I've been using Twitter for a while now. It's one of those things that if you don't have it, you don't know why you should, but once you use it, it becomes so common it's hard to imagine life before it.

There's quite some controversy surrounding Twitter. For a while, everybody was complaining about its stability (or rather the lack of it), but people continued to use it regardless, and lately, it's been a lot more stable (it still has bugs but at least it's up).

Another popular subject is the apparent lack of a business model. Twitter seems to follow the 'find an audience first, find revenue later' model. But this has its problems. On wednesday, twitter dropped the popular SMS feature because they could no longer afford it. While this feature hasn't been working properly for me anyway, this has made a lot of their users angry.

But rather than being a symptom of the lack of a business model, I think this sheds some light on the way Twitter's model actually works. What I've noticed about twitter is that they develop their service in such a way that it is completely modular. Take the posting of messages. You can do that on the twitter website, but the majority of its users use third party tools that connect to twitter's API to post messages. (Some of these even have their own business model, like injecting ads between the Twitter messages).

Another such modularized feature is searching tweets. Twitter didn't have a useful search feature, but because of the API, a company called Summize was able to build a very good twitter search engine. There were others, but the Summize service was so good, that Twitter bought Summize and the feature is now available at search.twitter.com. (There seems to be a bit of irony here; Summize also didn't really have a business model, but they sold their stuff to twitter. Twitter on the other hand, paid a lot of money for a feature that they should have built in the first place and that they're giving away for free now.)

The modularity of a service such as twitter really became apparent when Twitter announced they would drop the SMS feature. Within about 2 minutes, TweetSMS was founded by a third party, to offer the users what Twitter had just taken from them. And recognizing that this feature is something that people would want to pay for, they even have a business model. If it's successful, twitter could easily acquire them in the future.

The interesting thing here is that it works like a formula. You let others develop features and business models, and you buy back the successful ones and incorporate them into the service. So you sow, then you reap.

Here are some characteristics of this approach, that I derived from the way Twitter currently operates.

• Even though there are many parties and many tools involved, you remain the center of the technology. Sort of like the 'hub'.

• Even more than building a product, you build a concept.
• It's more efficient than investing in the product yourself, as this way, there can be many parallel developments, and you pay only for the succesful ones. (Evolution)
• It takes a lot of venture capital to make sure this model works, as you have to buy a lot of things. On the other hand, researching and developing it yourself is expensive too.
• You basically outsource the risk. All the failed twitter clients and twitter services are not your problem. You just make sure you deal with the successful ones and keep those close.
• You outsource research. Many third parties have built tools on twitter based on ideas that the founders may never even have thought about.
• Every successful third party has a certain value (that Twitter will pay for when buying back the feature). However, with all those successes combined, the total value of Twitter will be more than the sum of its parts.
• This is a business model. One that may be carefully hidden, or one they may not even be aware of themselves.

In the past year, many alternatives to Twitter have seen the light of day, and most of them have died, even though some were better than Twitter. Their biggest problem: They are not Twitter. Since Twitter is more an idea or concept and not so much a product, it's hard to fight. It's easier to build a tool on top of Twitter than to build an alternative to Twitter. And this is its strength.

And with the above business model, I think that even though people are sceptical now, they will be highly profitable at some point.

Tags: , business model, twitter

This entry was posted on Friday, August 15th, 2008 at 11:13 am and is filed under Life. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.