What does it mean when hundreds of third party services (with questionable, if any, business models) are dependent upon a single service which itself has no business model? This guest post by Neal Wiser suggests that Twitter’s amazing growth and popularity are indicators that the company is at the center of an emerging Bubble and examines the risks and rewards that a bubble could present to the service.
Never before in human history have the words of so many been able to travel so far so quickly. Now, with the emergence of Micro-blogging and The Live Web, our ability to communicate and collaborate has, yet again, been significantly amplified. Indeed, it seems that everyday, as we drink our morning coffee, we hear about amazing new technologies, products and services that are developed, announced, released and gain massive loyal followings seemingly overnight.
While it took Twitter, the de facto leader among micro-blogging services, a little longer then that to reach its current level of popularity, few who use this and similar services can doubt that we are participating in the birth of a new, exciting and important communications channel. But does Twitter’s growing popularity and the evolution of the Twitterverse, the combined ecosystem of users, third party services and all things Twitter, foreshadow continued success or impending doom?
No Doom Here. Move Along
It’s hard to suggest that a company with less than thirty employees that just closed an additional funding round of $35 Million is at risk for anything, but the signs are there. Indeed, there are a combination of factors which, together, suggest that if it’s not careful, Twitter could succumb and be a victim of its own success.
So what could possibly suggest that Twitter is at risk? To answer this question, we must take a step back, far enough to see the totality of all that which is the Twitterverse, in order to get a good look at the big picture. It is, in fact, at that point when the ever increasing size of the big picture comes into view that one can see that Twitter is at the center of an enormous and ever inflating bubble.
What is a Bubble?
In economics, bubbles can generally be defined as asset prices that deviate significantly from intrinsic values. In other words, a bubble occurs when massive amounts of capital (or for our purposes, anything else of value) are invested into something of questionable, unproven or little value.
Remember when Alan Greenspan coined the phrase, ‘Irrational Exuberance?’ He was talking about bubbles. Indeed, bubbles seem to be appearing with greater frequency, so much so, that during the past fifteen years we have been witness to and participants in several bubbles including:
- The Dot Com Bubble (circa 1995-2001)
- Real Estate Bubble (circa 2006 – 2008)
- Oil Bubble (circa 2006 – 2008)
In fact, bubbles have become so prevalent that some people believe that bubbles are not only driving both the U.S.’s and much of the world’s economy, but that bubbles, and not products or services, are the main drivers of growth for a growing number of companies.
Why Bubble are Good
If you’re fortunate enough to be at the right place at the right time, and have the right skills, friends, etc., a bubble can be a truly great thing. We all benefit from bubbles in the following ways:
- Bubbles drive Innovation generating new technologies and processes
- Bubbles add value to existing products
- Bubbles put people to work in good jobs (if the enterprise is funded)
- Bubbles give people the opportunity to hone and develop new skills
One only need look at the already massive, yet still growing ecosystem of new products, features, enhancements and services as an example of how Twitter benefits from their own bubble. Together, all of the hundreds of third party products and services are adding tremendous value to Twitter by making the service both more useful and easier to use in a variety of ways. And this is all happening with barely any involvement from or risk to Twitter itself. The result is that Twitter gets free research and development and it directly benefits from the labor of hundreds, if not thousands, of hard working individuals who assume virtually all of the risk and ultimately make Twitter exponentially more valuable.
Why Bubbles are Bad
Of course, taking advantage of a bubble requires more then just good timing, a good idea or the sheer ability to execute. But even if all of these factors fall into place, one could still fail spectacularly because, like a soap bubble, the forces which hold bubbles together can be tenuous at best.
Unlike their physical counterparts, market-driven bubbles can appear, from the inside, robust and infinite. Unfortunately, as we all know, the reality is that bubbles can be unbelievably fragile and dangerously destructive. Indeed, for every positive effect, bubbles can have negatives effects as well, such as:
- Drive risky and irrational speculation by unqualified investors
- Cause prices to rise to unsustainable levels
- Expose companies and individuals to considerable and unnecessary risk
- Provide fertile ground for swindlers and other predators
Signs of Twitter’s Bubble
So, why do I believe that there’s a Twitter Bubble? Fortunately, the signs are numerous and plain to see; you just have to know what to look for. The following are just the most prominent.
- Astronomical growth
Twitter’s growth rate for the year 2008 reached 752% (). This may not seem impressive compared to Facebook which is currently adding a number equal to Twitter’s entire user base every two weeks, but for any service, this number is astounding.
- Twitter receives media coverage disproportionate to its number of users
Indeed, Twitter receives about half the media coverage as Facebook, yet only has a about 1/30th the number of users. In fact, so prevalent is the media’s fascination with Twitter that CNN incorporates the service into its broadcast. Even how people use Twitter makes news, such as a recent surgery and the fact that members of Congress were tweeting from the floor of the US House of Representatives during President Obama’s speech on February 24.
