Andrew Gawith: Twitter cashes in on its huge audience

Twitter has 58 million users which it plans to target with non-traditional advertising. Photo / AP

The selection process is over. The winner of the American Dialect Society's Word of Year Award for 2009 is "tweet", as in post an update on www.twitter.com, the micro-blogging website.

This announcement coincided with the report that Twitter had finally turned a profit after clinching a deal to sell search results to behemoth Google, and Microsoft's Bing.

Bloomberg Business Week reported the US$25 million ($35 million) these two deals are worth will help put Twitter in the black for a year or so. While US$25 million is a useful chunk of change, it's unlikely to give it sufficient long-term revenue to stay in the black.

For many of us the rise and rise of Twitter is of only passing interest. However, like a number of new social networking technologies, its growth is fascinating from a social perspective and it is also an intriguing financial phenomenon.

It's different to most social network sites because of its seamless integration with cellphones, its ability to target trending conversations in real time and its powerful distribution ability, with everyone from Dell to Air New Zealand using it as a sales and customer service tool.

In just three years, Twitter has gone from nothing to the bleeding edge of real-time web with 58 million users, and has persuaded various high-tech investors to plonk around US$150 million into the venture.

This in a marketplace littered with briefly famous social networking businesses. But is Twitter qualitatively different? That's certainly what their investors are banking on.

What the deal means is the world's largest two search engines will be able to data mine eight billion micro-blog comments a year (known as tweets), decide their relevance and then return this content as search results to users.

So, for instance, if you are a widget manufacturer and you do a search on your latest super-widget you will be able to pick up instantly the online conversations and consumer experiences relating to it, good, bad and plain weird.

But the real opportunity for Twitter is probably smart advertising, hyper-contextual placements that most of the digital soothsayers say is where the paid web is heading.

For instance if you happen to be tweeting with friends about the great snapper fishing you're having off the back of Waiheke, you'd be offered up the ability to rent a holiday home on the island with its own pier. Twitter foreshadowed this last November when it promised its "non-traditional" advertising would be announced in early 2010.

In addition to whatever this "non-traditional" content might bring in, there is likely to be income available to Twitter through the likes of endorsements by influential tweeters or advanced use of tagging to sell well-targeted ads.

Stepping back a moment, it's interesting to contrast Twitter, which has a huge audience and engagement but precious little income, with the many print publications and traditional broadcasters who have declining audiences and engagement but are hanging on to their income streams (though they are having to reduce costs to do so).

One has growing engagement but little income, the others have income but declining engagement.

The question being asked by analysts and tech-watchers around the world is why Google and Microsoft did the deal. Certainly it's helped re-ignite a number of rumours about either Microsoft or Google being interested in acquiring Twitter.

This wasn't helped by Twitter chairman Jack Dorsey's evasive answer in December, when asked if Google was planning on buying Twitter. Instead of flatly denying such a proposition, as he has previously, he replied "there have been no announcements".

The real story here isn't the fact that Twitter banked US$25 million for the coming year, it's the fact that Google is actually paying for the ability to provide its users with search results of this emerging communication technology.

It is also interesting given that Google has fought furiously against the idea of having to pay anyone for the privilege of including their content on their search results. And yet Twitter has managed to pull it off.

Better than that, they got the two biggest players in the market to effectively square off against each other playing the same game, and potentially preparing for a bidding war further down the track. Clearly it's not only in the dialectical stakes that Twitter was a winner in 2009.

The actual use of Twitter may leave you cold, although everyone from John Key to John Cleese is using it. But the sheer audacity of it is intriguing. And while the commercial viability of these new social networking sites and technologies still seems a long way off, in the short term you've got to admire anyone who can get two mega-companies to pay US$25 million for what they would normally take for free.

* Andrew Gawith is a director of Gareth Morgan Investments.