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Twitter’s Valuation – More Like AdultFriendFinder or YouTube?

After the recent news that Twitter turned down a $500 million acquisition offer from Facebook, I threw this tweet out there:

Twitter for $500 million..gut says that’s too low. Twitter is the defining platform for lightweight interactions. $1 billion +…

A nice discussion followed on FriendFeed about this notion. A couple counterpoints were made:

“I disagree: their model is no longer unique. Moreover, they don’t offer any particular feature that separates them from other similar models. The best they have to offer is the user base, and the right name-brand shiny shiny with a few choice features would take most of them away.”

“It’s a glorified IM network, only less functional because it’s a centralized platform with an absurd character limit that only the most ADD among us can find usable.”

My gut feeling is based on three factors:

  1. Platform
  2. Growth
  3. Comparable transactions

Here’s where I’m coming from.

Platform

Twitter has established lightweight messaging as valuable and addictive. From the simple roots of “What are you doing?”, people have morphed Twitter into a range of use cases. Open channel chats. News updates. Sharing articles and blog posts found useful. Polls. Research. Updates peers on activities and travels.

Based on tweets, companies find out how they’re doing out in the market. Twitter search yields a treasure of information about subjects. Find like-minded individuals with whom to connect.

The platform aspect is not one to be undervalued. This is a key point – platforms are worth more than any single app. Tim O’Reilly penned a thoughtful piece in this regard. With regard to Twitter as platform, he writes:

Rather than loading itself down with features, it lets others extend its reach. There are dozens of powerful third-party interface programs; there are hundreds of add-on sites and tools. Twitter even lets competitors (like FriendFeed or Facebook) slurp its content into their services. But instead of strengthening them, it seems to strengthen Twitter. It’s the new version of embrace and extend: inject and take over.

Microsharing, as Laura Fitton calls it, certainly requires some change in people’s behavior. There’s no doubt about that. But the concept of microsharing, or as it also known as, microblogging, is powerful. It’s highly flexible and has a variety of use cases.

It’s not just early adopter/social media types that are taking notice of this microsharing trend. Click here to see how often the New York Times has written about Twitter. An article on cnn.com about the Mumbai terrorists included this:

Neha Viswanathan, a former regional editor for Southeast Asia and a volunteer at Global Voices, told CNN, “Even before I actually heard of it on the news I saw stuff about this on Twitter.”

Twitter is transforming in terms of social, accessible and findable updates. True platform companies with reach and highly flexible uses don’t come along very often. Twitter is one of those platform companies.

Growth

Twitter’s early period was marked by some uneven growth. But around March 2008, the service really took off. And it hasn’t looked back:

twitter-compete-graph-oct-2008

It’s fair to say that the network effects are getting stronger and stronger for Twitter. The more people that join, as seen in the graph above, the more valuable the service becomes. Search grows more and more in importance. So more people join, meaning it’s more valuable others to join, and so on…

Don’t dismiss Twitter’s growth either. This post on the Ignite Social Media blog, which shows traffic for 37 different social websites, illustrates how challenging it is for most social networks to maintain growth these days.

Twitter’s got huge momentum right now. That’s valuable.

Comparable Transactions

I researched purchase prices for technology companies in recent years. The table below shows acquisition prices for what I’ll call “market comparables”.

twitter-valuation-comps

Valuations are more art than science. Personally, I’m a big fan of triangulating on a value by looking at what other companies have gone for.

My point with the above table is to put some context around Twitter. Danger and XenSource were important niche plays. AdultFriendFinder was valued at $500 million. Given Twitter’s role in the emerging realm of microsharing, should it have the same valuation as AdultFriendFinder?

I know that there currently is no revenue for Twitter. It’s not like they’ve tried and failed. They haven’t even tried. But my guess is Twitter’s revenue path lies beyond punching up some ads on Twitter profiles or in Twitter streams. Those may be there, but like any platform, there will be other ways to monetize.

And let us not forget YouTube’s (non existent) revenue model when Google purchased them for $1.65 billion.

What Do You Think?

I’ve laid out my thinking here. Twitter is a rare platform play that’s hit a strong growth curve. Previous acquisitions say that Twitter should be able to take advantage of those factors for any valuation.

How about you? Weigh in on the comments below, or just answer this quick poll (RSS readers – click out to take the poll!).

*****

See this post on FriendFeed: http://friendfeed.com/search?q=%22Twitter%E2%80%99s+Valuation+-+More+Like+AdultFriendFinder+or+YouTube%3F%22&who=everyone

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