Even as a hardened skeptic of the microblogging service Twitter, I cannot deny that it has built up a passionate if not mainstream userbase.

Putting aside the reasons why I personally think Twitter is a waste of time, the real problem for the site is that it doesn’t yet have a business model.

Twitter founder Biz Stone is on record as stating that looking for a business model might be a “distraction” for his company, but in an economic environment where the future is uncertain and suddenly-cautious investors have rediscovered the importance of revenue, this attitude could eventually prove to be very problematic for obvious reasons.

Last week, Bernard Lund of ReadWriteWeb called on his readers to “Help Twitter Find a Revenue Model.” After all, he noted:

Twitter won’t survive if it doesn’t find a great revenue model.”

I read Lund’s post with interest and followed the responses with interest. I’ve decided to address the issue here because I think Twitter actually makes for an interesting case study that can benefit many internet entrepreneurs.

Let’s go through some of the more common suggestions for Twitter’s business model and then let’s take a look at what we can learn from the way Twitter has approached developing one.

Advertising

Is there money in advertising for Twitter? Sure. The question is – how much? In my estimation, it’s probably not enough to sustain the type of business that Twitter is and the type of business its investors hope it will become.

As we have seen with Facebook and MySpace, one of the great challenges in monetizing “social media” properties is that the users are far too busy “socializing” to pay attention to advertising.

I don’t think Twitter is different from Facebook and MySpace in this respect, and given Twitter’s tech-savvy audience, I suspect that the problem of advertising blindness will be an even bigger factor with Twitter.

Some tout more “innovative” advertising models that emphasize “user engagement” as a solution to Twitter’s monetization troubles but I’m skeptical.

After all, nobody has truly convinced brands that they’ve discovered a way to turn “user engagement” into ROI. Further, brands that want to leverage Twitter as an engagement tool can do so by simply setting up a free account.

While it’s conceivable that Twitter could offer special features with a “brand account” (much like Facebook and MySpace charge brands for “pages“), whether or not this can be turned into a significant business is questionable in my opinion.

Given inevitable cuts to advertising budgets in any economy like this, I think that an advertising business model, no matter how “innovative,” is not going to be a panacea for Twitter. It could be a part of a business model but it isn’t a complete business model in and of itself.

Data mining and brand monitoring

A lot of people believe that Twitter is in a perfect position to collect data and mine it for the benefit of brands. Is it?

The market for brand monitoring services is growing but but data mining is a complicated business and turning large amounts of raw data into large amounts of valuable, actionable analysis is a huge challenge.

While there’s no doubt that Twitter collects a lot of “data,” I question whether Twitter has enough of true value to be of real use to brands.

Quite honestly, I doubt that Twitter’s data is going to be of a sample size that is meaningful to major brands. Most people who argue for data mining services on consumer internet properties really don’t understand the scale at which major brands operate and what is truly of value to them.

Knowing that 500 people on Twitter are criticizing you or that 5000 tweets have mentioned your newest product is probably of very little use to most major brands.

As such, I think it’s unlikely that Twitter is going to develop an attractive business as a data miner and overestimating the potential for data mining would be a genuine “distraction” for Twitter.

Licensing/platform

Some have suggested that there’s a demand within organizations for Twitter-like tools and that Twitter should license its platform. Others have suggested that Twitter’s platform could become the backbone for a microblogging infrastructure that Twitter could charge for access to.

The challenge with the various licensing/platform revenue models that have been floated is that the Twitter platform itself is hardly defensible. A Twitter clone won TechCrunch50 and there is a decent open-source alternative in Laconica.

And while Twitter seems to have improved on its reliability, given all the problems experienced, I’d argue that the most serious individuals and companies would think twice before trusting Twitter at this stage of the game. Even one of Twitter’s investors recently asked, “Will recent reliability success continue? Can Twitter’s architecture scale now?

At the end of the day, I believe a licensing/platform business model is incompatible with Twitter’s direction at the current time and that trying to make this work would be risky.

Paid services

As much as I found no value in my little experiment with Twitter, the bottom line is that many of Twitter’s users find it hard to live without. And some have stated that they’d be willing to pay to help the company thrive.

I’m a big fan of online premium service businesses because there’s usually no business model more elegant (and simple) than selling a product or service that people want. In fact, as I have pointed out, these types of businesses (in theory) usually have a much better correlation between costs and revenues.

Given the anecdotal evidence that many of Twitter’s most passionate users are willing to pay for the service, I see no reason for Twitter to shun such a revenue model.

Of course, given that Twitter already offers its service free of charge, it’s not going to be able to successfully implement a model that is 100% paid. It will need to adopt a freemium model in which some of its features remain free and more advanced features (existing or new) are available to only those who pay.

Getting the mix right so that paying users can subsidize the non-paying ones while still making a profit can often be tricky but it’s not impossible, especially when ancillary revenue streams like advertising contribute to the bottom line in some fashion.

The big problem for Twitter is that its refusal to charge for anything has already provided opportunity for other businesses that

have been built

around the Twitter “ecosystem.” Twitterific, a MAC Twitter client, for instance is sold for $14.95. And when Twitter

cut off SMS support

in some countries outside of the United States, nimble entrepreneurs came in to fill the void.

That said, I do believe that paid services represent the best opportunity for Twitter to turn its user growth into revenue growth. Whether or not it can generate enough revenue from paid services to live up to the expectations investors who have invested in it at exorbitant valuations is unknown.

What can we learn?

So what does Twitter’s business model dilemma teach us? Two things in particular:

  • Finding a scalable business model isn’t always easy. Oftentimes, business models that are in vogue aren’t as viable as many would like to believe.
     
  • It’s important to look at a business model as soon as possible. The longer you go without one, the greater the risk that your options will “decay” in some form or another.

In all of this, it’s worth considering that Twitter is a unique case. Most entrepreneurs start businesses to make money (not to build something “cool“) and most entrepreneurs don’t have the luxury of getting tens of millions from investors who are content to wait on a business model.

Twitter’s investors have been content to wait and in the process, Twitter has already forfeited a number of potentially important revenue streams. While it may not be impossible for Twitter to recapture them in some fashion (and to create new ones), it has made its job more difficult and that’s never a good thing for a startup business that is reliant on investors to keep the lights (and servers) on.

The reality is that we have seen no shortage of consumer internet startups (many without outside funding) over the past several years that either overestimated the ease with which a business model could be developed and executed or that put off the development of a business model for a rainy day.

Now that the rainy day is here, it’s going to be very interesting to watch well-capitalized startups like Twitter try to make the transition from cool to cashflow positive.

In the United States, the phrase “Drill, baby, drill” recently became popularized by one of the presidential campaigns. Hopefully here in internet land we’ll hear more chants of “Charge, baby, charge.” Maybe Twitter can lead the way.