Betaworks’ John Borthwick recently posted the informative Ongoing tracking of the real time web… Combined with Fred Wilson’s AVC post Twitter v. the Twitter Ecosystem, these two posts illustrate and highlight important learnings for startups and entrepreneurs everywhere. Those learnings are the subject of this post.
The key points of this post are: (1) Twitter is indeed a platform; and (2) platforms’ own profitability are related not a little bit to the revenue driving capabilities of those partners that build on the platform. Twitter has clearly enabled other applications to create and build innovative services, a la Tweetdeck, Seesmic, Bit.ly, etc. These are great as they extend Twitter’s value even further. Over time, we should expect that the traffic through the platform will dwarf the traffic of the application/web site called Twitter. This is a useful illustration for web- internet-based entrepreneurs on the value of platform building in a business. Here’s what I mean…
I give a talk called Revenue: Of Moats & Models in Silicon Valley. The purpose of this talk is to help the very early stage startup—ideally the 1-2 founder team in the garage—frame quickly and easily how to think about revenue and building their business. One of the things that I talk about a lot is thinking through how to build a fly-wheel in your business. Some people call this a “platform play,” but I tend to prefer a more crisp illustration of a positive feedback loop. The steps that I illustrate and walk through with founders is one that is simple and seems to resonate with most founders. The steps are:
- Create something users want. (Smart, effective founders recognize this as the Paul Graham [YC] mantra. It totally makes sense—this is step 1, without this you’ve got nothing.)
- Build user base and share leadership. (This is just about extending step 1 into momentum.)
- Create a extension that attracts and enables a second stakeholder group. E.g., application developers who want to access your users; teachers who want to access your students; advertisers who want to sell stuff, etc., etc.
- Empower that second stakeholder group to reinforce and extend the value to the core users who you started with in step 1.
Wash, Rinse, Repeat.
This is a very basic description of the positive feedback loop that the vast majority of massive tech companies have used to achieve their dominance—Microsoft, Google, Facebook, Apple Iphone, etc. Sometimes tech folks will look all dreamy eyed and say the words “platform play,” and this is probably what they mean (or should be). Specifically, the platform means that there is a second stakeholder group that is specifically betting on you to make money, gain share, whatever for themselves.
In the talk I give, I suggest or recommend that the founding team spend an hour or two trying to think about building that precise feedback loop around their idea. I contend that this can be a useful exercise, one more should do.
Part of the reason this exercise is so useful is now highlighted with the blog posts that I started this off with. What Borthwick and Wilson are both highlighting is something that has been obvious to me for months: namely that the power of Twitter is as a Platform, not as an Application. Others – bit.ly, tweetdeck, tweetfeed, etc. – are now investing their R&D budgets, engineering talent, marketing efforts towards extending brands that build on Twitter. Twitter as the platform enables this, and Twitter gets some benefit by having these partners do this work. This is all great, and it reinforces arguments I’ve made before on this blog about why skeptics focusing on Twitter traffic or retention, while important, is probably less important than the health of its ecosystem.
The second thing that I’d illustrate on Twitter as a Platform is a point that’s common to most platforms but not well understood. Namely, while platforms on their own can be massive from a revenue and profitability standpoint, over time, healthy platforms can pale in comparison to the revenue pool created for the partners betting on the platform.
Microsoft’s Windows business is a great example. According to MSFT’s Annual Report, the Windows division pulls in roughly $16B in revenue, and makes >$12B in operating income. (What a machine!) This is awesome. What is also awesome though, is that you are probably talking about an order of magnitude in terms of the amount of revenue that the partner ecosystem makes.
Same thing with Google. Massive revenue, massive margins. But the amount of money that advertisers are making through getting direct contact with users, massive. Facebook, starting to show the same thing. Its an awesome thing on its own, but as Zynga, Playdom and others are showing, they are making massive amounts of money on the Facebook platform. As Facebook extends, I expect to see even more companies making more money off of them.
This brings us back to Twitter. As I’ve said before, its easy to think that Twitter is too simple to be a viable business. That’s wrong-headed. Twitter is en route to becoming the platform for the real-time web. As I’ve said, it will create massive value for its users, employees, founders, and investors. To me, the key quesiton with Twitter is not whether it will continue to thrive in users and traffic (it will), or whether it will make money (it will). The question for me is whether its ecosystem will find ways to make real money, as this is ultimately a partner ecosystem’s profitability is ultimately the best way for a platform to ensure its long-term viability.