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What Is Twitter’s Problem? No, It’s Not the Product

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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!

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47 Responses to “What Is Twitter’s Problem? No, It’s Not the Product”

  1. pceasy

    I’m sure they’ll be ok. Twitter will figure it out and they’ll make tons of money doing so.

    Now for startups who think they’ll be as lucky as Twitter, good luck.

    • Subscription models are great. Is it too late for Twitter to implement one? If they do, how will it provide value? I know there’s a good sub model out there for them, however it’ll come by the way of a third party. I don’t think Twitter is capable of doing it themselves unless they carve out a serious group within the company to focus on it. Do you think that’s likely?

  2. Twitter turned a profit in 2009. The Data pipeline not free, Google and the growing number of Social Media Monitoring tools are paying to access this data. They get paid by brands, brands get paid by consumers. Oh Capitalism we love you… indirect costs. As with any variable cost structure growth will push a company into a new cost zone. Twitter has been forced to find additional Monetization lines (rather successfully), the product will be fine… people will get over their complaints. Twitter is not going to get “myspaced” because there is too much invested into this network counting both innovation and followers.

  3. I’m a big fan of Osterwalder’s Business Model Generation. Every entrepreneur should read this book.

    I think it’s a little hasty to say that Twitter didn’t think about how they would generate revenue. It’s probably fair to say they were more concentrated on product and scaling but could you blame them given the tear they’ve been on?

    In general, I do think that some of today’s highly-covered startups needs to put revenue into the DNA/model of their business. It doesn’t bode well that Twitter shut this off right away. Perhaps this is one of those situations where they shouldn’t have listened to the greater audience, bit the bullet and see if the criticism dies down.

    Lastly, one probably didn’t need to read Osterwalder’s book or even go through a complex analysis to see the problem here. It’s a simple question: How do they make money? If it’s not ads, then their options, at least for a tremendous return, are much fewer.

  4. Mr. Bee

    Interesting angle, and quite correct. However I wish people would think of the alternative once in a while, which is not monetising the product at all.

    Why do we always assume that “popular-product=megabucks”? What’s wrong with Twitter just being a service that is paid for by the sales of the clients (entirely possible economically speaking), and that’s it? There is tons of money being made in the Twitter client field, but instead of capturing that, they give away the client for free and then are forced to find ways to milk the clientele for cash.

    The unspoken and mostly unexamined assumption that they have to “find a way to make money,” seems faulty to me. Providing the world with a service and merely breaking even is also an option.

    • inthewoods

      Yes, that is an option, if you don’t take millions in VC money. At that point, that really isn’t an option. And without the VC money, Twitter would have been unlikely, in my opinion, to have been able to scale.

  5. Erik Schwartz

    I would be surprised if the app store adds much to Apple’s bottom line. The expenses are not trivial. Every release of every app needs to be manually reviewed (including releases that fail). Most apps are quite cheap.

    Now apportion some percentage of the iOS marketing budget to the app store and I bet your net margins are near 0%

  6. inthewoods

    I think their business strategy, at the end of the day, is for Google to buy them to make up for their lack of social, and compete against Facebook.

  7. I think the main thing Twitter is lacking is the realisation that users might actually *want to pay* for the service. It’s like a brain virus these companies have, thinking that trading money for service is some kind of taboo, so therefore we all have to put up with a compromised experience.

    Twitter doesn’t even charge for its clients, or offer a premium version. That’s just an inexcusable lack of trying in my book. This page talks about “business model innovation”, but here the innovation would actually just attempting to sell something in the first place.

    • Why are new, young tech companies seemingly so averse to the generation of rigorous strategic planning (short and long-term) and development of comprehensive business plans? In most cases, without a solid strategy (which can always be adjusted), tactics that result in revenue are often a proposition in time-limited luck. I posted the following comment yesterday in response to an article about Twitter’s recent push of trending topics ( which also seems to have some relevancy here:

