Pascal-Emmanuel Gobry| Oct. 7, 2011, 11:18 AM
Twitter is already a tremendous success: It has 100 million active users and 400 million monthly unique visitors.
It has also raised funding at a valuation of $8 billion.
Is that valuation justifiable? Could it actually be too low? How big can Twitter get?
At this early stage of the game, estimating Twitter's total revenue opportunity is tough, but it still makes sense to think about.
In this note, we'll lay out our thinking on one approach.
Twitter already has hundreds of millions of users. Ultimately, its revenue opportunity will be determined by how much revenue it can generate per user.
Right now, at the early stage of its revenue development, Twitter's revenues per user are very low relative to those of other Internet companies. As Twitter places more emphasis on revenue, however, this revenue per user should increase. The question is how much.
For now, Twitter is mainly in the passive display advertising market. Twitter's users do not go to Twitter to search for products to buy, as they do with Google. They go to Twitter to be informed and entertained. And while they're getting informed and entertained, they encounter some ads.
How big is the global display ad market?
It was $26 billion last year. So Twitter is playing in a big pool.
So how much revenue do display-ad companies generate per user?
Well, take a look at some of the big display advertising companies, including Yahoo, Facebook and Demand Media, and you'll see that there is great variance between those companies' revenues per user.
As the chart below shows, Yahoo generates the most revenue per user (in this case unique monthly visitor), at $6 per year. Facebook's at $5 per monthly user. Demand Media, meanwhile, generates the least, at about $1.85 per monthly unique user per year.
We computed the numbers using ComScore numbers for average monthly unique visits for a number of sites and reports on Demand Media; We updated Facebook's figures using the latest reported user and revenue estimates.
From an advertising perspective, Twitter actually has two types of users: active users and visitors. Most Twitter users simply visit Twitter.com to follow updates from people they like, without logging in. And a minority of Twitter users (still around 100 million people each month) logs in to Twitter to participate more heavily—they're the active users.
Right now, Twitter doesn't advertise to passive visitors, but there's no reason it won't eventually. In fact, influential Twitter investor Fred Wilson has hinted that this might be in Twitter's future.
Unlogged-in visitors are relatively "low-value" traffic for Twitter because it is harder to target ads to them. These folks, therefore, are probably most analogous to to the people who visit Demand Media's content sites.
For logged-in users, the best comparison is Facebook, whose ads are tiny social media ads, not big display banners and search ads like Yahoo.
Can Twitter reach the same revenue/user/year numbers as Facebook?
Actually, in our opinion, probably not.
Facebook blankets its pages with ads in a way that Twitter doesn't. There are many ads on each Facebook page. Facebook ads also have graphics, which probably makes them slightly more valuable to advertisers than Twitter's current ads, which are tweets.
Anyway, using these observations and revenue-per-user figures, we can begin to develop some estimates for Twitter.
Let's assume, for example, that Twitter can get $3 per user per year from logged-in users, modestly less than Facebook's $5 but more than Demand Media's $1.85. And let's assume that Twitter can get the same revenue per user per year from logged-out users as Demand Media. This would equate to about $2 of overall revenue per Twitter user per year.
With 400 million global users, $2 per user per year would equate to a current Twitter revenue opportunity of about $800 million. This is vastly more revenue than Twitter is currently generating today (about $150 million this year, last we heard.)
Looking ahead, let's assume a few years from now Twitter can continue to grow its user base and refine its advertising revenue targeting. As Twitter's ad targeting improves, it will also likely generate more revenue per user—at least from the logged-in users.
It seems reasonable to assume that, in a couple of years, Twitter's overall user base will have doubled and that it will have modestly increased the revenue it can generate per user. Using 800 million visitors and, say, $2.50 per user per year, the company could generate... $2 billion in revenue.
Now, there's a scenario in which Twitter might be able to generate a lot more revenue per user: If its targeting or brand-following becomes so valuable that it starts to charge companies for communicating with their followers. (Either by charging them for their accounts, or charging them per-tweet). This might sound outrageous, but most companies would gladly pay up. And there's no other way, other than Facebook, for companies to reach so many people so quickly and efficiently.
THE BOTTOM LINE: So, we estimate that Twitter's revenue opportunity is about $2 billion. $2 billion of revenue is a lot—more than enough to justify the company's recent valuation. It's not a lot relative to Facebook ($4 billion this year) or Google ($30 billion), though. To compete with those companies, Twitter would likely have to develop a new revenue producing product, one that radically boosts the revenue it can generate per user. Or, it will have to keep growing until its user base is measured in the billions.
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