The world may be buzzing about Twitter, but will the San Francisco-based messaging service with the high cool factor ever be a money maker? Or will it operate at a perpetual loss, as one Wall Street analyst suggested, “until the next cool Web 2.0 social networking concept comes along and Twitter tweets no more.”

Peering into the future of a web startup — Twitter is just three years old — is always a risky affair. Indeed, Wharton faculty who pay close attention to the nexus of technology and business see a range of possibilities — most of which involve a sale of the company followed by its integration into a more diversified Internet service such as Yahoo or Google.

For now, though, most believe Twitter is wise to build up its user base, which is already happening. The free service, which allows its users to send messages of up to 140 characters, is the Internet’s fastest growing social networking site, according to media-market research firm Nielsen. Unique visitors to Twitter’s web site skyrocketed from 475,000 unique users in February 2008 to more than 7 million in February 2009. And those statistics don’t count people using the service on their mobile phones.

Twitter was founded in 2006 by Evan Williams, Biz Stone and Jack Dorsey. Williams is best known for creating Blogger, a blogging service, and later selling it to Google. Stone also worked for Google, and later he and Williams left to form a podcasting company called Odeo. Twitter was hatched as a side project inside Odeo by Dorsey. Dorsey had been CEO of Twitter when it became an independent company in 2007, but a year later yielded the title to Williams, who had more experience running startups. Dorsey is now chairman of Twitter, which is backed with venture capital from Union Square Ventures, Digital Garage, Spark Capital and Bezos Expeditions, an investment group led by Jeff Bezos, CEO of Amazon.

Twitter’s messaging service is a blend of text messaging, blogging and random thoughts. Some observers have described Twitter’s service as a “micro-blogging” platform that is a real-time gauge of what its users are thinking, seeing or doing.

Some of those users have become citizen reporters during events such as the May 13, 2008, earthquake in China, the November 2008 terrorist attacks in Mumbai, India, and the January 15 plunge of a US Airways jet in the Hudson River outside Manhattan. In fact, Twitter reports — also known as tweets — from people on the scene are often the first accounts available, as was the case with Janis Krums, a Sarasota, New York resident, who twittered to friends about the plane crash with the words:  “There’s a plane in the Hudson. I’m on the ferry going to pick up the people. Crazy.” Krums also uploaded the photo of the plane just after it hit the water.

Those events have given Twitter an invaluable buzz boost, says Shawndra Hill, an operations and information management professor at Wharton. “The primary reason Twitter has taken off is that celebrities and businesses are using it. Consumers want to feel like they are in touch with celebrities. Businesses want to be in touch with customers. And it certainly doesn’t hurt that CNN says ‘follow us on Twitter.'” 

“Twitter is clearly tapping into a need for people who want to convey short, frequent tidbits about themselves,” says Wharton legal studies and business ethics professor Andrea Matwyshyn. Kevin Werbach, another legal studies and business ethics professor at Wharton, agrees. “Like most of the big Internet success stories, Twitter is taking off because it serves the needs of many different communities. It’s fun and a way to socialize, but it can also be an information gathering and business tool. From a broad perspective, Twitter lowers the barrier to publishing online even more than blogging, and at the same time it makes the social networking experience much more interactive,” says Werbach, who has been a Twitter user since the early days of the service.

Other Wharton faculty use Twitter, too, but their reaction to its torrid growth ranges from belief that the service could be the next Internet giant to mild bemusement. Meanwhile, Twitter doubters aren’t hard to find. “I find the Twitter phenomenon to be a charming little surprise of the Web 2.0 world,” says Wharton marketing professor Peter Fader, “but I’m skeptical about its long-run sustainability and impact.” Wharton management professor David Hsu agrees that Twitter does one thing well — messaging in 140 characters or less — but argues that the service will have to evolve or it will be replicated by rivals. Indeed, Facebook recently redesigned its user pages to mimic Twitter’s rapid-fire updates. “How protectable is Twitter’s service as it stands today?” asks Hsu.

