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Summary:

At Twitter and many other startups, most entrepreneurial energies and decisions are seen through one lens: product (and product functionality). But truly successful companies marry a smart product with an innovative business model.

twitter-failwhale

With increasing regularity, Twitter — the San Francisco-based micro-messaging company — finds itself in conflict with its ecosystem. Last year, its decision to buy Twitter clients only resulted in fraying its bonds with its ecosystem. Earlier this year, it made it very clear to Bill Gross that his plans to monetize Twitter-streams (even indirectly) are not welcome.

And last week it faced a rebellion of sorts from users of the Twitter client on the iPhone who hated the new Quick Bar. The Quick Bar shows hot trends on Twitter, but more importantly, it’s a way to surface advertising and promotional messages to Twitter’s growing number of mobile customers.

These actions have inspired many blog posts, arguments and theories, but in the end, the question that remains unanswered is: What is Twitter’s problem?

The answer to that question came to me earlier today, when I was reviewing notes from my conversation with Alex Osterwalder, who co-authored the best-selling book, Business Model Generation. Unlike fellow startup gurus such as Steve Blank and Eric Ries, Osterwalder has somewhat of a low profile.

Money, Money, Money

The Swiss author pointed out that the biggest problem is that these days, most entrepreneurial decisions are seen through one lens: product (and product functionality).

“There is a very pervasive product-centric thinking,” he said. “There needs to be more of a business-model-centric approach.” Osterwalder isn’t saying that you shouldn’t have a product or obsess about making it awesome. What he is saying is that as a startup, it behooves you to be aware of business model options, even if the answers aren’t obvious right away.

Good point! Now apply that to Twitter: having followed the company for a long time, I do know that “business model” is a relatively new concept at the company. Had it been aware of its options from the early days, it would have imposed some limitations on its decisions.

For instance, “no advertising inside the Twitter stream” should have been spelled out loud and clear. If Twitter at some point thought of itself as a media network, then its business model option would have included controlling the front end(s) to the service. Instead, it didn’t do any of those things. One logical explanation is that the service itself was evolving as it went along.

Twitter isn’t alone in this dilemma. I have seen many startups that have focused on developing awesome products but spend little or no energy on thinking through their business models. It is understandable. The features and product evolution are the fun part of the startup, and thinking about possible ways to make money can be soul numbing.

Xerox Me a Biz Model

The problem is that you have to think about it. No matter how great your product or your technology is, unless someone is willing to pay for it (directly or indirectly), there aren’t going to be that many users. In fact, the business model innovation is what turns great products into fearsome companies.

Xerox is a good example. It started life as The Haloid Company, a photo paper maker that was on the rocks when it managed to find its way to photocopier-related technologies and patents. They made a photocopier machine and according to their estimates, they had to sell it for about $4,000 a pop — not an easy task in the 1950s.

So what did they do? Instead of selling the machine, the Haloid people figured it would be easier to give away the machine and charge people for what the machine churned out — photocopies. At five cents per copy, no one was going to object to getting that machine installed in an office. Sure the technology was great, but in the end the business model innovation made it a success.

Xerox reminds me of ARM Holdings, which is a chip company. I have been a big fan of the company for nearly a decade. It was pretty obvious that what they had in their arsenal was pretty amazing: the technology to develop powerful, yet low-power chips.

Around 2005 to 2006, it was clear that as the world was going to have more connected devices, it would need more low-power chips for what experts then called distributed computing. Like Intel, ARM could have made chips and basically found itself in manufacturing hell.

Instead, it chose to license its technology to any and all comers. Today, companies from Samsung to Qualcomm use ARM’s core technology and pay it royalty fees. Thanks to that business model innovation, the company is now looking at a future where its long-term nemesis, Intel Corp., might end up getting relegated to the sidelines of the mobile revolution. ARM, incidentally, is one of the hottest stocks on NASDAQ.

The App-y Apple

Just like Apple.

Most of us believe that iPhone is the rocket ship that is making the company billions. But in reality, it is the app store — a business model innovation — that is giving the company its edge. It can get a cut off the digital goods revenues (publishers be damned). It brings in the apps and it brings in the app developers. That in turn helps make the flywheel turn and push the sales of iPhones, iPods and iPads.

