Reality check: Twitter is not worth $1 billion

So the venture capitalists have finally settled on a proper valuation for Twitter of $1 billion. This is based on a product with zero revenue and a history of struggles in figuring out how to generate revenue. I attribute this in part to the historic ambivalence of company founder and chief tech guy Evan Williams toward making money, which goes back to his days at weblog software firm Blogger before it was acquired. His heart never seemed to be in it. Neither does Twitter's collective heart seem to be into cashing in, let alone hitting the $1 billion dinger.

The catalyst for this speculative what-is-Twitter-worth frenzy was a $100 million investment by three funds. T. Rowe Price (TROW), Spark Capital and Institutional Venture Partners joined the round, which will increase Twitter's capital raised to $150 million. Naturally, when someone invests a lot of money in something, they expect returns. What sort of real returns can we expect from Twitter? I believe, contrary to the opinion of my esteemed colleague Peter Cohan, Twitter will never be a huge revenue home run. Here's why.
Google (GOOG) and Facebook are both unique in what they bring to the table. Google has a search engine that was, in its day, hard to replicate. It remains a technological tour de force. Facebook is a technology that was also fairly difficult to build and to scale. What's more, Facebook has made switching costs very high by making it difficult to extract your data and by populating the site with Flash, which is impossible to scrape and copy.

In contrast, Twitter is not unique in any real way. It's a glorified SMS service, plain and simple. It has very few technological innovations or barriers to entry. There are a few added features to it, but not much. There is no secret sauce. It also doesn't have any lock in. Witness how one of the most popular Twitter overlay applications, StockTwits, decided to run its new product outside of Twitter -- and no one complained. That's the equivalent of Ford dealers announcing they are going to build their own car engines and their customers merely shrugging.

Yes, you can still easily post your StockTwits observations on Twitter via a checkbox. But that further underscores the lack of secret formula. It's much easier to reduce Twitter to a checkbox than Facebook or Google, the most commonly cited comparisons to Twitter.

Also, Twitter results are searchable by Google or anyone else who can choose to overlay or run their own text ads. That means built-in competition and an easier marketing buy. Do you see anyone scraping Google results and dropping ads on top of them? I don't. Either Twitter is going to have to put in a massive change to its terms of service, or else it's always going to be competing to monetize its own content.

Then there's the monetization infrastructure issue. Twitter will need to build out its own self-service ad platform, which it can do without too much difficulty. But buyers like things that give them unified and varied opportunities across display and text. Google has this. Facebook has this. Twittter does not. Only text is possible. Maybe the company will use the $100 million to buy an ad network. If so, it's hardly a revolutionary play as advertised.

Further, Twitter does not collect good demographic information on its users who routinely post wacky names and humorous tags. Contrast that to Facebook, where marketers can place spots against hunters who live in Alaska and fish for salmon. Which would you buy -- some Twitter ID that appears to be located in Alaska, or an ad against a person who has verified their own profile in Facebook? (This also points out a weakness in Google's strategy, but that's a separate consideration.)

Then there's the question of real-time search and its inherent value. Ultimately, I think it will have some value. But in the near term, I'm not sure what it will be. I know people will use it and like it. And I understand roughly what for. You want to check traffic on the interstate from your smartphone, or perhaps to see what everyone is saying about Lost this week.

But it's not as easy to pin a buying decision on someone searching for reactions to Lost. Twitter could weave in a limited number of text ads but that could get clunky in a hurry. Twitter may not have real estate for ads because a significant portion of its users access Twitter via third-party clients that overlay their own interface and strip out everything twitter but the content of the main Tweet stream. In other words, real-time search inside of Twitter is really limited as an ad space.

Then there are the really bad numbers coming out of Web traffic analysis firm Hitwise, which showed Twitter hitting a brick wall and fluttering downward in usage numbers this spring and summer like a stunned bird. One has to wonder if there is some massive discrepancy between Twitter's traffic logs and usage numbers collected by Hitwise. It's hard to imagine any smart VC sinking money into an asset that suddenly appeared to be tanking. Should Twitter really plateau, then the $1 billion valuation looks particularly fanciful.

These may be somewhat random musings, but they form an idea that is coalescing in my mind about what Twitter is really worth. I believe real-time search is real and valuable. I also believe no one has it locked up. Twitter hasn't even really put itself in the best position to capitalize on real-time search.

I think it's far too easy to move away from Twitter and not miss the service. Facebook has already provided a viable alternative that is nearly interchangeable and reaches far more people. I also think that Twitter does not have the tools or the types of advertising options that would let it easily scale to a $1 billion company. It will probably get there one day. But the investors should pull up a lawn chair because it might be a long wait.
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