What happens when Web 2.0 startups founded on principles of openness
and freedom grow up? If we’re referring to Facebook and Twitter, the
answer is obvious: get a business model.

Unfortunately, finding a business model and implementing it
successfully can be hard to do, especially when you previously invited
third party developers to your ‘open‘ platform and told them to keep
the change. So it’s really no surprise that Facebook and Twitter, which
have collectively raised north of three-quarters of a billion dollars
in financing, are finding it necessary to pull the good old bait and
switch on developers.

Facebook, which launched its platform in 2007, lured developers to its platform with the promise that they could monetize their applications any way they saw fit. But some of the developers who took Facebook up on the offer have done so well that the company now wants a piece of the action, and isn’t afraid to use strong-arm tactics to get what it wants.

Twitter, which is well behind Facebook in the monetization game, recently launched its first advertising solution, Promoted Tweets, and has apparently realized that its laissez-faire approach to developers just might impede its ability to grow Promoted Tweets. So just this week it changed its API Terms of Service in an effort to clamp down on third parties who occupy (or might want to occupy) territory that Twitter wants for itself.

Who is pulling the bigger bait and switch? Facebook’s bait and switches seem far more problematic than Twitter’s, but that doesn’t mean that Facebook is going to have a more difficult time pulling it off. In fact, it seems likely that Twitter faces the biggest challenge.

Here’s why.

Despite Facebook’s audacity (and arrogance?), it is in a very strong position and can realistically ‘get away‘ with quite a lot. It has a massive audience of 400m users, and the Facebook virtual currency ecosystem is destined to become a billion-dollar market if it isn’t one already.

For developers grappling with Facebook’s monetization bait and switch, that massive audience and well-established market make a decision to leave the social network a tough one. After all, there will always be someone else willing and able to step in and deal with Facebook for a piece of the pie.

More importantly, Facebook’s bait and switch ultimatum to some developers (“give us a cut of your business“) is one that it has the ability to enforce and execute on. Because of the way the Facebook platform operates, kicking a developer to the curb is easy, and because Facebook has a virtual currency and payments solution that’s ready to go, it can deal with developers in a cookie-cutter fashion. Once they agree to Facebook’s terms, developers can integrate Facebook’s solution into their applications just as easily as they currently integrate third party solutions. Facebook controls the revenue, and takes a 30% cut. In other words, any friction involved in Facebook’s bait and switch originates from a developer’s principles, not the logistics of the deal.

Contrast this with Twitter. Its new API Terms of Service specifically state:

In cases where Twitter content is the primary basis of the advertising sale, we require you to compensate us (recoupable against any fees payable to Twitter for data licensing). For example, you may sell sponsorships or branding around gadgets or iframes that include Tweets and other customized visualizations of Twitter.

You may generally advertise around and on applications or sites that display Tweets, but you may not place any advertisements within the Twitter timeline on your Service other than Twitter Ads.

There are several problems with this:

  • Enforcement is going to be all but impossible. How can Twitter keep track of when and where activity that Twitter believes requires it to be compensated takes place, especially when dealing with commercial activity that occurs off of the Twitter website (as in the case of “branding around gadgets or iframes that include Tweets“)? Given how much Twitter-related activity takes place off of the Twiter website, it simply can’t. Facebook doesn’t have this problem, as the bulk of the activity that generates revenue in the Facebook ecosystem takes place on the Facebook website.
  • It’s vague. Twitter’s terms, don’t, for instance specify the amount of compensation it expects. This is obviously a problem on a number of fronts.
  • It’s a logistical nightmare. If Twitter moves forward and tries to enforce its terms at scale, it will probably learn the hard way that managing a portfolio of revenue share arrangements can be more trouble than it’s worth. Here, the problem is exacerbated by the fact that third parties who are supposed to be compensating Twitter are ostensibly responsible for reporting their own revenue and cutting checks to Twitter. In other words, unlike Facebook, Twitter won’t control the ads or the monies generated by them. This, of course, creates a lot of room for Twitter’s ‘partners‘ to under-report revenue.

    In some cases, ‘under-reporting‘ may be the result of clever maneuvering. For instance, let’s assume Company A is selling ads around Twitter content on its own site and agrees to pay Twitter 10% of the net revenue from these ad sales. Its owners form a separate ad sales company, Company B, that sells the advertising for Company A in exchange for a 50% commission. Using this setup, Company A could immediately reduce the net revenue on which it compensates Twitter by half. Is Twitter prepared to address these sorts of issues, especially when the amounts might be so small as to involved make extensive negotiations, auditing and litigation unviable?

In short, bait and switch is never an advisable business strategy. But that doesn’t mean that companies don’t do it, or that they can’t pull it off successful. But companies looking to bait, switch and laugh all the way to the bank have to be able to confidently yell “Gotcha!” when they pull the rug out. Twitter can’t do that. Facebook can.

Photo credit: taberandrew via Flickr.