No need to question Twitter's bona fides as a useful service, but can Costolo, Dorsey and team figure out how to start paying the rent?
The first in a series of articles leading up to Fortune Brainstorm Tech, a conference from July 19-21 in Aspen, Colorado that will round up many of the best and brightest thinkers in technology. Our coverage will examine the progress of companies that presented last year and what to expect this year.
FORTUNE — These days, it’s hard to ignore Twitter even if you’re not really sure what to use it for. The five-year-old social network made waves over the last six months with news of Apple iOS integration, not-so-secret boardroom shenanigans (remember my colleague Jessi Hempel’s Trouble @ Twitter?), and the return of the prodigal co-founder, Jack Dorsey, as chairman and head of product. News like the death of Osama bin Laden’s, the riots in Egypt, and even Shaq’s retirement announcement traveled lightning-fast via Twitter, proving that Twitter is all grown up.
“What we’re seeing is that people are using Twitter to instantly connect with things that are most meaningful for them,” Adam Bain, Twitter’s President of Global Revenue, recently said.
Still, one big question hounding Twitter remains largely up for debate: now that it’s a grown up business — let’s say it’s like a newly graduated college kid, armed with knowledge and a degree — what’s it going to do to pay the bills? Can Twitter find itself a job? In that respect, Bain has said Twitter is rife with potential, with 20%-40% of all users following some sort of brand. (In fact, for all-new users, one of their first 10 “Follows,” or accounts they follow, is a brand.)
“It’s usually people they know, people they wish they knew, and then brands they’re familiar with,” he admitted. And because of that, user engagement is supposedly through the roof: When Volkswagen decided to unveil the new Beetle exclusively on Twitter for instance, the auto maker saw a 52% engagement rate, meaning that more than half of users who saw VW’s Tweet clicked on it.
That’s all well and good, but to figure out whether high user engagement actually translates to revenues for Twitter, we need to look at the social network’s ad sales for clues. In 2010, the year Twitter started rolling out its business model in earnest with ad features like Promoted Tweets, Promoted Trends, Promoted Accounts and the now-defunct Early Bird specials, the social network only pulled in an estimated $45 million in sales. This year, that number should more than triple to $150 million, still a small slice of the $6 billion marketers will spend on social network advertising in 2011, particularly given that nearly $4.1 billion of that will come from Facebook.
“The growth we’re seeing in 2010 to 2011 is most representative of advertisers coming in and experimenting and trying out Twitter,” says eMarketer analyst Debra Aho Williamson, who is optimistic that the social network will become a strong secondary player in the social network ad spending. Indeed, when Twitter rolled out Promoted Tweets — Tweets written by and paid for by advertisers — roughly a year ago, there were only six marketers; now there are 600. Promoted Trends, basically sponsored trends that top the list on the social network’s right-hand side, can sell for $120,000 a day, up from $30,000 per day. At this point, Twitter doesn’t publicly disclose much regarding its Promoted products business, but Williamson says these are positive signs, and in terms of general ad sales, Twitter’s trajectory in year two closely follows Facebook’s own progress during the same period.
It all sounds promising, but clearly the social network has a long way to go before it can be viewed as more than an experiment for marketers looking to capitalize on social media’s potential. For an update on Twitter’s ad sales (and more), look for our conference coverage when CEO Dick Costolo sits down with senior editor at large Adam Lashinsky on July 19.