Bloomberg BusinessWeek Exclusive: Content-Search Deals Make Twitter Profitable

Content-Search Deals Make Twitter Profitable
Data-mining deals signed in October will bring in $25 million in exchange for rendering Twitter’s tweets searchable on Google and Microsoft Bing

By Spencer E. Ante

Twitter is ending 2009 on a high note. The microblogging site has reached profitability after inking $25 million of deals that make its content searchable by Google (GOOG) and Microsoft (MSFT), Bloomberg BusinessWeek has learned.

In October, Twitter said it had struck multiyear arrangements that make users’ short blog postings available on Google.com and on Bing, which is run by Microsoft. Those agreements carry sufficient value to help Twitter achieve a small profit for 2009, say two people familiar with the company’s finances, who asked to remain anonymous because Twitter’s books are not a matter of public record.

Like many social media startups, three-year-old Twitter focused early on adding subscribers rather than generating revenue. That’s left many analysts and investors wondering how and whether the company—often cited as a candidate for an initial public offering or acquisition—would make money. Twitter co-founder Biz Stone declined to comment on the company’s finances, but wrote in an e-mail that the company is proud of the work it accomplished in 2009. “We’re thrilled about the partnerships we’ve formed this year and we’re looking forward to opening Twitter even more in the future,” Stone wrote.

In exchange for making short blogs, known as tweets, searchable on Google, Twitter will receive about $15 million, the two people say, adding that the Microsoft partnership is worth about $10 million. “The deals were huge,” says one. “With two scoops of the pen, a lot of revenue came in.”

Read the rest of the story here.

Is Twitter Worth a Billion Bucks?

Check out this story I worked on with my colleague Stephen Baker.

Is Twitter Worth a Billion Bucks?
Twitter’s latest funding round values the microblogging site at $1 billion. Can the company become profitable enough—or profitable at all—to justify that valuation?

By Stephen Baker with Spencer Ante

Twitter’s home crowd can be pretty tough. When reports emerged on Sept. 24 that the microblogging service was close to securing $100 million in funding that valued the company at $1 billion, flurries of 140-character jeers flooded the service. “Nutty valuation,” wrote @Nicklippis. “I’ve seen this movie before,” twittered @ericclovesbacon. “It starred eToys.com and ended in fail.”

True, a billion dollars for a company with virtually no revenue recalls the excesses of the dot-com era. The logic behind Twitter’s valuation comes straight from the very same school. It views Twitter less as a single company than as the base for a whole realm of communication and data. “It is an increasingly important platform for business and consumers,” says Seth Levine, managing director of Foundry Group.

Read the rest of the story here.

Middle East Censors Got You Down? How to Circumvent an Internet Proxy

Like many Americans, I have been riveted by the outpouring of dissent in Iran against the powers that be. It is amazing to see such a public expression of outrage in an oppressive society. And it is equally amazing that the government can’t seem to put a lid on it.

One fascinating element of this story is the role that the Internet is playing as an outlet for that dissent. There have been numerous reports that the Iranian government has blocked cell-phone calls and access to Facebook and other Web sites, and shut down text messaging services for two days.

So how do videos, pictures and blog posts keep popping up? Well, one reason may be that Iranian geeks are finding a way to run around the censors. Check out this video by Howcast, which was financed by the U.S. State Dep., which shows you how to circumvent Internet censors and keep publishing.

Need Money for Your Startup? Meet the Super-Angels

Need money for your startup? Then you should read my new feature, “These Angels Go Where Others Fear to Tread,” in this week’s issue of BusinessWeek.

The story is about a new and increasingly prominent class of investors, which I call super-angels, who are financing startups as big-name venture capital firms conserve their cash. Over the last few years, these firms have funded hundreds of startups, including top outfits such as Facebook, Digg and Twitter.

My story focuses on First Round Capital and its co-founder Josh Kopelman. But there are a growing number of these firms, including Baseline Ventures, Soft Tech VC, Maples Investments, Felicis Ventures, True Ventures, and others.

[Risk-takers: First Round’s partners Howard Morgan, Chris Fralic, and Rob Hayes]

Since there seems to be more super-angels popping up every week, I am going to start a sort of wiki list of the firms, which I hope you all will add names to. Check out the story here.

I also sat down with BusinessWeek assistant managing editor Jim Elllis for an interview about the story in our new weekly video podcast. Check it out here.

Twitteriffic! Why I am Bullish on Twitter (and Why it Shouldn’t Focus on Making Money)

Today, BusinessWeek.com and the New York Times published features about Twitter. Not to be outdone, Kara Swisher published an interview with Twitter co-founders Biz Stone and Evan Williams on AllThingsD. All of these stories show how Twitter is becoming a platform that companies are building their businesses on.

This is the main reason I am so bullish on Twitter’s future. Silicon Valley home runs are all about platform plays. Whenever a company helps other companies make money, that’s when you have a potentially large winner on your hands. Think Microsoft (software developers), Amazon (online merchants) and Google (small to medium size publishers and other marketers).

