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Aug 19, 2008

The Trouble with Twitter

Don't be surprised to see advertising on Twitter soon. It's about the only way the service can generate revenue. But will it be enough?

Twitter's business model is starting to show. An early sign came in April, when the popular microblogging service launched in Japan and the home page for every Japanese user included a big banner ad in the top right corner.

Then, on Aug. 7, Twitter made another change, this time in the U.S., by limiting the number of people a single user could connect with, or "follow," to about 2,000. Most recently, on Aug. 14, Twitter made the biggest move yet to slash costs. It killed outbound message delivery to mobile phones via short message, or SMS, in all countries except the U.S., Canada, and India.

Taken together, these moves point to the trouble with Twitter. Investors and marketers have been agog over the potential for Twitter—unlike other social media properties, such as Facebook and MySpace (NWS)—to crack the code, finally, on wringing revenue from millions of users. But the optimists better brace for disappointment.


To understand the limits of Twitter's value, first look inside. Robert Metcalfe, co-inventor of the Ethernet, noticed that communication networks tend to increase exponentially with each single addition, a logic that today is called Metcalfe's Law. Think of a fax machine sitting alone and unplugged in your office; it has little value by itself. But plug it into a network of fax machines around the world, and suddenly that communications tool has huge potential.

Metcalfe's logic drove a lot of the inflated company valuations of the Internet bubble in the 1990s. And today, investors have the same hopes for a lot of companies that rely on users and their networks, including Yahoo's (YHOO) photo site Flickr, video sharing companies YouTube and Vimeo, and human networks on Facebook, MySpace, Pownce, and Twitter. Just think how delighted marketers would be to lob a single, online message to the masses and have it forwarded to millions of their friends, all for free.

But Metcalfe's concept doesn't apply to Twitter. The explanation why comes from two fellows named Zipf and Dunbar. Back in 1935, linguist George Zipf noticed that words in the English language are used in an interesting pattern. "The" is spoken most commonly, making up 7% of all utterances; "of" is the second-most common word, used exactly one-half as often as "the"…and the pattern continues with the 100th word in popularity being used only 1/100th as often. Zipf's Law suggests that each subsequent thing in any series (such as your Twitter contacts) has predictable diminishing value. Your spouse is more important than your best friend, who outranks your boss, colleague, and that guy you met on a plane from Chicago. Inside the 2.3 million-strong Twitter network, not all connections are equal, and some will never be used at all. You will probably never send tweets to ice skaters in Finland...

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