In the world of Internet startups people can become obsessed with the function of a product or app, often ignoring how a company can change the dynamics of a market just through its sheer existence. More often than not, it is not just a case of just having a better technology than the other guy. Equally it can be about a creating an incursion into a competitors’ space which forces them to manoeuvre, destroying value for them, and creating value for yourself. No greater example exists of this today as the dramatic moves being made around the rumoured sale of Tweetdeck.
I have been talking to sources well acquainted with the issue and what they have to say suggests a fascinating drama – which we are about to see played out.
The scenario: Back in February we reported that UberMedia, had acquired Tweetdeck for $30m, although no party released any official statement at the time. If true then this would have given Bill Gross’ company, after buying EchoFon, another popular Twitter client, roughly 20% of the userbase of Twitter. Tweetdeck reportedly has 11% of active Twitter users.
But as any journalist or social media expert will tell you, these are power users, producing many of the most influential content. Indeed Cornell University and Yahoo! Research found that a tiny minority of users – around .05% of the site’s population or 20,000 elite users – are generating around half of all the Tweets. These are divided into celebrities, media, organisations (such as Google) and blogs.
My sources tell me that UberMedia had a 30 day exclusive on that deal. But negotiations took too long and it expired, allowing Twitter to emerge with a $50 million offer for Tweetdeck. The battle was on for Tweetdeck’s high end users.
But there is much, much more to this than meets the eye, and there are earth-shattering implications if Twitter makes the wrong play.
The question is this: what is it worth to Twitter to keep Tweetdeck out of Bill Gross’ hands? For in Tweetdeck lies the balance of power in the Twitter eco-system.
Let’s run through the scenario.
Choices:
UberMedia buys Tweetdeck, thus gaining around 20% of the userbase of Twitter.
With one fell swoop UberMedia has market power relative to Twitter, plus most of the high value users.
As a result, UberMedia has the power to say to Twitter “We have 20-30 percent of Tweets. So, are you feeling lucky? Are ya?”
UberMedia can then say “Unless you let us sell our own advertising, not yours, against those Tweets, we will have to migrate our user base onto a different platform.”
* Boom *
This is the .44 magnum Bill Gross is holding to Twitter’s head.
UberMedia is already selling its own adverts on some of their applications. That is a huge threat. You can imagine that Twitter’s management will wondering how to deal with this threat.
But exactly why is this so likely as a scenario? Let’s work through the numbers.
Twitter’s original business plan said: we will get to sell 100 percent of the ads on the network. But remember, advertising follows an 80/20 rule. In any advertising network, around 80% of the revenue is made from 20% of the audience.
So if UberMedia becomes the owner of Tweetdeck, the most valuable 20% of the audience would not be owned by Twitter.
Thus, sitting in the Twitter’s boardroom, Dick, Ev, Biz and Jack will be saying something along the lines of: “Either Tweetdeck agrees to our deal and we own it, or they do a deal with UberMedia in some way, take a LOT of our users, and we have to cut a deal with them.”
Remember, keep in the back of your mind that research about those 20,000 elite users who tend to use higher end client apps – the apps Bill Gross has been busily acquiring. (All the monitoring is done on other platforms – these are less valuable).
You see, Twitter’s assumption was that no owner of a client app would stand up to them. Most of the client owners were young guys, just product guys, not commercial people. It’s one thing to deal with those guys, another to say to a company backed by Jim Breyer of Accel Partners, “no more client apps”.
What Twitter needs to avoid is a situation where UberMedia says “Guess what? On our client apps WE run the ads, not you.”
So the question is: Do you fight UberMedia with the risk that those high value users are ported to a totally new platform or do you cave in to them and say, “OK, you have us by the balls, we’ll let you sell your own ads.”
Let’s try out the latter scenario.
After losing the most valuable part of the ecosystem, Twitter’s ad revenues will have dropped by 80% to 20% of what they were GOING to be when Twitter owned the entire Twitter network.
In this scenario, UberMedia cuts a deal with Twitter. UberMedia says to Twitter, “we’ll do our own own thing, our own content, but you can run the infrastructure.”
UberMedia might also say to Twitter “Look, we’re nice guys – you can take the Tweets created on our platform and sell your own ads against them.”
