One thing I find quite ironic about the whole Twitter API crackdown is when people try to rationalize it because “Twitter needs to be a multibillion dollar business” or “Twitter must remain an independent company” etc. These kinds of statements just don’t hold water. Twitter CAN in fact make more money, and be more independent, by opening up the APIs than by closing them.
I’ve run the numbers (below). Let’s look at this in more detail.
Alternative 1 – The Dual API Approach.
How It Works
APPS CAN USE THE API FREE WITH ADS: API is free and unlimited, but every 50th Tweet is an ad from Twitter. If you use this API in your app you MUST display the ads exactly as Twitter intends.
OR APPS CAN PAY FOR NO ADS: If you don’t want to have ads in your app, you can pay for the premium API. You can pass that charge to your users as a fee or subscription for your app. Or you can sell your own ads and give your app away for free. Or you can give your app away for free and make money in some other way (commerce, data, consulting, donations, etc.). Lots of options, but Twitter gets paid no matter what.
Note: neither of these options prevent Twitter from also having their own free apps, and their site, and monetizing with ads/and or optional subscriptions there as well. Twitter gets your eyeballs or your money, everywhere. But users get diversity of tools, innovation, and choice.
What’s It Worth To Twitter?
Twitter makes more money from ads in the Free API option.
On the Free API side, Twitter can make the same CPM or CPC per ad, whether it is in their site or in their data in a third-party app. There’s no loss of revenue to Twitter. But there IS an increase in revenue because more apps being used by more people in more ways means more people see more Tweets per day, and that means they see and are likely to click on more ads. This means more ads are shown and clicked. And that equals more money to Twitter.
Twitter makes more money from the premium API option too.
For the apps that opt out of the free API, guess what? Twitter makes the same CPM or CPC or EVEN MORE from them that they make from the ads. It’s at least the same price, but Twitter could also charge a premium. Those apps are buying the ad space from Twitter and might even have to pay a premium.
App providers that opt for this option can do what they want – sell more expensive ads to cover the cost, because perhaps they have more exclusive audiences, or show no ads and charge a fee. It’s up to them. Or they can make money in some other way. Twitter wins here too because again, more apps showing more Tweets to more people in more ways in these apps, means more data payments to Twitter.
The Power of The Long Tail (Why Twitter Should Not Cut off Its Tail to Save Its Face)
Twitter does not make less money in either case. But they can make more money because more Tweets may be looked at this way. Twitter will never succeed in getting as much attention as a million third party apps can get.
This is the power of the long tail. Twitter can never support all platforms, all contexts, all situations where people might want to interact with Tweets. By cutting off the long tail of third-party apps and clients, and restricting use, they are shutting down all these long-tail distribution opportunities, and that means they miss out on the entire long-tail of their advertising revenue. They are cutting off their tail to save their face. But in the end, the tail is much more valuable than they realize.
The Power of Being an Ad Network Instead of A Media Property
In fact, if Twitter monetizes the APIs as suggested above, they would be an ad network — and they could actually charge more to advertisers depending on which app and site the ads appear in.
For example Some sites and apps in the network could actually be smaller but more focused or elite and have more value to advertisers — Twitter could make more money by running ads there than in their own walled garden media property. Look at some examples of being a walled garden that failed: AOL, MySpace… I could go on.
Alternative 2 – The Option To Pay For Choice Model
How It Works
Twitter charges an OPTIONAL $3/month subscription fee (or it could be less) to any user who wants to use non-official apps. This buys them a special flag on their account that let’s them OATH it to third party apps and services.
Users who don’t care about choice don’t have to pay this fee — they can still use Twitter’s official apps for free. But the ones who care about choice can pay.
NOTE: The optional fee is a LOT less than people pay for cable every month. The segment of people who would want this would have no problem paying for it. Think of this as a special kind of membership dues for users who want “Twitter Pro.” Power users, or anyone who wants choice can pay for it. And it’s still cheaper than a fully loaded coffee at Starbucks.
What’s it Worth To Twitter?
