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The little tweets that could mean big money

It has hundreds of millions of users and a new chief executive, but can Twitter ever become a profitable high-flyer?

Huge user base? Check. Large and increasing engagement? Check. Media hype? Check. Salivating venture capital investors? Check. Revenues, profits, sustainable business model? Um, we'll have to get back to you.

Twitter is four years old, and remarkably precocious, but nursery is over and it is time to go to big school. With 165 million registered users "tweeting" more than 90 million 140-character wisdomlets every day, the service is entrenched as a major source of news and noise on the web, and the company is stepping up its efforts to make money out of all this activity.

In a rite of passage moment, common to all successful start-ups, Ev Williams, one of the original founders, has stepped aside from the chief executive role in favour of a replacement with (slightly) more corporate experience, in this case a former Google product executive, Dick Costolo.

But that is not the only major news on the business front this week. Twitter also announced that it is widening the amount of advertising that users will be confronted with, not just on the main Twitter.com site, but also now on the myriad third-party applications and websites through which users access Twitter.

In April, the company said it had come up with a way to allow advertisers to stand out amid the torrent of tweets, buying Promoted Tweets that would jump the queue in return. It has also introduced Promoted Trends, which appear on the list of popular topics, and – this week – Promoted Accounts, which suggest to users corporate Twitter accounts that they might wish to follow.

The tie-up with third party Twitter applications is also a big step, since many of the heaviest Twitter users do not access the service directly, but rather through applications that aggregate and sort tweets from their followers. The first such partner, HootSuite, is a social media management tool used by small and large companies. Twitter will subtract some expenses, and then split the rest of the revenue 50-50 with its partners.

Ryan Holmes, the founder of HootSuite, says that the potential is immense. "The early numbers that they showed me looked pretty fantastic," he said, describing the tie-up with third-party companies as akin to Google's move to create AdSense, which places ads all across the web on third-party sites and not just on Google.com.

"There is going to be testing and adjusting, but this is a pretty big move and a step in the right direction," Mr Holmes said. "Time will allow it to mature, and the creativity of the team at Twitter means there will certainly be additional ideas, including ads with location-based elements."

Debra Aho Williamson, a senior analyst at the research firm eMarketer, also sees numerous opportunities for the company. "It's still very early days for Twitter's monetisation engine," she has told her clients, "and it's not yet clear if the company will come up with a true game-changer like Google's AdWords or Facebook's self-serve ad system. But there are a lot of possibilities.

"Twitter is perfecting the algorithms that suggest people to follow based on who you and your Twitter friends follow. Suggesting ads you might be interested in is the logical next step. If Twitter notices that I follow the Seattle Seahawks (which I do) and tweet about the team (which I also do), then it makes complete sense that I might be interested in following, or seeing ads from team merchandise vendors or bars near Qwest Field that might offer specials before or after a game."

Dallas Lawrence, at the marketing firm Proof Integrated Communications, cautions that there will be limits to advertisers' interest in Promoted Tweets, Trends and Accounts. Much of the value on Twitter, he says, lies in the day-to-day dialogue with customers via the service – and because it is a free service, this is a dialogue for which corporations do not have to pay. "Paid advertising should not be the only, or even the primary, component of Twitter outreach by a brand or company. The real value of the platform lies in dialogue, and its users don't want a monologue or one-way advertising."

The company will have to think of other revenue streams, he said. "The real challenge for Twitter is how to leverage me as a user to be an ambassador for their advertisers, and that means commoditising my support for a brand."

What Mr Lawrence is driving at is something akin to pyramid selling – the connotation is not nice, so he would not use the phrase – where Twitter users might get discounts or freebies if they pass on Promoted Tweets or other advertiser material to a certain number of their friends. It is an intriguing idea, and could generate real revenues for Twitter if it takes a cut – but there is also the very real chance that it could wreck Twitter for many users, with the result that activity on the service drops away as quickly as it came.

There is also the option of selling access to data about Twitter use, though outcry after outcry from Facebook users about that site's use of customer information also demands the company treads carefully. Twitter has promised to give corporate users more data on how tweets spread and who is spreading them, and has promised a real-time analytics tool by the end of the year

Promoted Products has started small and the advertising so far has been relatively unintrusive, precisely because the company is frightened about driving away users. It is working with only about 40, of whom it says 80 per cent have been repeat buyers in the six months since the launch. This is small beer relative to the volume of activity that would be needed to support Twitter's 300-strong staff bill, computer infrastructure costs and further expansion.

Twitter's management is acutely aware they are on a high-wire. "Success to us means meeting our potential as a profitable company that can retain its culture and user focus while having a positive impact on the world," Mr Williams wrote, in the blog post announcing his departure from the chief executive job. "This is no small task."