Facebook vs. Twitter: Old-School Business Models Still Rule
For those who have wondered about the financial underpinnings of Twittermania, Gawker claims to have a leak of the company's financials from an insider. And, whew, are they bad. They're not poor enough to justify the Gawker headline "Twitter’s Secret History As the World’s Worst Tech or Media Business"—there have been some doozies in this industry—but, if accurate, they're bad enough... and raise questions about the accuracy of the Bloomberg Businessweek story suggesting that Twitter "may be on the verge of a real business model." (We have a request in to Twitter for a comment.)
The dot com bomb may have officially ended by the early 2000s, but a financial miasma continues to haunt the high tech industry. Palpable in the pitches that echo in VC offices, this noxious odor is the smell of the ongoing trend in strategic business models: Ramp up the number of customers fast and then figure out how to monetize. Twitter seems to have jumped on that bandwagon with both feet. A difference in philosophy helps explain why Facebook has become not only dominant in its market but also positioned for future success with revenue and profit, even though it's only a couple of years older than Twitter: Facebook is old fashioned when it comes to business.
"Revenue was a sideline" early on, CEO Dick Costolo said in a video interview with Bloomberg. "They were growing and trying to get the service stabilized. And now what we look at is really an ad business that for the first time is courting big brands [like Verizon, McDonald's, and Nike]."
Things don't add up enough
The story that Costolo is pitching to Bloomberg Businessweek's Brad Stone is that the company has turned the corner and success is just ahead. And maybe that's so, but only if, as they say in investment disclosures, the past is not necessarily an accurate predictor of the future. Here are the numbers from Gawker:
The 2010 numbers stand out because they were so much worse than Twitter's own projections from 2009 for the same year of a $140 million run rate. In short, the company brought in 20 percent of what it had expected to make.
You might write that off as a remnant of an old managerial regime, except that Costolo became COO in the fall of 2009, so he should have been heavily involved in and responsible for the success of those projections. And Twitter had been in business for four years at that point.
Twitter talked up a positive future for Bloomberg, but as I've mentioned before, you cannot trust management that won't show financials. There have been too many cases of companies—LinkedIn (LNKD), Groupon (GRPN), and Demand Media (DMD) all come to mind—that claimed profitability, only to have those claims obliterated when the truth came out in IPO filings.
Your grandfather's Facebook
And then there's Facebook. It's new, it's modern, it's riding the crest of the social media wave. Read CEO Mark Zuckerberg's letter in the company's S-1 SEC filing for its IPO and you get the impression that offering the services are more important than making profit:
Simply put: we don’t build services to make money; we make money to build better services.
It might seem to be the same as bringing in customers now and coming up with a monetization scheme later, but actually it isn't.
Instead, Facebook has used a business strategy that seems to date back at least 30 years, if not more. Yes, what a company does is important. Check out Facebook's financials in its S-1:
Facebook started in 2004. Within four years, its losses were rapidly dropping as its revenue continued to ramp up, unlike so many recent tech IPOs that have shown losses continuing to increase over time. By its fifth year, Facebook had real net income, rather than some redefined accounting concept machined to make people think that the company was profitable.
One other comparison: revenue per customer. Twitter claimed to have 100 million users as of last September. If the first four months saw $23.8 million in revenue, triple it for a full year and add a generous 50 percent. That would yield $1.07 per user in its fifth year of existence. Back in the fall of 2009, Facebook's fifth year, Zuckerberg wrote that the company had hit 300 million users. With $777 million in revenue, that was $2.59 in per-user revenue.
Facebook's revenue and net income have moved ahead because someone at the company realized that plans to make those bellwether numbers increase are as fundamental as attracting customers. Because if the revenue, profit, and customer numbers don't all increase simultaneously, you can find yourself with a growing problem that only gets worse over time.
The time to look at revenue strategies is early on in a business. The longer you wait, no matter what the fashion may be, the more difficulty you'll have in creating a financially viable company. And that's with massive VC backing—something that most entrepreneurs don't get.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.