What were they thinking? AOL’s $4.2 billion acquisition of Netscape, and eBay’s $4.1 billion acquisition of Skype.
From Dealbook:
Whoever buys Twitter, they wrote, “will likely have to operate it at a loss in perpetuity, or until the next cool Web 2.0 social networking concept comes along and Twitter tweets no more.”
All That Twitters May Not Be Gold, Analysts Say
Twitter seems to have gone from obscure to mainstream in about the same time it takes to send a “tweet” over the network.
Despite the fact that the three-year-old microblogging service doesn’t generate revenue — never mind profits — there is already chatter about who might want to buy it.
However, analysts at Sanford Bernstein believe that potential acquirers for Twitter should think twice.
In a research note published late last week, the analysts argued that the Web 2.0 model of building a product and then figuring out how to monetize it has been largely debunked.
The Web is littered with examples of promising but ultimately value-destroying acquisitions, they wrote, citing deals such as AOL’s $4.2 billion acquisition of Netscape, and eBay’s $4.1 billion acquisition of Skype.
The analysts said that monetizing Twitter “would be difficult at best and likely unsuccessful.” People who sign up for free services tend to resent a company for trying to wring revenue from the business later. Subscription fees are out of the question, they said, and advertising-based revenues don’t seem to have yielded enough cash flow to make a Web 2.0 property viable.
Speculation about Twitter has been echoing in the yellow hills surrounding Silicon Valley lately. The chief executive of Google has been peppered with questions about whether the Web search giant might have its eye on Twitter.
But the Sanford Bernstein analysts think Google would do best to steer clear, as it is still struggling to make money from YouTube, a previous takeover target, and the social networking site Orkut, which it created in-house.
Whoever buys Twitter, they wrote, “will likely have to operate it at a loss in perpetuity, or until the next cool Web 2.0 social networking concept comes along and Twitter tweets no more.”
Last fall, reports surfaced that Facebook offered Twitter 3.33 percent of its privately held stock, which it had determined was worth $500 million, based on a $15 billion valuation for Facebook that was set when Microsoft invested in the company a year ago.
Twitter balked, and raised funds on its own instead.
How will Twitter make a profit? The company freely acknowledges that it’s not quite sure:
“Twitter has many appealing opportunities for generating revenue but we are holding off on implementation for now because we don’t want to distract ourselves from the more important work at hand which is to create a compelling service and great user experience for millions of people around the world,” Twitter says on its “about” page. “While our business model is in a research phase, we spend more money than we make.”
