Twitter's Ad Plan Draws Cheers - And Jeers

When Twitter Inc. raised its first round of funding in early 2007, shortly after being spun out of Obvious Corp., it let the world know in typical fashion--with a spare message of less than 140 characters posted on a co-founder's Twitter page.

More than three years later, and with more than $100 million in investment from a slate of high-profile backers that includes Amazon.com Inc. (AMZN) CEO Jeff Bezos, Twitter has informed the world that it has figured out a way to make real money.

On Tuesday, Twitter announced a plan to begin allowing advertisers into its users' streams of messages, or tweets, as they are commonly known.

The move is drawing a lot of attention, despite the fact that Twitter already had at least one business model in place. It's also eliciting questions about why the company has taken so long, though its pace in forming an ambitious means to make money isn't so different from that of other high-profile start-ups in the past.

Twitter currently draws some revenue from licensing partnerships with the likes of Google Inc. (GOOG), Microsoft Corp. (MSFT) and Yahoo Inc. (YHOO) Under the terms of those deals, tweets appear in each company's respective Internet search results.

However, since its early days, the real perceived potential for Twitter has been as a marketing machine, capable of tapping the unceasing flow of users' posts to target relevant advertising.

On Tuesday, Twitter co-founder Biz Stone wrote on a company blog that the company's new "Promoted Tweets" program will now enable marketers to key on searches made on Twitter, and prominently insert their own messages in the back-and-forth between users. Initial advertisers in the program include Starbucks Corp. (SBUX) and Best Buy Inc. (BBY)

 
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Forrester Research analyst Augie Ray said that while Twitter has developed ways of making money in the past, the new advertising model presents the first real potential for serious financial growth.

"The reason for making a big deal of it is that this is an opportunity to produce revenue that can scale as Twitter scales," Ray said.

Twitter's Stone acknowledged that the company's "Stubborn insistence on a slow and thoughtful approach to monetization...has frustrated some Twitter watchers."

Early backer Fred Wilson, a venture capitalist at Union Square Ventures, wrote on his own blog recently that Twitter "is only now" starting to do the important work of measuring data from tweets posted on external Web pages and applications. And the company hired a chief financial officer just two months ago.

Meanwhile, Twitter's number of monthly visitors in the U.S. has spiked to over 20 million per month, according to comScore data.

But Twitter's pace in forming a concrete business plan to match its growth isn't so dissimilar to that of high-profile predecessors, such as Google.

"When Google was founded, they didn't have a clue about how to make money," said Bill Burnham, a former venture capitalist and Wall Street analyst who has been running a hedge fund called Inductive Capital since 2006. Burnham noted that it was about two years after Google took its first funding and set up shop that it launched its AdWords search advertising program.

"Google is probably the best analogue" to Twitter, Burnham said, "you launch with no idea how to make money, and then grow and figure it out."

 
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YouTube also presents some parallels, as a company that fostered explosive growth while avoiding implementing a significant revenue model.

Google, which acquired YouTube in 2006, not long after the company was founded, has not disclosed whether the video service has yet become profitable.

Forrester's Ray concurred that Twitter's pace in developing a business model isn't so different from that of its peers. Ray added that Twitter will also likely augment its new advertising model with other services yet to be announced.

Twitter is hosting a developer conference in San Francisco starting Wednesday, and Ray suspects the company may discuss additional "business services," including tools for managing interactions with Twitter users on advertisers' accounts.

The move sparked a mix of reactions from Twitter's own user base. A scan of tweets on the subject revealed some who applauded the plan as a way to generate financial stability for the company, and others who expressed concern that Twitter would be making money off content created by its users.

"I still think Twitter isn't taking Promoted Tweets far enough," tweeted one user, who thought the company should insert ads more frequently than its current plans call for.

"People accept Google search ads. Why shouldn't they accept Twitter search ads (Promoted Tweets)? Let's move on," wrote another.

Others worried that the move could generate more forms of spam. "More porn and scams," wrote one user. "We'll see tweets from people we don't follow and don't wanna follow."