- The emergence of a massive and growing number of third-party services
As Twitter’s user base continues to grow, so have the number of associated third party services. Now numbering in the hundreds (Twitter Fan Wiki features over 350 alone) with more emerging every day, all are wholly dependent upon Twitter, yet few, if any (like Twitter itself) have any viable business models.Granted, many of these services are noble and selfless efforts by users who simply love Twitter and are merely trying to extend and enhance the core service. However, most of the rest are like the many companies making Facebook apps; almost none have viable business models either, except for (the hope) of being acquired.
- Overblown valuations
In the Fall of 2008, the news broke that Facebook offered to acquire Twitter for $500 million. The transaction, mostly Facebook stock which itself carries dubious value, was remarkable for a company with no revenue nor any plan on how to generate that revenue. The acquisition fell through, but, as previously mentioned, Twitter recently closed yet another funding round for an astounding $35 Million, giving the company an estimated valuation of $250 Million or approximately $73.00 per user.
- Third party applications and services are raising money and being acquired
In January of 2009, Tweetdeck raised approximately $500,000; a respectable sum considering the company has only a single employee. Additionally, rival Twhirl was acquired by Seesmic and Summize was bought by Twitter itself. Yet again, none of these companies have real business models.
- ‘Irrational Exuberance,’ indeed
While other third party endeavors will undoubtedly receive funding, a pair of recent events provides evidence that ‘irrational exuberance’ is starting to take hold of the Twitterverse.First, Twply, a startup that was developed, released, achieved ‘media darling’ status, became a pariah and was subsequently ’sold’ all in approximately 24 hours (admittedly, for a pittance, about $1,200, but not bad for a few days work).
Clearly, it’s not hard to see that things are starting to get out of hand. And while Twitter’s amazing growth is as enviable as it is impressive, if I were Twitter, I would be more then a little nervous. Although the $35 Million Twitter just raised (in addition to millions remaining from previous finding rounds) buys a lot of breathing room, Twitter is bound too closely to its third party providers just as they are bound to it.
Surely, Twitter could and most likely will acquire several of the more popular services which provide the most valuable enhancements to its core service. But, as Twitter makes these acquisitions, many new and exciting services will be developed as more people jump onto the band wagon hoping for a quick and profitable exit.
Consequently, these acquisitions will continue to inflate the bubble. In the near term, this will ultimately expand Twitter’s utility and usability, but as the world’s economy continues to contract, millions of people will suddenly find themselves with time to experiment and to use Twitter to help them find work.
Initially, this will be a good thing as Twitter and its third party service providers gain popularity and users, thus the bubble will continue to inflate driving additional investment and innovation. However, the costs of these services will likewise balloon as more and more bandwidth and server capacity will be required to maintain them. And this does not even address the ability for the services providers themselves to scale as they struggle to handle the flood of additional users.
Unfortunately, as the economy worsens, the vast majority of these service providers will find they are simply unable to cope. As their traffic increases, they will burn through what cash reserves they may have just to maintain their services, realize they had no practical plans to generate revenue (if they had any plans at all) and discover that new capital has dried up. Ultimately, they will no longer be able to pay their bills and they will be forced to shut down.
At this point, if enough services fail, Twitter will actually begin to lose value. Sure, some services may actually prosper as they pick up users shed by their less fortunate peers and perhaps even find their own financing, if anything is left. Or they may even be acquired by Twitter itself. But as Twitter’s value is derived from the entirety of the Twitterverse, even Twitter doesn’t have enough money to keep its entire extended family running.
While much of these events are probable, Twitter’s demise is by no means inevitable. Twitter should be working hard to shore up its infrastructure to support these services, perhaps by providing a ‘cloud’ service off of which the other services can continue to run. Additionally, Twitter could set up an incubator-style operation to support the more popular and promising services and provide the capital and technical expertise for them to stay alive.
Or Twitter could quietly build their own versions of these services, hold them in reserve for when the other services fail, then swoop in to save the day (I am NOT suggesting that Twitter is so underhanded, but it is consistent with allowing them to let their third party providers assume all the risk of developing new services, essentially giving Twitter a free R&D platform).
All this would clearly delay Twitter’s day of reckoning and buy them time to let their service mature. Of course, there are other dangers that will naturally evolve from Twitter’s own growth. For example; as it becomes commonplace for people to acquire tens of thousands of followers, the inevitable backlash of ‘Twitter-Fatigue’ will drive many people away as they become overwhelmed with managing the sheer number of followers as their flood of tweets becomes a torrent.
How to Protect Yourself
Unfortunately, there’s not much the average user can do to protect themselves, but there are a few options.
- Back up your Tweets regularly with services such as Tweetake, TwitterSafe or with applications such as Twitter Backup
- Start using other services like FriendFeed or Ping.fm that allow you to oversee all of your social networks without becoming dependent upon just one.
- Be vigilant. Pay attention to what’s happening in the Twitterverse and research competing third party services incase your service of choice closes.
In the meantime, please enjoy using Twitter, and don’t forget to Follow me at twitter.com/nealwiser. I look forward to your comments.