Valued at $10b, going public: how does Twitter make money?
As long expected, Twitter is going public. It almost goes without saying that the social network broke the news on Twitter. Its announcement was just five characters under the microblogging site's 140-character limit.
The initial public offering (IPO) is expected to be the tech world's largest since Facebook went public in May 2012. Analysts valued Twitter at $US10 billion earlier this year, and it may be worth a little more than that today. The fact that it is filing confidentially implies that its annual revenue has not yet reached $US1 billion.
Following the lead of Facebook and other internet companies whose fortunes depend on an enormous user base, Twitter has been cautious about turning its service into a money-maker so far, with ads few and far between on the site. So, how does it make money, and why might it be worth so much?
Like Facebook, Twitter makes its money primarily by selling ads, which gain a lot of their value from the advertiser's ability to target specific groups of users. Twitter's disadvantage relative to Facebook is scale: It has 200 million users, while Facebook has 1.15 billion.
But its advantage lies in timeliness and topicality. People check Facebook casually, when time allows. Twitter users tend to use Twitter quite actively, and in conjunction with specific events, like TV shows, rallies, concerts and breaking news. So advertisers can craft ads tailored not only to a Twitter user's general tastes and demographic profile, but to what that user is doing at the very moment they see the ad.
The fact that the company broke its own IPO news via Twitter - and saw the news retweeted by thousands of people within minutes - underscores the company's growing role as a global source of breaking news and instant analysis. It is in some ways the CNN of the internet - the key difference being that it costs CNN an awful lot of money to produce its content, whereas Twitter gets it all free from users.
A disproportionate share of those users are, in fact, paid journalists for other companies, including CNN. They use the platform enthusiastically as a way to build their personal brands and draw readers to their own sites.
Equally important to its business prospects in the near term is Twitter's role as a "second screen" that people check while watching TV. That gives advertisers a chance to play off a program that they know millions of people are watching, as Oreo did during this year's US Super Bowl.
Meanwhile, Twitter has bought two start-ups in the past year that analyse social-network activity related to TV programming, raising the possibility that Twitter could raise extra revenue by providing finely grained audience data to TV advertisers. In May it launched a feature that lets TV advertisers target Twitter users who have just watched their advertisements. That gives advertisers a clear path from showing an ad on TV to getting potential customers onto their website - or even selling them a product directly through Twitter.
Finally, Twitter is poised to be a big player in mobile advertising. Just days ago it spent a reported $US350 million to buy MoPub, the world's largest mobile ad exchange, which allows advertisers to target users on their mobile devices.