Virtual Pants

According to Dan Frommer, Twitter needs $1 billion in revenue next year. For some reason, Twitter is limiting itself to ad-based revenue, without giving people the option to pay for the service. Let’s see how they might be able to generate some revenue by letting us pay, and in turn, being a bit nicer to third-party developers in the process.

First, some data. According to Wikipedia, Twitter has 500 million registered users. Based upon a recent study, 23% of tweets come from third-party apps. So, let’s say 20% of users tweet from third-party clients.

Using the numbers above, if 40% of third-party client users (8% of total users) were willing to pay $25/year for an ad-free Twitter Pro service, Twitter makes $1 billion per year in revenue. That’s without a single ad being displayed on Twitter. I know that might be a high estimate, i.e., Twitter doesn’t have 500 million active users, maybe less than 20% use third-party clients, and maybe they charge less than $25. So let’s cut that number in half. $500 million is a reasonable estimate based on the available data.

But that’s not what they need. Dan said they need $1 billion. Don’t forget, Twitter will still display ads for the 92% of non-paying users. Twitter is internally estimating that they can hit $1 billion in ad revenue by 2014. Let’s be conservative and say they make half that now. 92% of half that is $460 million, which brings us to $946 million in total revenue per year. Right now. Pretty close to what they need next year.

Since we don’t have real numbers from Twitter, it is difficult to accurately estimate these things, but the analysis above is certainly reasonable. Someone at Twitter has done the same analysis with the real numbers, and I suspect the numbers look similarly reasonable. Then why not let people pay? Only Twitter knows, but for some reason it’s a risk that they aren’t willing to take. I think their recent policy towards third-party developers is more risky, and that Twitter would be much better served letting its users pay for the service. The results might be surprising.