Twitter's fantasy valuation

Latest figure of $8.4 billion generated by Digital Sky investment round

Let's assume the "person familiar with the matter" of Twitter's latest round of funding did indeed value the 5-year-old microblogging service at $8.4 billion.

It means nothing, and not just because one should be skeptical of anonymous sources -- who almost always have a vested interest in the information they're leaking to the media.

It's also because valuations for private companies -- especially ones in a hot sector like social media that are priming the investing public for an IPO -- are easily asserted and wildly variable.

So Russia-based venture firm Digital Sky Technologies invests $800 million in Twitter (we're assuming; Twitter only refers to the investment as a "significant" round), and therefore the company is worth $8.4 billion?

Of course, that's just the latest valuation accorded to Twitter. Here's a brief history of some others:

$3.7 billion -- December 2010

$4 billion -- February 2011

$7.7 billion -- March 2011

It keeps going up and up! Even though it's quite clear that Twitter has not settled on a reliable formula for growing revenue in a substantial way. It's still trying things, such as the introduction last week of "promoted tweets," a way of making it even harder for Twitter users to avoid advertising. Twitter previously had restricted ads to "promoted accounts" and "promoted trends" -- in other words, no ads in personal tweet-streams.

In a way it probably won't matter, as the tweet-streams of users long have been polluted by free ads from marketing hacks, self-proclaimed social media gurus, content providers and crass corporate opportunists.

Still, you can always unfollow or block any account you want on Twitter. What happens when you can't block ads from your tweet-stream? More to the point, what happens to Twitter's revenue if you can?

Once Twitter allows ads in the stream, where does it go? What are its next steps to develop new revenue streams and grow current ones?

Here's another question about the latest valuation: How much does it discount the fact that a huge number of Twitter's more than 200 million registered accounts are inactive? Or, worse, bogus?

There was an interesting article in several media outlets today about how an anonymous former staffer of Newt Gingrich claims that the reason the GOP presidential candidate has more than 1.3 million Twitter followers (more than twice as many as Sarah Palin) is because he pays companies to create fake accounts.

However Gingrich amassed his Twitter army, a brief look at even his first page of followers reveals that most are phony. My favorite is John Havens, aka @Prontorider, who has zero tweets and is following five accounts: Newt Gingrich, Newt 2012 Campaign, Newt Gingrich News and Newt Gingrich (his original account). Johnny loves him some Newt!

(He also follows -- get this -- Red Hot Chili Peppers bassist Michael "Flea" Balzary. Except it's Flea's old Twitter account, which he abandoned in January. Johnny, dude!)

There are millions of Johnnys out there, and Twitter happily counts them among its users. But fake people don't read online ads, nor do they buy products online. Advertisers will figure this out.

I like Twitter and consider it valuable for keeping up with news and following trends. Beyond that, I have serious questions about its long-term growth.

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