Why Twitter Isn't Worth $8 Billion

OPINION: Twitter Has Yet to Show it Can be Profitable Long-term

 @http://twitter.com/jtalty
on August 01 2011 5:58 PM

Twitter announced on Monday that it had received another significant investment, this time $800 million from Russian investment firm DST Global.

The deal gives the social media company an $8 billion valuation, but a big question still remains--why?

Why has a company that has still yet to show it can be profitable long-term keep getting major investments? It not only boggles the mind but shows that investors haven't learned much over the past decade.

Twitter is an interesting company that has seen exponential growth. The social media tool has over 200 million users, generates over 350 million tweets per day, and has served as a major venue for breaking news.

All of that said, what are Twitter's actual main assets? What warrants an $8 billion valuation?

I still haven't figured out the answer myself.

Its large user base certainly makes the company intriguing, but as seen in the past five years or so, large social media Web sites can come and go in the blink of an eye.

 Don't believe it? Just take a look at MySpace.

At its peak in 2006 MySpace was the most popular social networking Web site in the world, was valued at $12 billion, and eventually was bought by Rupert Murdoch's News Corp. Any clue what it's worth now?

Try $35 million.

At least that's what Specific Media paid for the company in late June of this year. That seems like quite a drop-off, doesn't it?

From $12 billion all the way down to a relatively paltry $35 million?

What's to say that a company valued even less, at $8 billion, couldn't fall all the way down too?

Twitter is capable of generating revenue through its Promoted Tweets, which cost $120,000, and its Promoted Accounts, but not to the tune of $8 billion---at least not yet.

A recent Business Insider story speculated that Twitter is actually quite profitable. Business Insider estimates that Twitter could see profits of $100 million this year, which is certainly possible though I'd guess it's lower, but I'd further argue that number isn't something to crow about.

As clearly seen with MySpace, the social media landscape can and will change quickly. If history tells us anything, it's that the shelf life for a social media Web site is incredibly short, though Facebook has continued to truck along.

It's in part because of the fickle nature of social media users and also in part because of how competitive the market is.

The most recent competitor is Google+, a social media outlet that some have speculated could replace Twitter in popularity. I still haven't seen enough of Google+ to proclaim it as Twitter's successor, but it does show another example of a major competitor within the market.

With so much competition in a market that can change in the blink of an eye, companies need to find ways to bring in as much revenue as early as possible. Otherwise what was once a big hit and valued at billions of dollars, quickly becomes a has-been Web site that virtually no one frequents.

One of the biggest questions you have to ask yourself is whether you think Twitter has a unique enough product that no one could cut into its niche market and knock it down a notch. That no company could successfully replicate what Twitter is doing and siphon off some of its users.

Right now I'd argue it doesn't.

If recent history has shown us anything, no social media company is unique enough.

Everything can and will be replicated.

 

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