Twitter Worth $3.7 Billion, But Is It Really Cost So Much?

The news that social networking website Twitter is worth $2.7bn more than it was just a year ago, according to a new valuation, has left some observers shocked.

Twitter Cupcakes: Photo: Bakerella/Flickr

A new round of fundraising has valued Twitter at $3.7 bn. Just a year ago the site was valued at $1 bn, and although the site is now making considerable revenues it is not yet profitable.

That’s almost twice as much as the New York Times, which has an enterprise value of $2 billion today. However, there is an obvious difference.

The New York Times Company value is based on a public stock, which anyone can purchase, while Twitter’s valuation is based on a private round of financing that individuals couldn’t participate in. But, in theory, at least, Twitter is now worth twice as much as the Times.

A total of $200 million was invested during a round that was led by John Doerr, the Kleiner Perkins partner who invested early on in the development of both Amazon and Google.

Twitter has added more than 100 million members this year, thanks largely to a focus on its mobile apps but also because of a redesign of the site that has tried to make the site easier to browse. “You don’t have to tweet to be a great Twitter user,” says co-founder Evan Williams.

The increased valuation indicates increased investor confidence in Twitter’s chances of making money in the future. Although new Chief Executive Dick Costolo has been criticised for lacking a coherent strategy for future growth, the site has already introduced a new system of “Promoted Tweets” to allow advertising without radically altering the user experience. Founder Evan Williams had said that 2010 would be mostly dedicated to developing a profitable strategy.

Sponsored tweets have seen a higher level of success than on many equivalent sites, Twitter said. Up to 8 per cent engage consumers in some form.

Over time, Twitter hopes to charge its advertisers based on the ‘resonance’ of their tweets – a metric that takes into account retweets, @replies, clicks on links and many more of the ways that Twitter users can interact with a tweet. And so far, it appears, companies are buying into the system.

There could be problems in store, of course. For example, the fact that HP owns the #Apple tag on Twitter raises questions about whether companies should be able to ‘own’ rival brands within the service but those things will be ironed out.

More of an issue will be the response of the Twitter community at large once advertising becomes more active and widespread. Will they object? Twitter is about to find out.

If its users are upset, that could turn out to be business model in itself. Perhaps Twitter could charge its users a subscription fee to turn the ads off?

The valuation is also a further indication of increasing market confidence in dotcom companies. Google was rumoured to be close to paying $6 bn for social commerce site Groupon earlier this month. It has been observed, however, that as John Doerr is also on Google’s board, the new investment indicates that a Google bid for Twitter is unlikely. [via The Telegraph (UK)Competitive Futures and All Things D]

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