Twitter has around 150 million active users today. Let’s say 10% of them pay for this special feature. That’s 15 million people * $3/month. Twitter suddenly makes $45 million/month from this. That’s $540 million a year folks! And as active users grow, they soon make a billion or more a year this way. That’s at least as good or better than advertising, frankly. Getting half a billion dollars as a “tax payment,” for doing nothing doesn’t suck either.
Oh and guess what, third party apps can STILL be required to either carry ads or pay to opt out of them as per Alternative 1, above. So Twitter can double dip here – they can make money from these “Twitter Pro” fees PLUS still make money on ads or API fees from those users when they are outside Twitter.
There are probably several other alternatives beyond the two outlined above, but this should be enough to make it clear that Twitter can make more money by being open than by being closed.
Therefore it seems that the management at Twitter must have hired the wrong management consulting firm to tell them what to do. Closing the API makes no logical sense at all. It also doesn’t make business sense.
What the Money Says
Forget about what’s right for developers or whether Twitter is evil or not. It also doesn’t really matter whether Twitter’s apps are better or worse than third-party apps.
“All that matters is the money” (to quote Shark Tank).
And the money says, closing the APIs is sub-optimal. You can make more money by opening them with a good monetization model.
To me what is the most disturbing thing about Twitter’s API policies, and the press coverage of the changes, and even many Tweets by industry people who should know better, is that they don’t seem to see the overwhelming financial benefits of keeping the APIs open.
Only someone who has no understanding of power laws, the long tail, and network effects, or how the Twitter ecosystem actually functions would shut down the APIs completely. It simply make no sense. It’s bad business. From a purely capitalist perspective, it’s not just leaving money on the table, it’s putting it in the shredder.
That’s why I doubt Twitter will shut down the API’s completely – they are smart people after all.
But what worries me is that they might be missing the value of the long tail here. Instead of shutting down third-party clients and trying to own all the consumer eyeballs, Twitter can make far more money leveraging them into a larger surface area that they control and monetize.
Justifying a Higher Valuation for Twitter
Twitter’s valuation is high – possibly too high. How are they going to justify that? Well for one thing, making a smaller business that is ultimately less important to the world is not going to help. But that’s actually what the result of becoming a walled garden usually is. Walled gardens are never as big or as valuable as global networks or infrastructures that everything depends on.
Instead of closing the walls, if Twitter stays open, but monetizes the openness, they could actually justify obscene valuations eventually.
Ultimately by being a global network that is woven into millions of apps, sites, products and services the valuation of Twitter will be much greater than any walled garden, and will be valued more highly. Why? Because they would be playing a central infrastructure role in the entire economy, instead of just being a single walled garden.
The future market cap of the company will ultimately be orders of magnitude greater if they are stewards of the open nervous system of the planet (with the exclusive right to charge everyone tolls) than if they are the next MySpace trying to sell ads on their own pages and apps. It’s really that simple.
Twitter is a network, not an app. It’s all about the data. The data is the ultimate viral vector for Ads. Not pages. Not apps. It’s about the data!
Open Does Not Equal Out of Control
One more point — I keep hearing people say that somehow closing the APIs is necessary to maintain “control.” Wrong. Twitter gives up no control by opening up the APIs and monetizing them. That is a complete fallacy.
They can enforce usage of their open API and data. They can require authentication, they can even approve apps, and they can monetize everything. They can shut off apps that don’t display their ads. Having an open API doesn’t mean you can’t stop violators.
Conclusions
Twitter gives up nothing really by being open, and they make MORE money. And more money means they are MORE independent, MORE powerful. MORE liquid.
Now maybe “I am constrained by logic.” But if I was a board member of Twitter, or an investor, I would want the company to run the numbers and be logical too. I have yet to hear from anyone any cogent argument that can convince me that closing the APIs makes more money than keeping them open in the scenarios above. Instead of all the hype and fury, run the numbers. Then let’s discuss it rationally.
Read the Next Article in this Series: Ten Questions for Twitter