“Is this nuts?”. In yesterday’s FT Analysis (p.9) Paul Murphy argues that “investors appear to have taken leave of their senses, pumping cash into projects regardless of profitability.” The article, inspired by Google’s £3.2bn acquisition for the privately owned four-year old start-up Nest, raises the question if investors once again have lost touch with reality – 15 years after what Murphy cheerfully (and appropriately!) describes as the “Great Dot Comedy”. The author examines four companies, one of them the “messaging service” Twitter which, according to Murphy, now commands a rating about twice that of Facebook.
In previous posts (1st and 5th Nov 2013) Pinkers strongly supported Twitter’s IPO and is happy to disclose that it put its money where its mouth is. Time has passed… and Pinkers isn’t so sure, anymore… . No, it’s not that Pinkers has lost faith in the Twitter model: This is as relevant as ever. In fact, Pinkers believes we may still underestimate its significance. The London brokerage Aviate goes as far as stating that “the opportunity for Twitter is to become the largest real-time delivery system, large enough and pervasive enough to exert noticeable ‘pressure’ on the internet itself.” Pinkers is inclined to agree.
However, this does not necessarily make it a great investment opportunity. Indeed, Twitter’s ‘DNA’ may actually prevent it from ever delivering the profits required to justify its current $40bn valuation which, by any conventional yardstick, can only be described as insane. So, is Paul Murphy right to refer back to the “collective psychotic episode” of the great dot-com bubble fifteen years ago? Yes, but for the wrong reasons. In its current form, Twitter provides a unique platform allowing its users to engage and communicate on a forum level hitherto unthinkable. The best example of its power is probably the ‘Arab Spring’: Without the instant messaging service Twitter, this would undoubtedly have taken a very different path and, indeed, may never have happened at all. Speed was of the essence, allowing the revolutionary ‘virus’ to spread rapidly and thus disabling the incumbent authorities before they even became aware of it. As such, Twitter defined and established itself as a highly effective democratic instrument.
Pinkers likes Paul Murphy’s definition “messaging service”. Pinkers has always argued that Twitter is not ‘social media’: Facebook is. Twitter is a telephone. No, not a ‘smartphone’ but just a good ‘new-fashioned’ telephone! That it precisely why it is such an effective an powerful tool.
The founders’ decision to turn this tool into a conventional business model by tapping the public markets may yet backfire. Perhaps understandably, both founders and early investors wish to translate a great idea into hard cash. As it stands, in its current and original form, Twitter is a huge success. However, to monetize the model would require a complete transformation (advertising!) which may well turn out to be incompatible with its original DNA and in consequence risk damaging the core concept.
On reflection, Pinkers thinks the decision to go public was probably a mistake. A successful business is about bringing in customers, selling a product and making money. Twitter is bringing in customers but it is not selling a product and that is precisely why it is not making money. A ‘partnership’ model – perhaps along the lines of John Lewis? – might have been more appropriate. Unless the management team can pull off a miraculous coup, Pinkers fears Silicon Valley’s prevailing dynamics of a “magical valuation creation machine” may yet render Twitter impotent.