Twitter's Problem? Product vs Money

It is an issue as old as the first tool; how to reconcile value vs functionality. The conflict has played out over the course of innovation history and received particular attention during the dotcom bubble when - ah for those innocent, care-free days - there were some who really believed in the moral superiority of a better product. In Twitter's case, the legion of financial types drooling over the monetization possibilities are pressing the company in one direction - towards financial optimization - while others are taking a different and, they would argue, longer term view. Critics say this is a textbook case of 'the perfect is the enemy of the good,' but Om Malik describes Twitter's rather more strategic dilemna in DigitalOm:


"With increasing regularity, Twitter — the San Francisco-based micro-messaging company — finds itself in conflict with its ecosystem. Last year, its decision to buy Twitter clients only resulted in fraying its bonds with its ecosystem. Earlier this year, it made it very clear to Bill Gross that his plans to monetize Twitter-streams (even indirectly) are not welcome.

And last week it faced a rebellion of sorts from users of the Twitter client on the iPhone who hated the new Quick Bar. The Quick Bar shows hot trends on Twitter, but more importantly, it’s a way to surface advertising and promotional messages to Twitter’s growing number of mobile customers.

These actions have inspired many blog posts, arguments and theories, but in the end, the question that remains unanswered is: What is Twitter’s problem?

The answer to that question came to me earlier today, when I was reviewing notes from my conversation with Alex Osterwalder, who co-authored the best-selling book, Business Model Generation. Unlike fellow startup gurus such as Steve Blank and Eric Ries, Osterwalder has somewhat of a low profile.

Money, Money, Money

The Swiss author pointed out that the biggest problem is that these days, most entrepreneurial decisions are seen through one lens: product (and product functionality).

“There is a very pervasive product-centric thinking,” he said. “There needs to be more of a business-model-centric approach.” Osterwalder isn’t saying that you shouldn’t have a product or obsess about making it awesome. What he is saying is that as a startup, it behooves you to be aware of business model options, even if the answers aren’t obvious right away.

Good point! Now apply that to Twitter: having followed the company for a long time, I do know that “business model” is a relatively new concept at the company. Had it been aware of its options from the early days, it would have imposed some limitations on its decisions.

For instance, “no advertising inside the Twitter stream” should have been spelled out loud and clear. If Twitter at some point thought of itself as a media network, then its business model option would have included controlling the front end(s) to the service. Instead, it didn’t do any of those things. One logical explanation is that the service itself was evolving as it went along.

Twitter isn’t alone in this dilemma. I have seen many startups that have focused on developing awesome products but spend little or no energy on thinking through their business models. It is understandable. The features and product evolution are the fun part of the startup, and thinking about possible ways to make money can be soul numbing.

Xerox Me a Biz Model
The problem is that you have to think about it. No matter how great your product or your technology is, unless someone is willing to pay for it (directly or indirectly), there aren’t going to be that many users. In fact, the business model innovation is what turns great products into fearsome companies.

Xerox is a good example. It started life as The Haloid Company, a photo paper maker that was on the rocks when it managed to find its way to photocopier-related technologies and patents. They made a photocopier machine and according to their estimates, they had to sell it for about $4,000 a pop — not an easy task in the 1950s.

So what did they do? Instead of selling the machine, the Haloid people figured it would be easier to give away the machine and charge people for what the machine churned out — photocopies. At five cents per copy, no one was going to object to getting that machine installed in an office. Sure the technology was great, but in the end the business model innovation made it a success.

Xerox reminds me of ARM Holdings, which is a chip company. I have been a big fan of the company for nearly a decade. It was pretty obvious that what they had in their arsenal was pretty amazing: the technology to develop powerful, yet low-power chips.

Around 2005 to 2006, it was clear that as the world was going to have more connected devices, it would need more low-power chips for what experts then called distributed computing. Like Intel, ARM could have made chips and basically found itself in manufacturing hell.

Instead, it chose to license its technology to any and all comers. Today, companies from Samsung to Qualcomm use ARM’s core technology and pay it royalty fees. Thanks to that business model innovation, the company is now looking at a future where its long-term nemesis, Intel Corp., might end up getting relegated to the sidelines of the mobile revolution. ARM, incidentally, is one of the hottest stocks on NASDAQ.

The App-y Apple
Just like Apple.

Most of us believe that iPhone is the rocket ship that is making the company billions. But in reality, it is the app store — a business model innovation — that is giving the company its edge. It can get a cut off the digital goods revenues (publishers be damned). It brings in the apps and it brings in the app developers. That in turn helps make the flywheel turn and push the sales of iPhones, iPods and iPads.

The same goes for Google. Search existed before Google, but it turned it into an awesome product, which was then married to an innovative business model — contextual advertising — and in the process became a $200 billion-in-market-cap giant.

Spotify is another good example of a business model innovation posing as a product. No doubt it is an amazing product. However it is the affordable monthly subscription model that makes Spotify a company worth its billion-dollar valuation. The company hit a million paying subscribers earlier this month.

Twitter’s Troubles Not Over?
During our conversation, Osterwalder pointed out that all new companies (and product groups) should think as long and hard about the business model innovations — ways to make money if you may — as they do about the product, features and user experience.

In the end, that business model ends up defining how companies get built over a long period of time. It is also a good way to avoid the problems of tomorrow. From the way I see it, Twitter’s troubles are not going to be over till it settles on a business model and then starts to shape its identity and organization around that model. When that will happens is anyone’s guess