Then again UberMedia might even say: “We’ll send the Tweets from our platform, but we’ll take a revenue share on the ads.”
Either way, in this scenario, Twitter’s share of revenues on their OWN PLATFORM has dropped from 100% to between roughly 20-40%.
Since the value of the business is in the cashflow, the challenge for Twitter is if they don’t buy Tweetdeck they will have created a monster that can bargain against them and take a samurai sword to their business model.
We’re not talking about losing 5-10% of the business here – we’re talking about a crushingly large amount of Twitter’s business disappearing. It’s not 11% of the Tweets that matter with Tweetdeck, it’s closer to 50% of the ad revenues in a combined UberMedia business.
If UberMedia ends up buying Tweetdeck, Twitter can eviscerate their business by shutting them off (and thus, a large swathe of their top users). Or they come to a deal, but it would be based on UberMedia’s terms. Under this scenario Twitter actually becomes more like a utility.
Remember, it’s currently valued at $10bn because it’s forecast to get 100% of the ad revenues on its network. For argument’s sake, let’s call it $1bn in annual revenues. But now, with UberMedia controlling TweetDeck and other clients: not so much. Under this outcome, Twitters revenues only reach half their potential – more like $500m.
So is Twitter now worth $10bn or $5bn? Looks like 5, kids.
But wait – back in our other parallel universe, Twitter has won the day and acquired Tweetdeck.
No, UberMedia doesn’t have a strong hand. But that is the ONLY real reason for Twitter to buy Tweetdeck.
In a world where Twitter buys Tweetdeck, then Twitter might still lose a bit of its revenues to Uber but not as much.
Unfortunately this is a beggar’s choice. Buying Tweetedeck does not increase Twitter’s value by much, but it DOES protect it from dropping revenues by 50% (because of the threat represented by Tweetdeck falling into UberMedia’s hands).
So what is Tweetdeck worth to Twitter?
Well for starters, it’s a LOT more than $50m.
It could be as much as $250-500m – because that’s the price Twitter might have to pay to protect 50% of its entire business.
That deal would have to be done in cash and a FUCK LOAD of Twitter stock.
Remember, sitting in TweetDeck’s boardroom are people who realise that the moment they sell to UberMedia, Twitter is fucked.
That is possibly the biggest bargaining chip in the entire startup world as of today.
Iain Dodsworth and his investors will not sit there and say to Twitter, fine, we’ll take 5% of a $5-8bn company – they could ask for 15% of the damn company. Because if you don’t agree, then we’re going to destroy your business by selling to UberMedia.
Meanwhile, back in the negotiations with UberMedia, TweetDeck will be looking at its offer.
This is where things get mighty interesting.
While the offer might be $25-30m from UberMedia (about 25% of its equity) at a $100m valuation, UberMedia might eventually be worth $1bn final exit value if it can sell the lion share of Twitter’s most valuable Tweets. So Tweetdeck’s stake in this would go to $250m, should they choose to go with UberMedia. Hold that $250m figure in your mind.
Now, in the case of Twitter’s offer, this $50m deal being talked about right now is at Twitter’s $10bn valuation.
But assuming Twitter is around for the next 10 years (as have all of the other big Internet giants like Yahoo and Google), what of the next 10 yars?
Imagine Twitter goes from a $10bn to a $20bn valuation. Tweetdeck’s stake goes from $50 to $100m over that period.
So, as a founder and investor in TweetDeck, are you better off talking the $25m deal from Uber to realise a $250m exit, or should you go with the $50m offer from Twitter to realise only $100m?
Exactly.
In fact, even if Twitter offered $200m for TweetDeck, that would go to $400m when Twitter double in value over a 10 year period.
But what if it doesn’t? What if it this picture of UberMedia still stealing a lot of ad revenue means (even without TweetDeck) and Twitter goes from its $10bn to a $8bn valuation?
Now you’re not sitting on $100m, you’re sitting on about $160m and the $250m offer you were getting from UberMedia actually looks a lot sweeter.
The end game is clear: Twitter must, at almost all costs, acquire Tweetdeck. Or they will be royally screwed.
Lucky there’s another royal wedding on to take their mind off things.
