The latest news that tech giants Google and Facebook are interested in Twitter and its huge audience and might be willing to pay up to $8 or $10 billion has kicked up the debate on the value of the messaging firm. Many, including CNBC commentator Herb Greenberg (on his Twitter feed!) are asking what it’s really worth.
In order to value Twitter one needs to understand it’s value to its own users and customers. On the usage side, it has proven itself extremely valuable to its users, creating a highly engaged relationship. But on the advertising side, presuming advertisers are its other customers, it hasn’t created created a large-scale platform that has given advertisers an opportunity to tell their story in an satisfying way. Unlike Facebook, which is generated revenues in the billions, Twitter’s revenue was $45 million last year and this year is said to be barely over $100 million, according to the Wall Street Journal (link to Subscription product).
What that means is that the established value of Twitter has to be based on the value it brings its users, but not necessarily its advertisers yet. That would suggest that the users may have to pay something for it to ever reach its valuation, at least until the advertising world figures out how to monetize that audience. The five-year-old Twitter has 200 million registered users.
While it is possible that many, if not most, people might be willing to spend a small amount of money each to be part of the Twitter universe, that is still a huge step that few internet businesses have been willing to take.
Where does that leave the valuation of Twitter? The answer today is in the form of another question: “To whom?”.
For Google to buy it with their stock, it could easily be worth that much, much the same way YouTube was worth the billions Google paid for it. When you have some much future growth priced into a stock, that stock can be used loosely to do things that enhance the existing platform. Like YouTube did, twitter can create an even deeper, more engaged, relationship between Google and its existing users by buying it for Google stock. Simply put, it will give Google even more time with its users, which presumes that Google will use that time and engagement to extract more from those users, either directly of through increase advertising.
In the YouTube case, in just a few days after the acquisition by Google, Google’s market cap went up by a larger amount than the entire $1.65 billion pricetag for of YouTube. At that time No one was even close to bidding what Google did for the video sharing company. And ironically, at about that same time, Twitter was just launching.
Almost no one else has that kind of currency and that ability to extract value from a service. Google is in the business of engaging customers and it is facing a possible topping out of search, which to this day is the one product that makes huge profits. Google needs to continue to diversify to protect to continue its growth.