The same goes for Google. Search existed before Google, but it turned it into an awesome product, which was then married to an innovative business model — contextual advertising — and in the process became a $200 billion-in-market-cap giant.

Spotify is another good example of a business model innovation posing as a product. No doubt it is an amazing product. However it is the affordable monthly subscription model that makes Spotify a company worth its billion-dollar valuation. The company hit a million paying subscribers earlier this month.

Twitter’s Troubles Not Over?

During our conversation, Osterwalder pointed out that all new companies (and product groups) should think as long and hard about the business model innovations — ways to make money if you may — as they do about the product, features and user experience.

In the end, that business model ends up defining how companies get built over a long period of time. It is also a good way to avoid the problems of tomorrow. From the way I see it, Twitter’s troubles are not going to be over till it settles on a business model and then starts to shape its identity and organization around that model. When that will happens is anyone’s guess!

Uh oh!

Something is wrong with your Wufoo shortcode. If you copy and paste it from the Wufoo Code Manager, you should be golden.

  1. Twitter’s main revenue stream should be data sales. Honestly, they have a real time hose for millions of peoples’ activities. That HAS to be worth something.

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  2. Great post. One thing I’d note with Google is that at first they did only focus ont he product, without consideration for a business model. They were one of the lucky ones, one in a zillion, that later stumbled upon an incredible business model.

    I think Twitter hoped they could do that too – focus on the product and getting a lot of users and then stumble upon a business model. They’re still stumbling. :)

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    1. Totally agree. It’s easy to say in retrospect that Google made it due to a good business model while forgetting that several of their business decisions/acquisitions lost money while on the way to being segment leaders.

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  3. Nice analysis, it seems Twitter seems to bumble along without any clear strategy.

    Another thing that bothers me about Twitter is their claim to focus on social responsibility yet they have held San Francisco hostage in that they threatened to leave SF unless they got big tax concessions. How do they square their “social responsibility” when they are working hard to remove resources from the community where they live and work? It adds up to bullshit PR. They shoud just f*ck the shut up about social responsibility – better be honest than hypocrites.

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    1. Social responsibility has very little to do with taxation, particularly when California’s tax rates in metropolitan areas are among the most onerous in the country. I’d rather Twitter felt responsible to its employees and investors, and there’s nothing socially irresponsible with trying to maximize after-tax profit. That’s more people who you can hire…or don’t have to fire.

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      1. If it’s profit, you’re not using it to pay anything or anyone (yet). Perhaps you meant after-tax revenue?

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  4. Entrepreneurs with a technical background get a lot of satisfaction in adding newer features .. and because of that business model / finances ends up taking a backseat ..
    “Dont let your creative satisfcation turn your startup into a science project” …

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  5. Twitter is more private than facebook, but has no personality. people on twitter don’t communicate like on facebook. twitter can boost their signature by going “wall street” , on line duel player arcade, and monopolize on line “price is right”. Possibly an e-bay type auctioning. What I like about twitter is you don’t have a million people popping up on your page every day.

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  6. Alexander Horre Tuesday, March 8, 2011

    The dickbar was fine in how it stat at the top. But the way it popped up over your tweets broke the UX. It was a big force to do that little step. I actually love the dickbar the the top when I want to look at it.

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  7. That’s great analysis. It touches about one of the open questions of the mobile platform wars. While Apple has won the most developer mindshare to date, it remains very possible, as your post suggests, that another platform play will crack the code for making developers more money than via the Apple approach (or Android for that matter).

    That’s would be some interesting business model innovation, right?

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  8. Ah me – was it just 2 short years ago that FreeConomics was IN, and Business models were OUT. We argued this was nuts at the time

    http://www.slideshare.net/Broadsight/broadsight-web-20-expo-presentation-presentation-682179?type=powerpoint

    Old wine, new Gurus :-)

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  9. Good to see you plugging the business model canvas from Alex Osterwalder. I guess it is more known in Europe than in the US. I am waiting for the iPad business model toolbox!

    Pim

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  10. Michele Clarke Wednesday, March 9, 2011

    Well said. Might be generous to call this one a product… fundamentally a technology. :)

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    1. Exactly. RSS for the masses.

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