter did work more like a protocol, where third parties could build apps and tools on top of the APIs. So making it open does sound like an interesting idea, as Twitter is a public square, and it would be interesting to understand better how its algorithms work (right now, it’s very opaque).
  • Fight spambots: Twitter UX gets worse every day due to the presence of a huge amount of spambots. This isn’t hard to fix from a technical standpoint. And the only thing that might have refrained the current management from doing it is that a reduction in the user base might have caused a crash in the stock and made them get fired altogether. If Musk doesn’t care about that, those changes can be implemented quickly, thus radically improving the UX.
  • Content moderation: this is the most complex issue. Content moderation is a very hard problem with a lot of subtleties. This might be a problem to tackle in the long-term but very hard to solve in the short term, even for Musk.

In the meantime, as Musk took over the company, he started to cut costs, reducing the staff by half!

twitter-employees-number

As of November 15, Musk announced that Twitter DAU was going up.

Source: Elon Musk’s Twitter

And while Musk is acting as temporary CEO, the company’s experiments are all over Twitter.

One of the latest was the launch of enabling people to get verified if they paid $8/month for Twitter’s subscription service.

Yet things got pretty messy, as accounts verified for paying the subscription impersonated other corporate accounts, creating huge repercussions.

A significant example of that was an account pretending to be Eli Lilly, the pharmaceutical giant, which announced it would make insulin for free, thus enabling a stock crash.

Thus Twitter halted the verification service to prevent other cases from happening.

As the experimentation continues, one thing is clear; Twitter is still a powerful platform where news is shared and where things go viral quite easily.

How do you monetize this sort of platform?

Advertising is the way. However, the most challenging part for Twitter is to enable advertisers to get visibility on the platform by avoiding controversy (if you’re an advertiser, in most cases, you want to avoid controversial takes next to your ads).

Thus, for Twitter’s ad platform to be successful, it will need to enable the whole funnel, from top to bottom, for advertisers to think it’s worth investing money in it.

While ensuring that Twitter tackles bots, hate speech, and fake news. Not easy challenges!

Twitter 2.0: The Everything App

In a Tweet by Elon Musk, he presented the plan to revamp the platform, in which Musk labeled as Twitter 2.0:

Musk’s idea is to transform Twitter into an “Everything App” where users can be able to share content, chat, and perform payments.

The concept of SuperApp is well known in China, even if it has never taken place yet, in the US.

super-app
Super Apps first formed on the digital native mobile-first Chinese market. In short, these apps comprised a whole range of services, spanning from entertainment, messaging, mobile payments, and e-commerce. Indeed, super apps like WeChat became a universe for mobile users to perform anything from messaging to payments. Therefore, the super app is an enhanced version of an app that doesn’t have just a vertical application but a horizontal array of use cases, almost like a swiss-knife for mobile apps.

Related Visual Stories To Twitter

Who Owns Twitter

who-owns-twitter
As of April 25th, 2022, Elon Musk tried to take over Twitter. Musk tried to purchase the company at $54.20 per share, or about $44 billion. While the deal hasn’t closed, Elon Musk is still the largest shareholder with 9.5% stock ownership, followed by Jack Dorsey, with 2.3% ownership, as the second-largest individual shareholder.

Twitter Business Model

how-does-twitter-make-money
Twitter makes money in two ways: advertising and data licensing. In 2021, Twitter generated $4.5 billion from advertising and $570 million from data licensing. While Twitter generated $5 billion in total revenues, it lost 221 million.

Digital Advertising In 2021

advertising-industry
The digital advertising industry has become a multi-billion industry dominated by a few key tech players. The industry’s advertising dollars are also fragmented across several small players and publishers across the web. Most of it is consolidated within brands like Google, YouTube, Facebook, Instagram, Amazon, Bing, Twitter, TikTok, which is proliferating, and Pinterest.

Related Business Model Stories

Google Business Model

google-business-model
Google is a platform and a tech media company running an attention-based business model. As of 2021, Alphabet’s Google generated over $257 billion in revenue. Over $209 billion (over 81% of the total revenues) came from Google Advertising products (Google Search, YouTube Ads, and Network Members sites). They were followed by over $28 billion in other revenues (comprising Google Play, Pixel phones, and YouTube Premium) and by Google Cloud, which generated over $19 billion in 2021.

Facebook Business Model

facebook-business-model
Facebook, the main product of Meta, is an attention merchant. As such, its algorithms condense the attention of over 2.91 billion monthly active users as of June 2021. Meta generated $117.9 billion in revenues in 2021, of which $114.9 billion was from advertising (97.4% of the total revenues) and over $2.2 billion from Reality Labs (the augmented and virtual reality products arm). 

Instagram Business Model

instagram-business-model
Instagram makes money via visual advertising. As part of Facebook products, the company generates revenues for Facebook Inc.’s overall business model. Acquired by Facebook for a billion dollars in 2012, today, Instagram is integrated into the overall Facebook business strategy. In 2018, Instagram founders Kevin Systrom and Mike Krieger left the company as Facebook pushed toward tighter integration of the two platforms.

TikTok Business Model

tiktok-business-model
TikTok is a creative Chinese social media platform driven by short-form video content enabling users to interact and generate content at scale. TikTok primarily makes money through advertising, generating $4.6 billion in advertising revenues in 2021, thus making it among the most popular attention-based business models or attention merchants.

YouTube Business Model

how-does-youtube-make-money
YouTube was acquired for almost $1.7 billion in 2006 by Google. It makes money through advertising and subscription revenues. YouTube advertising network is part of Google Ads, generating more than $28B in revenue by 2021. YouTube also makes money with its paid memberships and premium content.

LinkedIn Business Model

microsoft-business-model
Microsoft has a diversified business model, spanning from Office to gaming (with Xbox), LinkedIn, search (with Bing), and enterprise services (with GitHub). In 2021, Microsoft made over $168 billion in revenues, of which over $52 billion came from Server products and cloud services, and $39.8 billion came from Office products and cloud services. Windows generated over $23 billion, Gaming generated over $15 billion, LinkedIn over $10 billion, and search advertising (through Bing) over $8.5 billion. 

Amazon Business Model

amazon-business-model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services,  Amazon AWS, Subscription Services, Advertising revenues, and Physical Stores.

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