Twitter's Business Model: Profit Off Suppliers

Twitter has become a fantastically popular Web site on the basis of the incredibly simple idea of letting people zip out 140-character blog posts to anyone who wants to read their stuff. Sure, many of the comments are dreck. But Twitter has also become a kind of hopped-up, customized news feed. Follow the right people (i.e., smart ones) and you get a constant stream of links to the most interesting articles on the Web. Created only four years ago, Twitter has 105 million users and is delivering 55 million tweets, or messages, per day. It has raised nearly $60 million in venture funding, becoming the Next Big Thing in Silicon Valley. To date the company hasn't done much to generate revenue, but that too may be changing, as last week it announced a plan to start placing ads among the tweets.

But the really cool thing about Twitter has been its business model. Instead of trying to do everything itself, the company threw open its doors and let other people build little applications that make it more useful. More than 70,000 have been created so far. Instead of going to its Web site to post tweets, for example, you can use Twitter clients like TweetDeck, Twitterrific, and Seesmic, written by outsiders. That open approach seemed like techno-nirvana, a free playground where anyone could invent and contribute.

Well, not anymore. Because just as Twitter was announcing its advertising scheme, the company also announced that it intends to scoop up the best apps and build them into Twitter itself. That means it will now be competing against some of its partners. Twitter recently snapped up a company called Atebits, developer of Tweetie, a leading Twitter client on the iPhone. In other cases it will just build its own version of what someone else has done. Either way, it's rough news for developers.

How do Twitter's three cofounders explain the change? A spokeswoman insisted everybody was too busy to comment—because, oddly enough, the company last week was hosting a conference in San Francisco for developers. What should have been a big lovefest instead turned into a massive anxiety attack. Onstage, Twitter CEO Evan Williams conceded there would be some "tension" between Twitter and its app developers going forward.

Fred Wilson, a venture capitalist who is one of the company's investors, says a lot of stuff that outside developers have created really should be part of the basic Twitter platform. He means apps that do basic things like searching Twitter, shortening URLs so they'll fit into the 140-character limit, uploading photos, and running Twitter on a mobile device like the iPhone.

Building that stuff right into the Twitter platform will make life easier for users. The question is, if these features were so important, why didn't Twitter develop them in the first place? "I don't think Twitter planned any of this out in advance," Wilson says. For most of its history the company has been scrambling just to keep up with growth. Only recently has it been able to start thinking about building a cohesive business model. But it seems to me that Twitter has done something clever here. In effect, it got other people to do its R&D work at no cost. It just sat back and waited to see which products became popular. Now it can pick off the winners. So all the risk of product development gets pushed onto the outsiders, while Twitter still gets most of the reward.

For some, that is perfectly fine. The guy who created Tweetie, Loren Brichter, is blogging about the "amazing ride" he's been on since creating his program. Others might not be so happy, but Laura Fitton, who runs a site called Oneforty.com, which distributes Twitter apps, says, "It's being overplayed in the press as this big dramatic crisis." Fitton organized a meeting of 27 top developers during last week's Twitter conference, and she says none of them were overly concerned. "Everyone is being mature," she says.

Twitter's new strategy is a miniature version of what Microsoft did in the 1990s. Microsoft controlled the operating system for nearly every PC in the world, and then started absorbing other parts of the ecosystem. Sometimes it cloned them—as when it created a Web browser, Internet Explorer, and built it into Windows, wiping out Netscape Navigator.

Twitter turns out to be just like every other venture-backed company, under pressure to deliver a payback to investors. To accomplish that, it may have to hurt some of its partners. Should anyone be surprised?

Daniel Lyons is also the author of Options: The Secret Life of Steve Jobs and Dog Days: A Novel.