The Money Losing Conundrum of Twitter and Other Communications Apps

One of the most interesting areas of the Internet for me is communications applications. This includes everything from email, to IM to Skype, and new ideas like Twitter.

These applications are wonderful to create, in that when they click, they are incredibly viral. Users encourage others to sign up so that they can communicate with them. Or in the case of Hotmail, each email was an advertisement for the service.

Unfortunately, the bad news about all of these services is that they don’t really make money. Skype makes a bit using its SkypeOut gateway to the regular phone system, but even there, it does not make nearly as much as the attention it gets or the number of users it has would suggest.

The problem is that advertising seems to be ineffective in communications apps. You can’t put advertising in the way of the act of communicating. For example having to watch an add before you could send an email or a tweet would be a non-starter. But if you make the advertising unobtrusive, the ads become truly invisible and ineffective.

So with communications apps, you can get big fast, but so far no one has figured out how to monetize. This is the conundrum that Twitter finds itself in, but as I see it the problem is even worse for Twitter than for other communications platforms, because they don’t even control the user interface for much or perhaps most of the access to their service. Twitter offers a free API that allows application developers to make Twitter front ends. If there are ways to monetize these users it will most likely be through front ends, and so since anyone can make a front end it will be even harder to monetize and control than it has been for more closed platforms like Skype and AIM.

The good news about developing successful communications applications is that they are almost always acquired. The reason is that if you can convince someone to use your tools every day, you are really making them part of your family. For example, I use Google everything. The reason is that I started using Gmail, and so it was really easy to give them more information and to sign up for more revenue generating services. But this only works for companies that have a bunch of other lines of business like Google, Microsoft, and Yahoo.

And so, looking at Twitter, I suspect they will never make a penny, but they will be purchased by one of the big guys for a whole lot of money. This is great for the founders and investors, but it is a shame that that seems to be the only way to make money from such cool stuff.