The New Reality of the Twitter Ecosystem

In the last two months, a controversy has broken out between the startup of the moment, Twitter, and its ecosystem. Some of its actions — such as acquiring Tweetie (a mobile client that has since been rebranded as Twitter for the iPhone), coupled with its recent decision to impose limitations on companies building ad-related businesses on Twitter — have thrown everyone into a tizzy.

Dozens of tiny startups that formed specifically to leverage the Twitter platform are now wondering if they’ll be able to get anyone to fund their dreams. Chris Dixon, a New York-based angel investor and founder of VC fund Founder Collective, has been among the most outspoken about Twitter’s actions. “Twitter is like a drunk guy with an uzi killing partners left and right,” he recently tweeted. “Expect investment in ecosystem to drop significantly.”

“A bunch of investors have told me recently there is no way they’d invest in Twitter ecosystem now,” he later added. To which Twitter COO Dick Costolo responded by saying, “I’m hearing *precisely* the opposite. Fortunately, time will soon tell which of us is getting bad information.”

Hot or Not?

Upon seeing this exchange, I emailed a dozen top investors — angels, super angels and early-stage venture capital investors — to get their take. Understandably, they agreed to respond on the condition that they remain anonymous. Interestingly, their perspectives all fell somewhere between Costolo’s and that of Dixon.

Many of them, who had themselves invested in Twitter-related startups, said they were stepping back from the Twitter ecosystem, even if only momentarily. They said that while they understood some of the onetime shifts that Twitter has made, and the necessity for the company to make money, its recent moves had given them reason to pause.

Most said they were no longer interested in talking to pure-play Twitter startups. (Fred Wilson, an investor in Twitter itself, made clear in one of his recent blog posts that you can’t just develop stop-gap products for the company’s service because Twitter will end up filling those holes.) However, there is still interest in startups that are using Twitter as a broad distribution platform and as part of an overall growth strategy.

Here are some of their other comments:

* There may well be opportunities in the current Twitter ecosystem, but investors will need to be even more vigilant about filtering deals.

* Twitter is a small company that can’t do much on its own, so there’s still room for developers.

* Twitter doesn’t have much of a business ecosystem to support venture returns (in the near term.)

* Twitter is more of a broad distribution platform for customer acquisition than an investment platform.

* One needs to wait until Twitter becomes profitable before investing in its ecosystem since that’s the point at which the company will likely embrace it.

The House Always Wins

I’ve remained fairly ambivalent through this whole controversy — mostly because the gray in my hair tells me that the economic interests of platform owners and the people who develop for them are almost never in sync. So from my perspective, those who invest in single-platform companies deserve their fate. I was equally hard on those that focused their investments solely on the Facebook platform, too.

Whether it’s Google, Apple, Intel, Microsoft or even Sony (Playstation), platform owners almost always end up going home with 60-70 percent of the total profits. From that perspective, what Twitter is doing isn’t so out of step — even though Twitter and its ecosystem are nowhere close to being a profit machine.

Historically, developers have had much less control over their destiny than platform owners. Take Facebook. It’s played the developer community like a fiddle with its recent actions (and ad-hoc changes). And platform owners always play favorites. eBay picked PayPal, Intel had Dell, Facebook chose Zynga — that’s just how the dice rolls.

When 140 Characters Aren’t Enough

If there’s one criticism I have about Twitter, it’s that it’s failed to be clear in its communications with the developer community. The company doesn’t have a business ecosystem yet, so until it does, it needs to nurture its developer ecosystem. In particular, it needs a way to encourage developers to embed Twitter into their products.

In order to do so, Twitter needs to acknowledge that it’s not a media company and instead see itself as the activity stream for the web, one that is inherently open, portable and malleable. Its uniqueness lies in its ability to become the messaging bus for the new, almost real-time Internet.

If it can do that, then it will be able to take on Facebook in a far more meaningful manner than it is currently. Facebook is working hard to spread its social tentacles across the web — the only way Twitter can counter that effort is by using the best weapons in its arsenal, namely a healthy and happy developer ecosystem.

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