Twitter's Immense Supplier Power

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Last year, Twitter brought in $47.5 million from licensing its data. Year-to-date, Twitter has increased its licensing revenue 36% on the back of a 30% price increase. While Twitter expects to generate the vast majority of its revenue from advertising, its data licensing business now has a new big-name buyer thanks to Apple's acquisition of Topsy -- one of Twitter's "certified data resellers."

Twitter has grown into a unique resource for breaking news and trendspotting. There are dozens of companies that might find the site's data useful, and Twitter holds immense supplier power over them. As a result, I expect Twitter to continue increasing the licensing fee as more companies -- some with lots of bidding power -- compete for access to the company's data stream.

Social data mining is big business
The phrase "big data" has been tossed around quite a bit in 2013, and with good reason. IDC estimates the big data market has grown seven times more quickly than the IT industry as a whole, and may be valued at $16.9 billion in 2015.

Social data is a growing part of the burgeoning industry, and Twitter is far and away the leader in the segment. Not many can compete with the immediacy of Twitter's stream of news and opinions.

Facebook comes to mind as a likely source of precious data supply. The world's largest social network, however, has largely neglected the data mining industry. That's not to say Facebook's data isn't valuable -- there are dozens of companies that use whatever they can get from the site -- it just seems the company would rather keep some of that data to itself.

Facebook's only major foray into the industry is providing publishers with tools to detect popular topics of conversation and find "stories to share." Still, it keeps the raw data to itself.

Big buyers want in
Apple's Topsy acquisition is a signal that Twitter data has big buyers. Another Twitter data buyer, Datasift, sports 1,000 companies to which it provides analytics. That number will only continue to grow as analytics companies create new tools to analyze and filter the constant stream of Tweets.

This is how Twitter will capitalize. It might not necessarily increase the number of licenses it issues, but it can cut into resellers margins by increasing prices as they gain more revenue. In effect, these companies are paying Twitter to peddle its goods, and Twitter will be able to grab the vast majority of the benefit. (This is a lot like how the media industry is behaving with regard to Netflix.)

Although Twitter supplies a lot of its data to the public for free, there's nothing preventing it from cutting off that supply and charging for it. Twitter's data stream has already proven to be a premium product, so there's plenty of room for the company to continue squeezing cash out of it.

Just a side business
Twitter expects data licensing revenue to continue falling as a percentage of total revenue over time. For the near-term as the company continues to add users, that's probably true. At some point, however, its user numbers will grow more slowly, and ad revenue will slow with it. That's where the benefits of Twitter's pricing power will really shine through, when it reaches those sticking points in advertising. Its pricing power will allow it to continue pleasing investors for years to come.

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The article Twitter's Immense Supplier Power originally appeared on

Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Facebook. The Motley Fool owns shares of Apple and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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