And Bernstein Research analyst Jeffrey Lindsay, also a fan of Twitter, says that the startup is a fine “pre-business” that can round up users, but ultimately fails to make much money. “The problem is that Twitter falls into the broad category of new Internet businesses that are almost un-monetizable,” writes Lindsay in a research note. “Whoever buys it will likely have to operate it at a loss in perpetuity, or until the next cool Web 2.0 social networking concept comes along and Twitter tweets no more.”

Indeed, predicting Twitter’s business prospects has become a bit of a virtual parlor game in Silicon Valley as observers guess how the service might ultimately turn a profit. Twitter CEO Evan Williams has been coy about the company’s revenue plans. In December 2008, Williams said, Twitter “will make money….  I can’t say exactly how because we can’t predict how the businesses we’re in will work.” On the company’s site, Twitter adds that the company “has many appealing opportunities for generating revenue, but we are holding off” to focus on building its service and growing the user base.

Revenue vs. Traffic

Wharton faculty say Twitter needs to walk a line between growth and making money.  For instance, Twitter could focus on becoming profitable yet shortchange itself by failing to scale its base of users. By comparison, Facebook’s rapid growth has propelled it to be the 10th largest site on the Internet with 57.35 million unique visitors in February, according to comScore.

“Twitter is right to focus on scaling its service before emphasizing revenues,” says Werbach. It has a big opportunity, but only if it can keep and grow a big community of users and developers. Maximizing short-run revenues can actually get in the way of [expanding] the network during the build-out phase. Twitter will definitely need to find an economic model if it wants to remain independent, but it’s not yet at the point where that’s essential.”

Hill agrees. Twitter’s main objective should be to maintain its standing as a much-talked about social network, she says. “Twitter has to grow its user base and it doesn’t matter if most people are lurkers [just reading, rather than contributing].”

According to Matwyshyn and Hsu, an advertising-supported business model is Twitter’s best bet. Subscriptions and data mining are possibilities, they note, but Matwyshyn points out that using information about users for better targeting by marketers is fraught with risks, such as subscriber backlash over privacy issues. “Twitter could get a subscriber stream, but it would depend on a price point,” says Matwyshyn. “I’m not sure that free services that try to become premium are that successful.” In addition, says Fader, subscription models usually have an archive of exclusive content that people want. Twitter is all about the here and now. “No one cares about yesterday’s Tweets.” 

Hsu suggests that Twitter’s service may not be suited for a data-mining and targeted marketing model because, relative to Facebook, it does not collect as much information about its users, and the social networks that people construct on Twitter are less meaningful. For example, a popular aspect of the Twitter network is that users can “follow” other users — even famous ones — without first securing their permission (although users can block followers after the fact). But following someone on Twitter requires the scantiest personal commitment by the person followed.  Want to “follow” Britney Spears and Shaquille O’Neal? Go right ahead; they and other celebrities are happy to show you everything they — or their “ghost Twitterers” — post. But don’t expect them to accept that invitation to your weekend barbeque.

“On Twitter, I can find personal and non-personal information, but a friendship doesn’t have to be reciprocal,” says Hsu. Twitter’s minimal interpersonal commitment and ease with which users can follow famous peoples’ lives has fueled growth, notes Matwyshyn, but it also means that the company knows less about its users than Facebook, which has experimented with better targeting of its customers. Nevertheless, Hill suggests that Twitter “has to make sure celebrities and businesses stay” because of their drawing power. Indeed, the company in March posted a job opening (which is no longer active) for a “VIP Concierge” to help celebrities use Twitter correctly and remain happy with the service.

If revenue from subscriptions and data mining are not now in the cards, Twitter’s most obvious business model is advertising. Twitter recently announced its first revenue-generating experiment by partnering with advertising agency Federated Media to create a site called Exec Tweets, which allows users to track and follow business executives. Currently, Exec Tweets, which launched March 23, has a single advertising sponsor — Microsoft. Exec Tweets aggregates executives who already are active Twitter users and displays them on one site.