      Twitter has evolved to be like a free shuttle to take people to shopping destinations for discounts and deals, to news/political links for real-time and reference information, and to socially relevant content. With all due respect to the people who work at Twitter and likely do lots of hard work there, it seems Twitter has become a pro bono middleman to: 1) help channel its users toward fulfillment of some knowledge and/or engagement goal and 2) provide a lucrative platform for businesses to engage with customers, make money, and foster goodwill for themselves. Realizing that Twitter has hired a “President of Revenue” and is beefing up a sales force (???), until the company comes up with a viable revenue model (which, to be fair, they’re likely working on), that organizational title simply comes off as sounding grandiose and like they’ve hired and upgraded a “Mayor of Something” on Foursquare. I’m certainly not trying to bash Twitter, as it has turned out to be a vitally important service for those who use it. It’s just that approximately 20 million people (according to the data presented in this article) are currently drinking free milk because they don’t have to buy the cow. Ironically, I just read a WSJ article this morning about how advertisers are paying big bucks through for celebrity product endorsements on Twitter. Is Twitter even getting paid for providing the advertising vehicle? Twitter has a tough task when it comes to monetization since people and many businesses are already used to a free service and also because consumers simply don’t like the annoyance and interference of having products and ads pushed at them via an internet platform.

      • inthewoods

        I love the free shuttle analogy there. I’ve often wondered if Twitter will be Java was for Sun – namely that everyone BUT Sun was able to make money off of Java.

  8. Beyond the phenomenon that is Twitter, the world’s ultimate social communication utility… watching Twitter’s business model ideas unfold is one of the most exciting business stories happening today. It must be equaling maddening and exciting to be in their situation.

    Perhaps, Twitter’s hire of Adam Bain, president of monetization will bring out the creative thinking necessary to make a real business out of the giant micro messaging service.

    What do think is the worst that could ever happen to Twitter, by the way? Other than being bought by Yahoo.

    • I think they need to finally get to the bottom of the business model problem. If they don’t, they will keep alienating their ecosystem which in turn would cause more long term problems for them.

      I have to say, the developer attention is the crucial difference between the success and failure of platforms.

  9. inthewoods

    One small comment – the business model innovation for Google was created at Overture (aka Goto). And while Google did take it to the next level, they did have to license the patents – thus showing that the innovation came from outside the company.

  10. Nice post, Om. It’s right on. Two quick thoughts:

    First, on the question of Twitter itself – yes, the tweet stream outside accounts for 75% of total tweet volume, but even using last January’s numbers, that still leaves 300 million tweets a month coming through the UI, which is the company’s canvas to paint. They have really valuable data on my interests that are real-time, which makes them extremely valuable from an advertisers perspective. Also, there is a definite tiering of Twitter users in terms of service usage, which, like flickr might be used to build a “professional” account. Some thinking on this tiering, and the overall Twitter service here:

    Second, and this is the more controversial thing to say on post about business models, but sometimes I wonder if we as a society need a better way of thinking about how we fund socially valuable services like Twitter. There is no question that it, like Wikipedia, is a critical information infrastructure. It’s helped topple tyrants and helps me track the Charlie Sheen spiral. Users complain about this and that, but my guess is that there is a great deal of love for this company out there and that in the back of people’s minds, we’re all concerned about its ongoing financial health and the long-term viability of the service. It would be an amazing thing to see the company open up a discussion with this huge community on the best way to ensure its continued sustainability. Whatever path to remuneration Twitter pursues, it will no doubt have impact on this community. Better to engage them directly in it to hep ensure their buy-in in advance. The Japanese call this Nema-washi, or root-binding (i.e. what you do to a tree’s root system before you move the tree). Having that kind of discussion would be a radical departure from the norm, but Twitter is itself a different creature.

    • The thing with Wikipedia is that the company DNA is completely different. From day one, Wikipedia was about providing a free and open service to provide information to anyone.

      Twitter is a more for-profit model. If they weren’t, then they could be accomplishing the same things with 1/10th the staff (but at a much slower rate). They also wouldn’t have garnished the valuations and as much VC money as they did.

      I don’t see a problem here. Someone can build an open-source Twitter (in fact, I’m sure there are many out there). Twitter’s value isn’t so much about technology as it is market penetration.

  11. Great thoughts, I had been trying to put words around this same concept for some time now.

    The biggest issue, in my opinion, is the fact that advertising is thought of just as something slapped on at the end. If you make it a core part of your product in a creative way, it’s simply a way of a seller conveying information to a buyer – and you can still do that in a sexy way.

    I’ve blogged about how these “media models” can be very effective, if anyone is interested:

  12. 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?

  13. Alexander Horre

    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.

  14. 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.

  15. 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” …

  16. 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.

    • 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.

  17. 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. :)

    • Kartik

      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.

  18. evster88

    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.