Twitter Price: $1 Billion For Tweets? Get Real

11/20/2009 05:12 am ET | Updated May 25, 2011

$1 billion for a 140-character product? Apparently so: Michael Arrington broke the news that Twitter is raising another $50 million round of financing -- and has been valued at $1 billion.

But where did those ten figures come from?

Citing an interview with Twitter co-founder Biz Stone and leaked company documents, Venture Beat links the $1 billion pricetag to Twitter's projects it can attract 1 billion users by 2013.

Biz's logic:

"We started with a very broad idea that the open exchange of information has a positive impact on the world," he said. "Then we worked backwards thinking that if there's more than 6 billion people and 1.5 billion web users, what's a crazy number of users that we could grow the company to for that vision and that would work for us?"

A Twitter account for every web user? Better hope those "fast followers" speed up.

Also, a billion users has a nice ring to it, but it remains to be seen how many of those are, and will stay, active. Already, research from Harvard Business School found that 90% of tweets are generated by just 10% of users. On a typical social network, the top 10% of users account for 30% of all production, meaning Twitter "resembles more of a one-way, one-to-many publishing service more than a two-way, peer-to-peer communication network." How much will those users be worth if nobody Tweets, or signs on?

There's also the problem of business plan -- or rather, the lack thereof. Twitter's $50 million infusion comes on top of $35 million already raised earlier this year. The company has yet to make a penny.

Switched likens Twitter's $1 billion price to the Easter Bunny and Tooth Fairy.

The service is free, has no "premium" options, and displays no advertising -- leaving no discernible avenues for revenue (aside from asking rich folks for it, that is).

Twitter has left the door open to sell advertising on the site (a potential cash cow), although arguably, the ads are already there: Wired reports 20% of Tweets mention a brand somewhere in their text. Twitter's already a channel being used extensively for product promotion.

Twitter entrepreneurs have already reaping in the dough, says the New York Post:

One sports entrepreneur, Chris Russo, reeled in a chunk of McDonald's marketing millions with Twitter. In 2006 he founded Fantasy Sports Ventures, which is now helping the fast food chain reach fantasy football players with a branded product that aggregates "tweets" about the subject. Russo's revenue, thanks to the burger giant, is expected to double this year to $10 million.

Numerous others, from individuals to small businesses to nonprofits, have figured in how to use Twitter to reap in the dough using everything from Twitter-tees to proferring advice on social media to creating Twitter-based currency ("Twollars").

VentureBeat reports valuations have ranged from:

  • $263-385 million (the implied valuation from what sellers are offering to buy Twitter shares at on private equity trading startup SharesPost)
  • $589 million (NeXt Up! Research, assuming Twitter will have $134 million in revenue in 2013, a 25 percent profit margin and a price-earnings multiple of 25)
  • $1.3 billion (The Wall Street Journal, assuming Twitter will have 250 million users and $500 million in revenue in 2013, a 27 percent profit margin and price-earnings multiple of 20. The paper then applied a 20 percent discount rate to accommodate the riskiness of the company.)
  • $1.7 billion (TechCrunch, assuming that Facebook's worth $10 billion and dividing that by the ratio of Facebook's user base to Twitter's. He also considered how much the average Internet user spends in all the countries Twitter has users in.)
  • $5 billion (Robert Scoble, who argued on a mostly qualitative basis)
Think about that for a second: the largest estimate is twenty times the size of the smallest one.

The WSJ even made a case for valuing Twitter at $2.7 billion.

What do you think? Are you a Twitter addict or just ho-hum? Think it's more bubble fever or is Twitter the real deal? Share your comments with us below.

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