New York - Twitter’s operating costs are growing faster than its revenue. To understand why, consider how the microblogging service deals with would-be partners.
More than four years after Twitter touted the importance of opening its doors for programmers to build businesses to complement its short-messaging site, start-ups are finding themselves shut out. The San Francisco-based company has restricted outside applications in its drive to shore up control of advertising sales on the site.
On the eve of the biggest US technology initial public offering (IPO) since Facebook, Twitter must instead rely on its own talent for a continuous stream of innovative products, contributing to surging expenses. Even as business booms, with brands seeking to reach its 230 million users, Twitter has to spend faster than its revenue growth to keep up.
“They will never let a business become huge on their platform,” said Nihal Mehta, a venture capitalist and co-founder of LocalResponse, a New York-based online ad company that buys Twitter data. “If someone is generating a ton of revenue on their platform, they’re going to want to do it themselves.”
Twitter ploughed $87.3 million (R857m) – more than half its revenue – into research and development (R&D) in the third quarter, mostly tied to hiring. R&D costs soared 170 percent from a year earlier, while sales jumped 105 percent.
Similar to how developers build programs that run on Windows or Mac computers, an app would tap into Twitter’s data and network of users to provide complementary services – say, a compilation of messages from a selected group. The app provider could make money off Twitter’s platform by selling ads that accompany its services.
Unlike Facebook, Google and Apple before it, Twitter faces a trickier conundrum in its relationship with developers. All profess to be platforms. The word shows up 260 times in Twitter’s IPO prospectus. Even so, the other companies have success stories, be it Facebook spawning Zynga or the thousands of games and apps on Apple’s iOS and Google’s Android.
Attracting outside developers is one way Facebook, Google and Apple kept R&D costs down. Facebook spent 19 percent of sales on R&D in the latest quarter and 14 percent in the last period before its May 2012 IPO. Google spends about 14 percent and Apple 3.3 percent.
Jim Prosser, a spokesman for Twitter, declined to comment.
Twitter, which embarked on its roadshow to investors yesterday, has not always had a platform that is more or less shut. In July 2009, co-founder Biz Stone posted: “We very much believe in nourishing and supporting” an ecosystem.
New York start-ups hosted an event in January 2009 called “Built on Twitter” for companies aspiring to create businesses on the service.
Joe Fernandez, the chief executive officer of Klout, was one of the presenters. In front of about 700 techies, he tried to stoke excitement for his product, which was designed to measure influence on the social web by analysing a person’s Twitter network.
Sharing the stage that night were founders of TwiTerra, CoTweet, StockTwits and even Botanicalls, an application that lets plants publish tweets when they need water.
“There was this hyper-intense interest in Twitter as a platform,” said Fernandez, who the next year moved Klout into the same building. “I was obsessed with it.”
Companies like Klout and LocalResponse pay for Twitter’s data by going through Gnip and DataSift, which are among the few companies with access to the site’s so-called firehose, or the entire bulk of postings. DataSift and Gnip pay Twitter for licences, a business that accounted for 9 percent of the short-messaging service’s third-quarter revenue.
That is one area where outsiders can make money on Twitter. The company is also investing in a feature called Twitter cards, designed to let publishers and developers customise how their content shows up on the site.
As far as ad dollars flowing through its system, Twitter isn’t sharing. In mid-2010, it turned off the ability for other companies to put ads within tweet streams on their sites. Start-ups that had emerged to broker paid tweets have had to find new ways to make money, while others like Magpie were acquired.
In 2011, Twitter also cracked down on services that allowed users to access Twitter in different ways, like an online dashboard or a separate mobile site. The move helped shut down a popular service called UberTwitter. TweetDeck, one of the biggest Twitter client programs, which lets people use the microblogging service via another program, was bought by Twitter in May 2011 for about $20m.
Twitter chief executive Dick Costolo told the Wall Street Journal last year that the platform wanted to go from a place where companies “build off Twitter to a world where people build into Twitter”. Co-founder Stone left in 2011.
HootSuite, which competed with UberTwitter and TweetDeck, survived the changes and has grown by expanding into all major social networks and developing software for businesses to create and monitor ad campaigns across them.
In August, the Vancouver-based social media dashboard raised $165m from venture capital firms, including Accel Partners and Insight Venture Partners. It’s customers include PepsiCo and Sony Music, and the company was helping Twitter by getting more brands to spend ad dollars there, said Gregory Gunn, vice-president of business development. “You have to make sure you’re putting money in their pocket and understand what is of value to them.”
Unlike Facebook, Twitter’s ability to help brands target customers was limited because users were not providing extensive profiles on their likes and preferences, said Charlene Li, an analyst at Altimeter Group. “Twitter doesn’t know much about its users. It needs to keep everything flowing through its system because of that lack of information.” – Bloomberg