As Twitter develops its platform, the next step for the company is to find standard monetization formats, and help automate the commercialization of the service, much like Google did with AdWords and AdSense and Amazon has done with its merchants program.

But unlike many folks who have been pressing Twitter to announce a business model, I don’t believe there’s an urgent need for Twitter to focus on making money. As a two-year-old company, Twitter SHOULD concentrate on product development and growth and core innovation. It’s too early to be maximizing for profit. The platform is still in its early stages of development and there are so many more users to sign up and the company has raised a war chest of capital to finance that growth. This bird just got its wings and is learning to fly.

Facebook, on the other hand, which is five years old, is in the typical stage of a startup where it should be shifting from growth to profit. Even so, it makes sense for Twitter to start thinking about business models since it takes a year or two to develop and roll out a monetization program. And that’s exactly what the company is doing now.

I will have more to say about the recent reports about Google and Twitter but first I wanted to get this thought off my chest. So keep doing what you’re doing, Twitter. It’s worked out pretty well so far. And I think it should get even better.

It’s Official: Twitter Hires Ex-Google Designer Douglas Bowman

Turns out the Web rumors were true for once. In a meeting last Friday afternoon in Twitter’s San Francisco office, Twitter co-founder Biz Stone told me that the company had hired ex-Google Visual Design Lead Douglas Bowman to be the company’s new creative director.

Bowman will replace Stone, who was acting as Twitter’s creative director. “The Twitter Web page looks pretty simple,” says Stone. “But from our perspective the design needs a lot of work.”

This is a great hire for Twitter, and more proof that Twitter has replaced Facebook as the tech industry’s hottest startup. Bowman probably could have joined Facebook if he wanted. But the talented designer, who used to work at Wired News, clearly sees a bigger opportunity at Twitter, not only from a design perspective but perhaps from a monetary one as well.

Bowman will be a much-needed presence as Twitter expands and tries to handle the enormous design challenge of helping Twitter users to manage the increasingly large amount of information flowing through the Twittersphere.

Bowman caused a bit of a stir when he announced his departure from Google in late March. In a candid post on the blog of his design consultancy stopdesign, Bowman said he left Google because of what he described as the company’s slavish obsession with data.

“I had a recent debate over whether a border should be 3, 4 or 5 pixels wide, and was asked to prove my case,” wrote Bowman. “I can’t operate in an environment like that. I’ve grown tired of debating such minuscule design decisions. There are more exciting design problems in this world to tackle.”

Not surprisingly, it appears as if Bowman digs Twitter. He seems to have joined the service on or around March in 2007. His first tweet appears to have been posted from, what else, South by SouthWest. “mellowing at the Driskill,” wrote Bowman. “my lord there’s a lot of people at sxsw this year.”

But Bowman is far from prolific or Scobel-like. He only has published 401 tweets over the last two years. Apparently, Bowman has to work for a living.

He is pretty popular, though. Bowman currently has 3,677 followers yet he himself only follows 93 people. Among the select crew of people that Bowman tracks are: San Francisco Mayor Gavin Newsom, Biz Stone, Tina Fey, designer Derek Powazek, Google senior vice president Jeff Huber and blogger Anil Dash.

Facebook’s Thiel Explains Failed Twitter Takeover

This morning, BusinessWeek published my story confirming for the first time that Facebook made a serious offer for Twitter. I’ve also got some scoopy details on the negotiations and why they failed.

Facebook’s Thiel Explains Failed Twitter Takeover
The social network intends to grow during the downturn, but Facebook’s imprecise and illiquid stock valuation limited its appeal to Twitter

Facebook remains on the lookout for acquisitions after its failed attempt to buy microblogging site Twitter, one of the company’s directors and largest investors says. “We’re still focusing on growing as much as possible,” says Peter Thiel in an interview with BusinessWeek.

In Facebook’s first public confirmation of the talks, Thiel said the parties disagreed over price and structure when they seriously considered a deal last fall. “It became pretty clear it wasn’t going to happen,” Thiel says from the mid-Manhattan office of his hedge fund Clarium Capital. “The deal would have to be done with Facebook stock. And then you have to figure out how much the stock is worth.”

Determining Facebook’s true value is a matter of heated debate. Since Facebook is a private company, there is no liquid market for its stock. When Microsoft (MSFT) bought preferred stock in the company in 2007, it valued Facebook at $15 billion. Around the same time, Facebook placed an internal valuation of the company company’s shares of common stock at about $3.7 billion, according to court documents. The Palo Alto company relied on the appraisal to value employee stock options fairly and avert possible tax problems. But since then, the valuations of most private tech startups have fallen along with stock markets.

Facebook’s Risky Strategy

In November, the blog All Things Digital reported that Facebook was in talks to acquire the fast-growing micro-blogging service Twitter for $500 million, most of it in Facebook stock.

