how-does-twitter-make-money

How Does Twitter Make Money? Twitter Business Model Analysis 2022

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 took 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 was feeling the pressures of other giants at the time (Apple) were also 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 out.  

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 use initially 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, 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 in multiple messages, which would only make the phone bill go up.

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 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 growing very quickly, 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 to the point that celebrities like Ashton Kutcher, Britney Spears, Ellen DeGeneres, Barack Obama, and Oprah Winfrey all 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 really profitable only by 2017-18.

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

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,” appear within a user’s timeline, search results, or profile pages just like an ordinary Tweet regardless of device, whether it be 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 that is 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 on a global basis. 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

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.

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 growing very quickly, and Pinterest.

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

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

To keep the whole infrastructure and company evolving over time, Twitter also spends money on product development, engineering, and research. 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 a publisher?

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

twitter-fact-checking

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

Companies like Facebook and Twitter for years 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 gave them wide space to let their platforms develop freely.

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

A new chapter: Elon Musk taking over Twitter

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

Let’s review the timeline.

Musk placed, out of the blue, a bet to take over the whole company. 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 the Twitter’s board, as per SEC Filings, Musk had sent a message to Bret Taylor, Chairman of the 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 the 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 had 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 did Elon Musk secure the funding to purchase the company?

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

Where is Twitter going under Elon Musk

Below are some of the things Musk announced he would do:

  • 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 every day worse, 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 to do it, is the fact 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. 

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