Twitter has been in the news constantly for the last few months. Elon Musk bought the social media company for about $44 billion, taking it private in a deal surrounded by drama and intrigue.
The media covered the takeover and subsequent lawsuits with great zeal. But behind the theatrics, Twitter aims to generate value for its shareholders by leveraging its 206 million active daily users.
But how does Twitter make money, given that it’s free to use? The answer lies primarily in advertising, as with most social media companies.
What is Twitter?
Twitter is a social network founded in 2006 by Jack Dorsey. He is also the founder of Block (formerly known as Square). The company went public with an initial public offering (IPO) in 2013. Since then, Twitter has grown rapidly. It is one of the most ubiquitous social media platforms due to the seamless connectivity it offers to users.
What is a tweet?
A tweet is a short message posted to an account and viewed by the public. The original limit was 140 characters. Twitter later changed it to 280 characters. Tweets are automatically distributed to your feed, which is constantly updated.
Twitter is free and popular
The platform is free to use and that is why it is gaining momentum. The platform reportedly has about 396.5 million users worldwide and 206 million daily active users. At least 500 million tweets are sent daily. Most people use it to find news or entertainment content.
Many entrepreneurs, celebrities and politicians use Twitter to make announcements and gain followers. For example, President Barack Obama has the most followers, with approximately 133.3 million, making him the most followed account on Twitter. Man number two is Elon Musk, who now owns Twitter with 116.7 million followers. Interestingly, the most popular business is YouTube with approximately 77.7 million subscribers.
How does Twitter make money?
Despite Twitter’s large user base, it has struggled to make money consistently over the years. The firm makes money mainly in two ways: advertising and data licensing. A large database allows companies to send promotional tweets to users.
Twitter’s revenue in 2021 was about $5.08 billion. That’s more than double his 2017 revenue of roughly $2.44 billion. With this kind of growth, Twitter can be expected to be profitable. But operating expenses and expenses grew just as fast and included a huge legal fee of $765.7 million in 2021, resulting in a net loss of about $221 million.
Advertising
The main way to make money on Twitter is advertising. In 2021, advertising made up about 89% of the firm’s revenue and was worth about $4.5 billion. Advertising revenue growth is in double digits and increased by 41% from 2020 to 2021.
The company’s own algorithms create targeted ads. Advertising formats include boosted ads, Twitter Amplify, follower ads, and Twitter takeovers. Ads are always marked as Promoted in the user’s feed. Before Elon Musk bought Twitter, the cost varied depending on the type of ad.
Advertisements are regular tweets that advertisers buy to place their product or service on a large group of user feeds. The cost can be up to $200,000 per day for the most popular Twitter topics. The price is determined at the auction and is based on a performance fee or a fee per impression.
Follower ads suggest new Twitter accounts to users based on similar interests. Promoting a tweet costs $0.50 to $2 per action, while promoting an account costs $2 to $4 per new follower.
Trend Takeovers place ads next to a trending topic to get an idea of the hottest and most popular topics.
Advertising is targeted at users. The algorithm ensures that ads are placed in the correct channels based on time, search results, profile pages, and tweets. As a result, advertisers can target users according to different criteria and expand their audience. They can also pay to display ads at the top of the trending topics timeline.
Data Licensing
The other 11% of Twitter’s revenue comes from data licensing and services, which is the second way to make money. In 2021, revenue from this segment was about $571.8 million. This income grew more slowly, but at a respectable 12.3% between 2020 and 2021.
This revenue stream comes from subscriptions to other businesses and software developers. The data provides them with historical and current user trends and demographics.
Another
In this segment, Twitter makes money by selling user fees for MoPub, its mobile ad exchange. Users buy and sell ad inventory, and MoPub matches buyers with sellers. However, Twitter sold the business in early 2022 for approximately $1.1 billion in cash.
Twitter Blue has been widely discussed in the news because Elon Musk wants to charge $7.99 per month for verification services. Only legitimate billing accounts will receive a blue checkmark. Previously, the accounts of famous people were ticked. If this move is successful, it could become a new and untapped source of income for the company.
Major competitors are bigger
One of the reasons Twitter struggles to make money is because the company competes with much larger companies for ad dollars. For example, Facebook is much larger. Its parent company, Meta Platforms (META), generated nearly $118 billion in revenue in 2021, many times more than Twitter. Similarly, the parent of Google and YouTube, Alphabet (GOOG, GOOGL), had nearly $258 billion in revenue.
In addition, other social networks including Instagram, Snapchat, TikTok and Pinterest are vying for ad dollars. Snap-owned Snapchat (SNAP) was founded later than Twitter and is growing faster, hitting just over $4.1 billion in revenue in 2021. Pinterest (PINS) is also growing revenue faster than Twitter.
Also, companies like Amazon.com (AMZN) and Microsoft (MSFT) are bigger players in recurring online ad revenue, though not on social media. However, LinkedIn, owned by Microsoft, is a multi-billion dollar business in the social media market.
The bottom line is that the competitive field is overcrowded and Twitter is a relatively minor player, making it difficult to consistently grow revenue and maintain profitability. In addition, new members grow faster.
Advertisers looking to get the most bang for their buck may opt for something other than Twitter due to its relatively small size. For example, Facebook has nearly three billion users, YouTube has over 2.5 billion users, and Instagram has nearly 1.5 billion users. Even TikTok, Snapchat and Pinterest are bigger. Consequently, advertisers may choose Twitter alternatives because they can reach a larger audience.
The business model is stagnating
Twitter is struggling to make money because the business model is relatively stagnant. The company focused on advertising sales as its main source of income. Initially, the firm grew its user base rapidly, but as competition in the social media space increased, it became increasingly difficult to sustain that growth.
Advertisers focus on the number of users and engagement. For example, a platform like Facebook keeps its users in a closed environment, and they spend about 21-22 minutes a day on the site. But Twitter users are looking for news and entertainment and typically only spend an average of six minutes a day on the platform, limiting interaction.
Elon Musk buys Twitter
In addition to the problems of making money, Twitter has recently faced controversy. Elon Musk offered to buy the firm on April 25, 2022 for $54.20 per share, or $44 billion. It seems that he changed his mind, but after many months and litigation, the deal was closed. The transaction was completed at the end of October 2022, taking the company private. Only some people could buy Twitter on their own. But Elon Musk is the richest man in the world, having made his fortune mostly by owning Tesla shares.
Musk is making quick and seemingly frenetic changes to Twitter. It reduced headcount to less than half of its pre-acquisition headcount and laid off top management. In addition, he created a content moderation council, made changes to the home page, and is busy reloading Vine. One of the consequences of the Elon Musk purchase and the rapid change was that some advertisers were left out.
Twitter remains a popular social media platform, but some people are moving towards competitors like Mastodon, an open source network where you don’t post tweets, but ‘beep’. The alternative service claims that since Musk took over on October 27, one million new users have joined.
How Twitter will make money in the future
Twitter is likely to change in the future, but it continues to make money, as it always has, through advertising and data licensing. Advertising will always remain important, but Twitter is exploring pay-per-view options when users post videos behind paywalls. Other potential earning opportunities in the future include allowing users to sell products. A subscription-based model with tiered pricing is another way Twitter can make money. However, competitors like Facebook are free, which presents a barrier to significant change.
This article originally appeared on Wealth of Geeks.
