How does Twitter make money?

Steven Loeb · November 16, 2013 · Short URL: https://vator.tv/n/333e

Twitter basically has one single source of revenue, advertising with 70% coming from mobile

With Twitter finally going public, we finally got the answer to the question that people had been asking for years: how much does this company make?

Turns out, not as much as you'd think. In fact, the company is still operating at a loss.

Twitter saw rapid revenue growth from 2011 to 2012, jumping 198% to $316.9 million. And its net loss decreased by 38% to $79.4 million. But while revenue in the first six months of 2013 also rose, going up 107% to $253.6 million, so did the company's net loss, rising 41% to $69.3 million.

In the last quarter, ending September 30, 2013, Twitter took in $168.6 million, but, due to expenses, its net loss now stands at $64.6 million.

So where does Twitter get its money? And where is it all going? Let's take a deeper dive.

The money coming in

Twitter makes its money from two key areas. And you can probably guess what they are.

One, of course, is advertising. The other is from data licensing.

When it comes to which area reigns supreme, there is no contest. In the third quarter, advertising counted for $153.4 million. Out of $168.6 million. That is an astounding 91% of revenue. Talk about putting all of your eggs in one basket!

And that number is rising quickly. In the second quarter of the year it had roughly $121 million from advertising, for an increase of around 27%

Twitter has three types of ads that it makes money from: Promoted Tweets, Promoted Accounts and Promoted Trends. Over 70% of its advertising revenue in the quarter came from mobile.

Twitter seems to be taking a big risk by taking nearly all of its money from one source, which it acknowledged in its S-1 filing with the Securities and Exchange Commission before its IPO.

"We generate substantially all of our advertising revenue through the sale of our three Promoted Products: Promoted Tweets, Promoted Accounts and Promoted Trends. As is common in the industry, our advertisers do not have long-term advertising commitments with us," the company wrote.

"In addition, many of our advertisers purchase our advertising services through one of several large advertising agency holding companies. Advertising agencies and potential new advertisers may view our Promoted Products as experimental and unproven, and we may need to devote additional time and resources to educate them about our products and services."

Translation: this could all fall apart very quickly. And yet Twitter also says that it expects even more of its revenue to come from advertising soon.

The other money maker for Twitter is data licensing. You know, the times that they basically sell you to advertisers (please do not act like you are shocked that they do this at this point).

Twitter took in $15.1 million from its firehose, or 9% of revenue. That is actually a 17% dip from the second quarter, when it took in $18.3 million.

In the first nine months of 2013, the company's top five data partners accounted for approximately 73% of its data licensing revenue, and approximately 8% of total revenue in the period. 

Twitter says that it expect that data licensing revenue will actually decrease as a percentage its total revenue over time. Honestly, though, how much lower could it go? And what will replace it? More advertising revenue?

The money going out

So with all that money coming in, where is it going exactly?

The biggest expense for Twitter is research and development, which accounts for $87.3 million of the company's $232 million expenses.

Research and development expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation, for Twitter's engineers and other employees. As the company plans to hire more engineers, and as stock-based compensations come due, R&D expenses are expected to continue rising. 

Another big expense is cost of revenue, which accounts for $62.2 million. This is the cost of running Twitter's data centers and facilities.

The company also spent $61.2 million last quarter on sales and marketing, which Twitter's says it will see an increase in as it intends to "to continue to invest in sales and marketing to expand internationally, grow our advertiser base and increase our brand awareness."

The final $21.2 million is just general and administrative costs.

A recipe for disaster?

So Twitter has more money going out than going in, and it plans to actually start spending more on both research and development and marketing. Yet, it basically only has one revenue stream and that is one that is out of Twitter's control.

I know that social networks are overly reliant on advertising revenue, but Twitter barely seems to have any other way to make money. If user numbers start to plateau, or trail off a little, advertisers could easily get scared and run away. 

Twitter has put itself into an extremely vulnerable position.

(Image source: https://allinonehousewife.blogspot.com)

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What is Twitter?

Twitter is an online information network that allows anyone with an account to post 140 character messages, called tweets. It is free to sign up. Users then follow other accounts which they are interested in, and view the tweets of everyone they follow in their "timeline." Most Twitter accounts are public, where one does not need to approve a request to follow, or need to follow back. This makes Twitter a powerful "one to many" broadcast platform where individuals, companies or organizations can reach millions of followers with a single message. Twitter is accessible from Twitter.com, our mobile website, SMS, our mobile apps for iPhone, Android, Blackberry, our iPad application, or 3rd party clients built by outside developers using our API. Twitter accounts can also be private, where the owner must approve follower requests. 

Where did the idea for Twitter come from?

Twitter started as an internal project within the podcasting company Odeo. Jack Dorsey, and engineer, had long been interested in status updates. Jack developed the idea, along with Biz Stone, and the first prototype was built in two weeks in March 2006 and launched publicly in August of 2006. The service grew popular very quickly and it soon made sense for Twitter to move outside of Odea. In May 2007, Twitter Inc was founded.

How is Twitter built?

Our engineering team works with a web application framework called Ruby on Rails. We all work on Apple computers except for testing purposes. 

We built Twitter using Ruby on Rails because it allows us to work quickly and easily--our team likes to deploy features and changes multiple times per day. Rails provides skeleton code frameworks so we don't have to re-invent the wheel every time we want to add something simple like a sign in form or a picture upload feature.

How do you make money from Twitter?

There are a few ways that Twitter makes money. We have licensing deals in place with Google, Yahoo!, and Microsoft's Bing to give them access to the "firehose" - a stream of tweets so that they can more easily incorporate those tweets into their search results.

In Summer 2010, we launched our Promoted Tweets product. Promoted Tweets are a special kind of tweet which appear at the top of search results within Twitter.com, if a company has bid on that keyword. Unlike search results in search engines, Promoted Tweets are normal tweets from a business, so they are as interactive as any other tweet - you can @reply, favorite or retweet a Promoted Tweet. 

At the same time, we launched Promoted Trends, where companies can place a trend (clearly marked Promoted) within Twitter's Trending Topics. These are especially effective for upcoming launches, like a movie or album release.

Lastly, we started a Twitter account called @earlybird where we partner with other companies to provide users with a special, short-term deal. For example, we partnered with Virgin America for a special day of fares on Virginamerica.com that were only accessible through the link in the @earlybird tweet.

 

What's next for Twitter?

We continue to focus on building a product that provides value for users. 

We're building Twitter, Inc into a successful, revenue-generating company that attracts world-class talent with an inspiring culture and attitude towards doing business.

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