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 goes, Evan 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:

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:

Promoted Tweets revenue stream

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 revenue stream

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

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.

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:

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 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:

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.

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