Twitter’s new business model
Twitter recently announced a significant change to their business model by introducing advertising on the site. Does this constitute a business model change? Yes! Twitter’s current business model has no revenue. Twitter’s new business model bets hat they have established enough consumer loyalty to interrupt users with advertising.
This may be risky for Twitter. Recent web failures like MySpace proved that web users can be fickle. We may be in the age of Web 2.0; however there is a seedy underbelly to Web 2.0. Specifically:
- Traffic ≠ profit. Worse yet, traffic costs money. Take Google’s struggle to make Youtube stop losing over $300 million per year. Traffic eats resources. Traffic must serve a desired result other than charitable web content.
- Web loyalty is not the same as typical product loyalty (e.g. MySpace). People use Crest toothpaste their entire lives but switch websites in weeks.
- Easy in, easy out. It’s difficult to erect a barrier of exit for a free product. There is a significant chasm between free and nominal charges (e.g. Facebook). Back in the old days of tangible products, there was a saying, “Cheap things aren’t good and good things aren’t free.” Many people still feel that way. It’s rooted in human psychology. It would make for an interesting psychology experiment. First, we give the product away, creating the impression that it can’t be sold and it’s “cheap.” Then we try to upsell the “cheap” product into a paid product. Instead of paying, many web users matriculate to an alternative free offering.
Twitter also faces additional challenges to its business model:
- Traffic is leveling off
- Is it just a fad? Think Bebo, MySpace, WebVan, AOL, etc.
- At what point to people get information overload and unplug from the barrage of jibber-jabber
- Will an advertising strategy work for a broad range of advertisers? Google Adwords works well for both B2C and B2B. Would an industrial supply company ever advertise on Twitter? I doubt it.
- Can Twitter geographically target or will it only work for national consumer brands? If so, the revenue model will be adversely affected due to the limited number of advertisers available.
In spite of these potential issues, I believe Twitter can effectively pull off this business model change. Twitter has a strong place in their market niche. Effectively, Twitter has no real competition. Twitter has embraced add-on software to raise switching costs should a competitor appear. As long as Twitter’s ads are not excessively disruptive, users should accept them as they have on Facebook and Google.
