By now you’re probably aware of Twitter.  If you haven’t it’s a very difficult service to explain to the newbie.  You can try Wikipedia’s article but I’m not going to spend any time explaining the service here.  Today I’m going to explain a few things about Twitter and their ability to pay salaries.  We will start with the most basic for the non-business minded and expand into the business models.

Basic Twitter
The shortest answer to the question “How Does Twitter Make Money?” is they don’t make money.  That’s right, for three years, Twitter has basically been in a money pit.  Someone has been pumping money into Twitter though to keep it afloat.  After all they have bills to pay and a few dozen employees who have need to eat.  For a company to not make money and stay alive they must have investors.  Investors give Twitter money in exchange for partial ownership and the rights to a cut of future profits (if there are any).

These investors are called “venture capitalists” or VCs.  VCs are companies where wealthy individuals or organizations can bring their money together to help fund companies just getting their feet wet with a promising future.  Facebook, Google, and YouTube are all companies that received VC funding to help get launched.  According to Crunchbase Twitter has gone through three rounds of raising money from VCs.  The link includes a list of companies that have invested, you likely have not heard of any of them.

Advertising Business Models
Internet companies have limited options with business models.  You go to their website, read whatever is there, and move on.  With Weakonomics I make money by putting advertisements up around the blog.  Twitter could easily do the same thing on the Twitter homepage and next week be giving out Teslas as business cards.  They could also place ads in your Twitter stream where it would look like a Tweet, perhaps with a link.  But Twitter has shied away from this model.  I don’t blame them because dealing with advertisers can be a pain rear and perhaps ruin the look of the site or service.

Paid Content
Perhaps then Twitter will seek an income by charging users to access their service.  Maybe they bill you $1 per month to use Twitter.  I could charge my readers $1 per month to access my site but I would likely end up with one reader, my mom.  Twitter wo
uld encounter a similar problem with a similar (percentage) reduction in users.

A more appropriate model would be to offer a basic service for free and then charge for premium content or features.  Xbox Live has had success with this, bloggers see it with Sitemeter, you see this with TV too (over the air is free and you pay for cable or satellite).  Features would be beneficial for companies or people willing to pay anywhere from $1 to $500 a month for access to them.  This could be link tracking, extended character length, embedded media, or priority access to their API.

Other Options
Twitter could take a page from Yammer.  Yammer is a service very similar to Twitter that offers the same system for business users.  This allows for internal twittering at companies.  Yammer charges companies a fee in order to obtain the administrative rights to their company’s Yammer account.  Twitter could do the exact same thing, or perhaps offer dedicated software to companies/departments that want to host a twitter-like service on their own servers.  This would be a great way for the company to diversify a bit in the future.

Wrap-Up
I’ll remind you again that at this time Twitter has no official business model.  They’ve played with advertising on their Japanese Twitter site to some degree of success and there are rumblings of a premium account option for businesses.  We are certain that Twitter is planning on making some money this year  .  If you enjoy Twitter as much as I do, then you’ll be anxious to see what they roll out.  Good luck Twitter, we wish you the best.

Photos: mfilej, shovelling son

***UPDATE 3/2/10***

Hey reader!  This post is very popular among Googlers looking for how Twitter makes money.  Some of you may have noticed this post is almost a year old, and a lot can happen in a year.  I wanted to let you know that their situation hasn’t changed, but once it does, I’ll be sure to update this post.  Thanks for reading!

categories: business, technology