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Twitter's going public: So how does it make money?

NEW YORK — As long anticipated, Twitter is going public. It almost goes without saying that the social network broke the news on Twitter. Its announcement came in five characters under the microblogging site's 140-character cutoff.

The offering is expected to be the tech world's largest since Facebook went public in May 2012. Analysts valued Twitter at $10 billion earlier this year, and it may be worth a little more than that today. But as my Slate colleague Matt Yglesias points out, the fact that it is filing confidentially implies that its annual revenues have not yet reached $1 billion. Following the lead of Facebook and other Internet companies whose fortunes depend on a huge user base, Twitter has been cautious about turning its service into a moneymaker 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 mostly 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 on the order of 200 million users, while Facebook has some 1.15 billion. But its advantage lies in timeliness and topicality. People check Facebook casually, when time allows. Twitter users tend to use Twitter 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 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 for free from users. A disproportionate share of those users are, in fact, paid journalists for other companies, including CNN. They use the platform enthusiastically, bordering on addictively, as a way to build their personal brands and draw readers to their own sites. The result is that Twitter today is valued at some $10 billion, more than five times as much as the New York Times — and it has the potential to become more valuable still.

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 it knows millions of people are watching, as Oreo did during this year's Super Bowl. Meanwhile, Twitter has acquired two startups in the past year that analyze 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. And in May it launched a feature that lets TV advertisers target Twitter users who have just watched their commercials. That gives advertisers a clear path from showing a commercial on TV to getting potential customers onto their website — or, potentially, even selling them a product directly through Twitter.

Finally, Twitter is poised to be a big player in the fast-growing realm of mobile advertising. Just this week it splashed a reported $350 million to buy MoPub, the world's largest mobile ad exchange, which allows advertisers to target users on their mobile devices.

Twitter's going public: So how does it make money? 09/13/13 [Last modified: Friday, September 13, 2013 9:25pm]
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