Gawker uncovers unsurprising Twitter financials: There is no business there

It’s an article of faith in Silicon Valley for almost every start-up. Get users first, figure out the business model second. The faith part comes into play because there is unwavering belief that enough users will somehow create financial opportunity, even if you can’t see what that would be today.

And that brings us to Twitter. Gawker has a big scoop today, with financial data from the past two years. Let’s cut to the bottom line: The company is deep in the red. And after six years in existence, there are no signs it’s getting anywhere near the break even point.

The numbers Gawker obtained are for 2010, and the first quarter of 2011. And they are bleak:

Jan. 2010 – Dec. 2010

Revenue: $28.5 million
Net loss: ($67.8 million)

Jan. 2011 – Apr. 2011

Revenue: $23.8 million

Net loss (non GAAP): ($25.8 million)

Now, a caveat. Those last numbers are about a year old. And Twitter had been ramping up its ad products in 2011. Indeed, as Gawker notes, a recent BusinessWeek story claimed that Twitter has “finally turned a corner” and a third party estimated that Twitter will do $260 million in revenue this year:

Twitter’s gung-ho product VP Satya Patel told Businessweek that 2011 “was the year we began scaling… our ad business… And 2012 is the year when we demonstrate it’s a juggernaut.”

I can’t say I’m a bit surprised by the numbers. Many have faith that Twitter will eventually find a way to make money because it has so many users. Indeed, while attending a Twitter event in December, I talked to CEO Dick Costolo who made it clear that revenue was not the primary operating mandate for him:

“We should think of revenue like oxygen,” Costolo said. “It’s necessary for life, but it’s not the purpose of life. If we do the right things, the businesses are going to follow it.”

In a way, that’s noble. And I applauded Twitter for “taking the slow road” to the IPO, and not going public just because the current social media frenzy might give them an opening.

At the same time, Twitter face some steep challenges. The way people access it and experience it still tends to be very fragmented, it’s hard for Twitter to control the user experience which makes it complicated to create an ad model. Costolo, while apparently well regarded, is also running the largest company of his career, and faces challenges scaling it, maintaing its culture, and figuring out the business model question.

Clearly, investors have a lot of confidence that Twitter will get there. The company is building out a new headquarters in San Francisco. They’re planning for big hiring and expansion. Investors have poured $760 million into the company, according to Gawker. And while it’s hard to gauge how much of that is still on hand, it seems to safe to say Twitter has a couple of years of runway with the money it has, assuming it can keep revenues and expenses growing at a similar pace.

But here’s the awkward question: What if  there is no business model there? And I say that as a user who loves Twitter, and would love that not to be the case. But for those who cry, “Impossible!” let me just offer one word: Browsers. They are the most commonly used service on the Web, but no one makes a dime from them. Yes, the biggies such as Microsoft and Google make them because it enhances their data on you. But otherwise, it’s not really a business.

I have a hunch that in the end, it’s just as likely that Twitter is more like a browser than Facebook. It’s a great utility, indispensible in many cases. Very influential. But simply not capable of being monetized in a way that covers its operating and infrastructures costs. That doesn’t mean Twitter is not great. It just means that Twitter might not actually be a business. And that’s okay. Not every great piece of technology, not every great innovation has to be judged in terms of dollar signs.

But how long will investors sit tight? Hard to say. There’s been some assumption that if the business model doesn’t materialize, then someone, probably Google or Microsoft would buy them. Owning Twitter might be interesting to them not as a direct source of revenue, but rather, another stream of data they can gather about you to expand the databases they’re already building of your personal information.

For many, such an outcome would probably feel like a failure. But for me, anything that brings stability and a sound financial footing that keeps Twitter around for the long haul would be just fine.


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  • I think that Apple would also be a very likely acquirer given it’s importance as a mobile application.