Twitter Ads Test Billion-Dollar Valuation

(By: Wired.com)

In toying with ads, Twitter — the net’s largest micro-publishing service — is going where every internet company in search of a dollar has gone before. But the history of how advertising has been introduced into a formerly commercial-free community is mixed, and success for this billion-dollar baby depends on how they decide to zag.
Twitter, the net’s largest micro-publishing service, launched an advertising service Tuesday that will let advertisers — beginning with some of the world’s top brands such as Starbucks — have their tweets show up in the top of search results. It’s a first attempt by the service to make money from its users.
Twitter’s ad model should sound familiar to net users, because it’s not unlike Google’s search ads — which let advertisers have links to their services and products show up above and beside search results. It’s not a bad model to work off, given those tiny ads propelled Google into one of the world’s top tech companies with enough global clout to even take on Microsoft and the Chinese government.
Twitter is moving tentatively, however: Only one “sponsored tweet” will be displayed alongside search results, and the ad has to be something the advertiser already tweeted.
“We are simply following our long-held ethos of putting user value before profit,” said Twitter spokeswoman Jenna Sampson by e-mail. “We also want to ensure that promoted tweets are additive to the user experience as opposed to simply ensuring that they don’t detract from it. This takes a careful, thoughtful approach.”
Without saying it, Twitter is trying to avoid the pitfalls that have plagued Facebook in its attempts to make money from its users — whether that be the ill-considered Beacon initiative that publicized users’ purchases on the net (leading to the $10 million settlement of a privacy lawsuit) and repeated changes to its privacy policy designed to make the site more open to advertisers.
Meanwhile, Yahoo and Microsoft have struggled to keep up with Google’s tiny-text-ad success, even as they’ve had better luck with more traditional banner and multimedia ads. The two joined forces — with Yahoo taking over ad sales for both search sites, and Microsoft’s Bing search powering the search results for both.
Twitter’s product is interesting in that it is both significantly similar to and different from Google’s approach, which nets the search giant more than $20 billion annually. Google’s ads, like Twitter’s, are mostly small text ads with links that show up alongside and, increasingly, above search results. But Google’s ads are targeted to searchers who often have some purchasing or research intent. It makes sense for a travel company to pay $2.50 or more for a click on its ad from someone searching on “Portland.”
By contrast, Twitter searchers are far more likely to be trying to follow a conversation, and so a search on “Portland” is likely to be simply a local trying to follow the news and conversation. That makes these searches less attractive to per-click advertisers.
Twitter seems to have recognized this, so its initial partners are companies that benefit from display ads that remind you of their brand. The firms don’t mind paying for the ads even if the person is searching on a term completely unrelated to Red Bull’s energy drink or Nike’s shoes. Ads that users don’t like (as measured by how often people do or don’t forward them to followers or click on the links) will drop off (not dissimilar to what Google does).
That’s exactly why Starbucks likes the program, according to spokesman Chris Buzzo.
“The one thing we are most excited about is these are simply tweets, not ads,” Buzzo said. “There is one big difference between a promoted tweet and a regular tweet. promoted tweets must meet a higher bar — they must resonate with users. This means that if users don’t do the things with promoted tweets that would normally do with a regular tweet such as reply to it, favorite it, or retweet it and so on, the promoted iweet will disappear.”
It’s likely that then and only then will Twitter begin feeding ads into the streams of posts that users sign up to read, either online or in one of the many third-party clients that build on the company’s service. Given that most interaction with Twitter comes when people read the posts from those they subscribe to (rather than searching), this is where the real money is. Which is to say that the real money isn’t in search ads placed a la Google, but in ads pushed into the reading streams of users.
And getting users to accept that will be Twitter’s real challenge.
Intriguingly, a start-up incubator called IdeaLab launched a similar effort called TweetUp on Monday. IdeaLab is run by Bill Gross — the man who invented pay-per-click advertising for search engines with a company called Overture, which was purchased by Yahoo for $1.6 billion.
Overture, which used to be known as GoTo.com, lost the search war in no small part because it thought that money alone could solve the problem of spam in search results. In its system, companies bid for the top spots in search rankings — under the theory that the best results would come from the market. By contrast, Google figured out the real way to make billions was by creating a very good search engine with natural results — accompanied by paid ads sold at auction, which effectively work as top paid links, without actually replacing the top natural results.
TweetUp seems to be learning that lesson and drawing on Overture’s model at the same time. The company promises that it will build its own Twitter search engine and weed out the useless tweets with “sophisticated relevance” algorithms and then let paying users stand out even further by paying to be at the top of the ever-scrolling search results.
The potential irony is clear. Gross’s IdeaLab — with its aggressive tests — could again pioneer the ad model for the future, and yet have to come in in second place again when Twitter copies the model for its popular, but not very innovative search engine.
Meanwhile, Twitter can move slowly and avoid alienating its users as Facebook did when it tried its Beacon advertising program. The program startled many users when it began publicizing the things they bought at other sites around the web — including an engagement ring and Blockbuster movie rentals.
Twitter has had years of people wondering how it will make money — but it’s in a unique position to take its time. Twitter essentially owns it content, since it has millions of people publishing on its proprietary publishing system. That’s far different from traditional search engines which all index and search the public web.
Moreover, Twitter is an investor darling, with tens of millions in venture capital and a relatively small staff and operating budget (and a comparatively tiny bandwidth and technology cost compared to a site like Facebook which stores and serves millions of photos and posts with complex sharing rules). To top it off the company is even currently profitable, thanks to smallish deals with Google and Microsoft that give those search engines real-time access to the Twitter publishing stream.
Twitter is loathe to even label the promoted tweets as “ads.”
“We don’t see them as ads, but as promoted tweets,” Sampson said. “They are entirely organic, and users will only continue to see them if they have resonance.”
Advertisers will initially pay for the number of people who see the ads, but eventually will get charged for how much users like the ads, based on how often they reply, click on the advertiser’s profile picture, and republish the message. Twitter calls this “resonance.”
That’s a nice word, but the real test is whether users find the ads “reasonable.”
That’s a question Twitter will soon find the answer to. Whether Twitter users accept these promoted tweets as something other than spam and preferable to the now-tired model of a site cluttered with banner ads will determine is Twitter is really worth billions of dollars — or if they’ve simply invented an odd publishing site whose users are busy typing out the pulse of the planet, while remaining wholly uninterested in seeing ads in the midst of their 140-character conversations.

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