Twitter was losing money when it began selling stock last November, so Twitter has to show investors that it’s doing everything possible to make a profit. Twitter vice-president Jana Messerschmidt explained why Gnip will help Twitter generate new revenue:
“Every day
Twitter users share and discuss their interests and what’s happening in the
world. These public Tweets can reveal a wide variety of insights — so much so
that academic institutions, journalists, marketers, brands, politicians and
developers regularly use aggregated Twitter data to spot trends, analyze
sentiment, find breaking news, connect with customers and much more.”
Twitter
also generates revenue by selling advertising. But Twitter knows that we are at
the beginning of a data analysis revolution that already generates valuable insights
for “hundreds
of clients” in business, government, the media,
and academe. Those clients will now be paying Twitter for access to Tweets and the
analytical tools developed by Gnip.
Twitter
is under particular pressure from investors to generate revenue because the
initial price of its stock rose to levels that some analysts
considered too high for a company that was losing money.
But I suspect investors paid those high prices because they believe Twitter is likely to be one of three companies –Google and Facebook are the other two - that will dominate Western Internet markets for information and advertising. When a small number of companies dominate a market, those companies may have pricing power – they can increase prices far above production costs to generate high profits.[1]
One way for Twitter to reassure investors is to take steps that rapidly increase revenue, which is why I expected the company to assert more control over the valuable data on its network. Investors apparently viewed yesterday’s announcement the same way – Twitter’s stock price increased over 11 percent, which Reuters called the largest stock price increase since the company went public.
Gnip is not the only company that purchased access to Tweets and then re-sold them to its clients. Twitter’s statement did not specify how its relationship with other Twitter data providers might change.
However, it’s unlikely that independent Twitter data providers will be allowed to compete away a significant share of the revenue that Twitter gains from purchasing Gnip. At the same time, it will be interesting to see if Gnip continues to offer data from Tumblr, which is owned by Yahoo.
Media
companies have always competed for audiences and advertising. Twitter’s purchase of Gnip is an example of a
new kind of media competition. The new prize is an endless stream of raw
information detailing the characteristics, behavior and preferences of millions
of people who use the company’s products.
[1] An oligopoly exists if a company can set a price above its costs, but must then account for the reaction of rival companies in the same market. This makes it possible for companies to earn economic rents, which are profits above the level of returns that could be earned from comparable investments elsewhere. However, economic rents are not assured. A rival firm might offer advertising and information at lower prices, triggering a price competition that ends when prices are just high enough to cover production costs.
[1] An oligopoly exists if a company can set a price above its costs, but must then account for the reaction of rival companies in the same market. This makes it possible for companies to earn economic rents, which are profits above the level of returns that could be earned from comparable investments elsewhere. However, economic rents are not assured. A rival firm might offer advertising and information at lower prices, triggering a price competition that ends when prices are just high enough to cover production costs.