Of course, generating lots of revenue from advertising has its downside for social networking sites — ad clutter. “There’s a real strong analogy between MySpace and Twitter. MySpace started out as a consumer thing and has become a commercial wasteland,” says Fader. The challenge for Twitter is to find a business model that doesn’t offend its users, says Werbach. “Any monetization strategy that worsens the perceived experience for Twitter users or developers will push them to one of the many competitors.”

While Wharton faculty acknowledge that Twitter doesn’t have to find a business model this minute, there may not be a lot of time. It’s quite possible that a third party could find a way to make money off of Twitter before the company itself does. Twitdom, a startup that tracks Twitter applications, already counts 610 applications that piggyback off Twitter’s service. Any of those applications could find a way to take Twitter’s flow of comments and make money from them, Fader points out. “There are a variety of third parties that could monetize Twitter by scraping tweets and adding value. There are auxiliary models that could emerge.”

Taking on Un-monetized Services

Hsu suggests that Twitter’s approach to its business model really depends on its investors’ exit strategy: Is the company looking to become an acquisition target? Or will Twitter continue as an independent company?

“Whether you build, then monetize, or do a little of both depends on whether you think you’ll remain an independent business,” says Hsu. So-called pre-revenue companies can fetch high prices if they have amassed eye-popping user numbers. And given that the initial public offering market has been frozen by the recession, a number of Wharton faculty conclude that Twitter has one option to make money for its investors: Sell to a larger company.

However, writing in his research note, Lindsay suggests that the Internet’s short history is littered with pre-revenue companies that were acquired for big bucks only to leave the buyer stumped on how to make money with them. On that list: eBay’s $4.1 billion acquisition of Skype in 2005; AOL’s 1998 acquisition of Mirabilis, parent of instant messaging service ICQ, for $407 million; and Google’s $1.65 billion acquisition of YouTube in 2006. “We think that Google and Yahoo! and any other potential buyer should stay well clear of Twitter (and Facebook for that matter) at the ‘large but un-monetized stage,'” writes Lindsay. “We think they should leave it to the original founders to develop a business model and if the business survives, [then] consider acquiring it. Taking on un-monetized services has proven to be a very uneconomic proposition for the Internet players over the last decade.”

But Wharton faculty argue that Twitter’s best future may be as part of a larger service. Indeed, Facebook and Twitter have already partially integrated their services; Twitterers who also use the Facebook service can have their Tweets delivered as Facebook status updates., which makes on-demand customer relationship management software, has integrated Twitter into its application. And Matwyshyn says Twitter would make a lot of sense as part of Google’s Gmail or Yahoo Mail.

Twitter, however, may turn out a lot like ICQ, Fader suggests. An instant messaging service, ICQ garnered 13 million users in just 18 months and AOL pounced to expand its customer base. “ICQ is a perfect analogy for Twitter. You do one cute thing you couldn’t do before, but it can’t stand alone,” says Fader. “I’m not knocking ICQ: Those guys made a lot of money for their idea.”

Fader also questions Twitter’s ability to stand alone partially on demographics. Research firm Nielsen notes that teenagers aren’t the primary users of Twitter; more than 60% of Twitter’s users are between the ages of 25 and 49. In the 18 to 24 bracket, Twitter’s user base was too small to register. Users under 17 accounted for 3.6% of Twitter users. “Facebook had the perfect diffusion of innovation. It started out as popular with the young and went to the general public,” notes Fader, who argues that popularity with a younger demographic is a good gauge for future growth. “Twitter isn’t doing that. Twitter is a feature. There are things you can potentially do with it, but it would do much better when folded into something else.”

It’s possible that Twitter is just developing differently than Facebook, says Hill. “The demographics are a worry because it shows that Twitter hasn’t reached the masses yet. But that doesn’t mean it won’t.”