Twitter’s Valuation – More Like AdultFriendFinder or YouTube?
December 1, 2008 10 Comments
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:
- Platform
- Growth
- 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:
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”.
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
About Hutch Carpenter
I'm Not Actually a Geek 
Hutch –
There are many problems with the valuation. First, twitter has no revenue. I am not sure it even has a strategy for monetizing the value of its twitter-ers. Without a revenue stream, placing a value is very difficult.It also leaves little benchmark for comparing to other transactions. YouTube is probably the closest comparison.
Second, Facebook was offering its stock. Twitter investors would be getting illiquid stock. They would not be able to realize value unless they could sell that stock to someone else. The investors would just be trading one illiquid investment for another illiquid investment. Except now liquidity and value is in the hands of Facebook instead of Twitter’s management. The Youtube investors got Google stock which is liquid. If Facebook was offering cash or if Facebook had publicly traded stock, Twitter probably would have jumped at the offer.
Third, there is little agreement over the value of Facebook stock. You can look at the Microsoft investment, but many people think they overpaid. Facebook also has had problems monetizing their viewers. Lots of activity, but not a corresponding revenue stream.
I can see why Facebook would want twitter, but I saw little reason for Twitter to want Facebook (unless they were running out of cash).
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Hey Doug –
Thanks for dropping by – I really enjoy your blog. With regard to Twitter, I agree the lack of revenue makes valuation tricky. I’m of the belief that there will be several, with ads as just one component. Besides the smart folks running Twitter, investors like Fred Wilson and Jeff Bezos are backing the company. I’d put my money on them.
But there’s an equally likely scenario – acquisition without a huge revenue stream. This would be the YouTube scenario, with Twitter fitting some major company’s strategy.
Agree that Twitter doesn’t need Facebook, but Facebook would love Twitter. Facebook’s status updates are good competition to Twitter.
The $500m offer puts Twitter at $140 per unique visitors… If you believe in the FB valuation. From what I understand FB stock valuation used was $15bn (I.e. Microsoft price). But if you take the $ 4bn FB valuation used for internal stock that puts Twitter (and FB) at a $38 multiple which is in the high-end of the range of transaction multiples of the past years (e.g YouTube multiple was $40).Bottom-line the valuation seems ok, especially in the current financial context… but the illiquid stocks payment sort of ruins the party. Let’s not forget another dimension: it’s not only about money, maybe these folks really want to keep their company and continue the adventure.
Thanks for the link to our post. I personally think $500mm may have been overly generous.
Remember when MS paid over $400m for Hotmail? They never did monetize that, unless the ads sold around it did a lot better than I think.
This isn’t the first time that huge valuations for companies with eyeballs seemed like a great idea. And that bubble didn’t end well.
I’m a fan of Twitter. I don’t think monetizing it will be hard if they choose to do so, but how long will it take to make that $500mm back if they do? At some point, you’ve got to make that calculation.
~Jim
Thanks Jim. MSFT’s acquisition of Hotmail is a good comp too. Certainly email and microblogging share communication use cases. But I’d argue that email is something of a subset of how Twitter is used.
Twitter = email + IM + social network + research database.
Nice writeup. I think some of the prior acquisition prices have to be taken in the context that the entire industry has had a huge macro level shift down since those were completed. If the companies that are doing the acquisition are worth 50% less then it is a pretty straight line to expect that unless the macro market conditions improve that near term acquisitions (2008-10) may be at lower levels then the 2005-07 time frame.
On Twitter, hard to say what they are worth, but I would think a cash+stock combination deal would have been much more attractive then all stock.
Shane – great point that valuations today are definitely lower than they were when YouTube, MySQL, Bebo and others were acquired. Perhaps all the more reason for Twitter to say ‘no’ to any offers until the economy picks up again.
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