But for those looking at Twitter as an investment for the first time, there’s one big question to answer: How does Twitter make money?
The short answer: Most of Twitter’s revenue comes from advertising – a revenue stream that’s benefitted from Twitter’s explosive growth…
Here’s a closer look at how Twitter operates, and how its growing revenue stream translates to profits for investors.
How Twitter Makes Money
Twitter, founded in 2006 in San Francisco, allows users to send 140-character text messages – or “tweets” – to their list of followers. In 2007 the site was hosting 20,000 tweets per day, and by 2010, that figure had jumped to 50 million. Since then, the number of tweets per day has grown tenfold.
The microblogging service sees massive spikes in tweets during global events or major breaking news stories. For instance, this year’s FIFA World Cup brought in more than 652 million tweets alone.
The service is available in 35 languages, and more than 77% of the site’s users reside outside of the United States.
In its last earnings report, TWTR reported that its user base was growing rapidly. It reached 271 million monthly active users (MAU) at the end of July, a year-over-year gain of 24%. That news sent TWTR stock soaring 30% in one day.
Aside from the stock gain, that MAU growth was great news for investors because advertising accounts for 89% of Twitter’s revenue. And the bigger Twitter’s user base, the more people it can advertise to…
Twitter’s $277 Million Advertising Business
In the second quarter of 2014, Twitter reported that its advertising business brought in roughly $277 million in revenue. That was an increase of 129% from the previous year.
Twitter offers three major advertising methods for reaching its growing user base.
The most popular method is promoted tweets, which allow marketers to buy tweets that show up in users’ timelines like any ordinary tweet. Twitter uses an algorithm that puts these promoted tweets on the timelines of the most appropriate users. For example, if Twitter knows someone is a sports fan, they will place a promoted tweet from a sports apparel retailer on his or her timeline.
Promoted accounts is another advertising avenue, which places paid accounts in users’ “Who to Follow” section or on users’ timelines. Essentially, advertisers pay Twitter to promote them as a desirable account to follow.
Finally, the third advertising method Twitter uses is “Promoted Trends.”
“When a user clicks on a Promoted Trend, search results for that trend are shown in a timeline and a Promoted Tweet created by the advertiser is displayed to the user at the top of those search results,” Twitter officials said in their last earnings report.
While advertising accounts for the lion’s share of Twitter’s revenue, the company generates 11% from another source. And it’s a revenue stream that could have a big future with the company…
Where the Rest of Twitter’s Money Comes From
In Q2, TWTR reported nearly $35 million in revenue from its “data licensing” business. Essentially, Twitter sells the content of tweets to third-party buyers, mostly marketers.
Data licensing may only account for 11% of Twitter’s revenue, but that $35 million was an increase of 90% from the previous year.
Money Morning‘s Defense and Tech Specialist Michael A. Robinson thinks Twitter’s data licensing or “Big Data” business could play a key role in the company’s future.
“One area that will be interesting is the Big Data aspect,” Robinson said. “Twitter is a goldmine for data with the number of users and tweets they have. Twitter has tons and tons of data, almost an incomprehensible amount.”
Twitter has made nine acquisitions totaling nearly $470 million in the Big Data industry. Its most recent acquisition came in April when it bought Gnip, a company that packages and sells massive amounts of data from large companies.
The company says that data licensing will represent a smaller percentage of its revenue in the future, but that’s only because advertising is expected to grow at a faster rate.
Regardless of which revenue stream grows faster, the number that will dictate Twitter’s overall revenue growth is monthly active users.
As the MAU figure grows, Twitter will have a larger group to advertise to and a larger pool of data to draw from for its data-licensing business.
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