The attempt to buy Twitter fits with Facebook’s risky strategy of pursuing user growth and product innovation over profits. Facebook is hewing to that strategy at a time when many technology companies are slashing costs and announcing layoffs. “It will either turn out to be a great strategy or a terrible strategy,” Thiel says. Larry Yu, a spokesperson for Facebook, declined to comment on Twitter and the other aspects of this story.

If Facebook is to succeed in using its stock to buy companies, it will need to do a better job at persuading targets of its worth. A person close to Twitter with knowledge of the negotiations confirms that valuation was the primary problem. Twitter management also believed and continues to believe that Twitter has tremendous momentum and that its full potential isn’t close to being realized.

Twitter Wanted Open-Market Valuation
Representatives of Twitter liked the sound of $500 million but balked when Facebook said its stock was worth $8 billion to $9 billion. Twitter’s team knew that Facebook was letting employees sell stock on the secondary market at company valuations ranging from $2 billion to $4 billion. “We said it’s not worth it,” the person says. “Don’t treat us like children.”

At that point, Facebook offered Twitter around $100 million in cash, with the rest of the deal in stock. Facebook said it would come up with the $100 million by selling more of its stock to outside investors.

Twitter agreed on one condition: that the Facebook stock it received be valued at the price company shares garnered on the open market. Facebook blinked and the deal talks ended. “They wanted to buy us but there was not much conviction,” the person says.

Click here to read the rest of the story.

Twitter Gets Shorty (What’s Next? Best Status Updater Awards?)

Last night I was getting ready to leave the office and go home when my colleagues Doug MacMillan and Arik Hesseldahl asked me if I wanted to go with them to the Shorty Awards.

“The hooty-hoos,” I said, having no clue what they were talking about.

“It’s the first award show for Twitter people,” said Doug.

Doug and I schlepped out to Brooklyn. When we walked up to the bar, there was a line of about 50 people snaking down the block. That was a shock. People will do anything to promote themselves–especially in a recession.

I won’t bore you with a recount of the evening other than to say, it was not as bad as I expected it to be. The biggest surprise was that the sponsors of the event shrewdly got some mainstream media organizations to sponsor it and buy in. CNN anchor and Twitter-lover Rick Sanchez was the host, MC Hammer made an appearance to promote his online venture and the Knight Foundation actually sponsored the event.

I also got to meet Howard Lindzon, a hedge fund manager who co-founded Wallstrip. I’ve been following Howard’s Twitter posts and enjoying them. He pulls no punches. Howard is actually trying to build a business on Twitter, using the messaging service as a sort of virtual order flow system where people can eavesdrop on what stock traders are buying and selling. The name of the company is stocktwits.

Howard made an interesting point when he told me that the first Blackberry devices took off because brokers and traders would message their friends with their trade orders when their internal networks went down. Now he is trying to revive that idea via Twitter.

The irony is that even thought Twitter has yet to figure out a way to generate revenue from its growing popularity, entrepreneurs like Howard are trying to build a business on it. Howard told me he is going to start charging a monthly subscription fee to get some sort of premium access to this info.

But on the whole the idea of giving out awards to the best twitterers is kind of absurd and reductive. What’s next?

Best Facebooker?
Best Status Updater?
Best Text Messager?
Best Emailer?
Best Instant Messenger?

What silly award show would you like to start?

Take 2: How Social Media Changes Your Business

My colleagues Stephen Baker and Heather Green wrote a fabulous update to their 2005 BusinessWeek cover story, Blogs Will Change Your Business.

It’s called Beyond Blogs: What Business Needs to Know, and you should definitely read it.

Since our 2005 story came out, a lot has changed in the blogosphere. Facebook, YouTube and Twitter barely even existed. As Steve and Hetaher write, “Three years ago, we wrote a big story—but missed a bigger one.”

The bigger story, of course, is the rise of social media–of which blogging is just a small but important part.

Here’s another snippet from the story encapsulating the shift we’ve seen the last few years:

“But blogs, it turns out, are just one of the do-it-yourself tools to emerge on the Internet. Vast social networks such as Facebook and MySpace offer people new ways to meet and exchange information. Sites like LinkedIn help millions forge important work relationships and alliances. New applications pop up every week. While only a small slice of the population wants to blog, a far larger swath of humanity is eager to make friends and contacts, to exchange pictures and music, to share activities and ideas.

These social connectors are changing the dynamics of companies around the world. Millions of us are now hanging out on the Internet with customers, befriending rivals, clicking through pictures of our boss at a barbecue, or seeing what she read at the beach. It’s as if the walls around our companies are vanishing and old org charts are lying on their sides.”

Obama: Master of the Web?

In this week’s Digital Dish, BusinessWeek reporters Steve Baker, Heather Green, Catherine Holahan and Spencer Ante discuss the merits of News Corp’s dalliance with Yahoo! and how the Internet is helping to change the art of presidential campaigning.

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