For Twitter, Key to Revenue Is No Longer Ad Simplicity

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SAN FRANCISCO -- When it comes to making money, Twitter is all about keeping it simple. There are no banner ads, no dancing animations, no ads inserted between screens that you must click to get past.

Virtually all of the company's revenue, which is projected to be nearly $600 million this year and $950 million next year, comes from three basic advertising formats that blend smoothly into its core microblogging service, whether users are accessing it from a mobile phone or a Web browser.

"What they have been able to do very well is develop products that meet the needs of most advertisers without being overly complex," said Debra Aho Williamson, principal analyst for social media at eMarketer, a research firm.

But the simplicity of Twitter's products is also a weakness, especially when compared with other social networks like Facebook. The company does not have concrete demographic information about individual users, like gender and age, to allow it to sell highly targeted ads at expensive rates. And its marketing efforts have largely been oriented toward large advertisers in the United States, with few sales to smaller businesses and only about one-fifth of its ad revenue coming from overseas, Ms. Williamson said.

Twitter, which announced last week that it had filed confidential paperwork to begin the process of selling stock in an initial public offering, has disclosed virtually no information about its finances. The company declined to comment for this article, citing regulatory restrictions surrounding its I.P.O.

But eMarketer estimates that the company will bring in $583 million in revenue from advertising this year, and $950 million in 2014. Twitter also makes additional revenue from selling the data in its raw feed of hundreds of millions of messages daily.

The most common type of Twitter ad, especially on mobile devices, is the promoted tweet. Essentially, advertisers create a Twitter message -- limited to 140 characters like any other message on the service -- and pay to insert it into the flow of messages that a user sees, based on certain traits like age, gender or keywords that a person is interested in.

So if you search for "Apple iPhone" on Twitter, the first message that is likely to appear is a paid ad from Google's Motorola unit, which is running a campaign proclaiming the virtues of its Android smartphones ("Love to talk? Moto X responds to your voice -- no touching necessary," reads one) or from Microsoft, which is pushing its Windows Phone devices ("Watch how the 41-megapixel #WindowsPhone Nokia Lumia 1020 makes any seat the best seat in the house"). Both companies are bidding against each other to reach people interested in the iPhone.

In many ways, the results resemble the ads that pop up at the top of the page after a Web search on Google, which also emphasizes simplicity in its ad business.

As with Google, Twitter's advertisers set key parameters like target audience and how much they want to spend, and then computer programs submit bids instantly to serve ads to available slots.

Advertisers pay only when someone interacts with an ad, such as by retweeting it to their followers, commenting on it or marking it as a favorite. That typically happens only 1 to 3 percent of the time. To get that rate on the higher side, Twitter's system does not just automatically award an ad slot to the highest bidder; instead, it gives an advantage to ads that previous viewers have found to be more relevant or engaging.

The holy grail for advertisers is an ad that is widely shared by Twitter users to their own followers. To increase the chances of going viral, brands will often embed photos and videos into their ads.

Twitter's other ad formats are even simpler.

The company's list of trending topics, the most popular 10 or so subjects being discussed at any given moment on the service, is well known as a window into society's transient obsessions. Advertisers can pay a flat fee to buy their way onto the list. The price for such a promoted trend, which is clearly labeled, varies by country, but runs about $200,000 for 24 hours of exposure to every Twitter user in the United States.

Companies or people seeking to build followers for their accounts can also pay to appear on the top of the list of new accounts to follow that Twitter suggests to each user.

As Twitter prepares to sell stock to the public, the company is planning initiatives that will add complexity to its advertising business while also diversifying its revenue stream.

Last week, for example, it announced that it had agreed to acquire MoPub, a start-up that acts as a middleman in placing ads from marketers inside mobile applications. MoPub does something quite different from Twitter, auctioning off two billion ad slots a day in apps like Songza and OpenTable through dozens of ad networks and delivering the ads so quickly that a user firing up the app barely notices.

But Jim Payne, chief executive of MoPub, said the two companies shared a common DNA. Like MoPub, he said, Twitter "was designed to be mobile and it was designed to be real-time." He said Twitter had promised to let MoPub continue building out its current business even as the two worked together to improve the ad offerings on Twitter itself.

Ms. Williamson, the eMarketer analyst, said MoPub could become a significant source of revenue for Twitter.

"MoPub's technology will streamline their self-serve platform," she said. "It gives Twitter entree into the real-time bidding business, the ad network business, mobile app ads."

Through its Amplify program, Twitter is also aggressively promoting joint ad sales with television channels. ESPN, for example, can show game clips on Twitter that are sponsored by an advertiser, with Twitter and the channel sharing revenue.

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This article originally appeared in The New York Times.


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