Twitter tries to turn 140 characters into cash

SAN FRANCISCO — On “The Tonight Show,” Conan O’Brien used to get big laughs for mocking Twitter as an egotistical stream of mundane updates from celebrities.

But when he got bounced from his late-night gig at NBC, O’Brien could no longer take to the airwaves to reach his fans, so Twitter became his open hailing frequency. He later thanked Twitter “for saving my ass.”

O’Brien isn’t the only one who is tapping Twitter’s mass-media potential. The social network, which will celebrate its five-year anniversary in March, last year signed up more than 100 million people who sent more than 25 billion updates called tweets.

Twitter Inc. gained another key following in December: investors who competed for the opportunity to pour $200 million into the company, nearly quadrupling its worth to $3.7 billion. The new funding comes even as the company experiments with how to wring sales from its surging popularity and find the kind of business formula that drove up the fortunes of Facebook Inc. and Google Inc.

Now Twitter finds itself at a crossroads, where it will finally have to answer the question: Can it make money?

“2010 was the year Twitter became a phenomenon,” said Forrester Research analyst Augie Ray, who tracks Twitter. “2011 will be the year that they have to prove they are a business.”

The man in charge of turning Twitter into a business is Dick Costolo, a former improvisational comedian turned technology entrepreneur who joined Twitter in 2009 as chief operating officer. Costolo, who replaced Twitter co-founder and product guru Evan Williams as chief executive in October, is credited with helping Twitter roll out advertising initiatives that have attracted more than 80 big brands such as Starbucks Corp., Coca-Cola Co. and airline Virgin America.

It will now be up to Costolo to determine whether Twitter becomes the next major independent Internet company like Facebook or the next promising start-up to get bought or flame out like News Corp.’s MySpace.

Twitter has turned down takeover offers from Google and Facebook, and intends to compete with them for users and advertising dollars. Costolo wrote in a recent tweet that “too many people worry about exit strategies when they should be worrying about entrance strategies.”

Part of his entrance strategy was helping Twitter raise cash to expand while relieving pressure for an initial public stock offering, which Costolo says is still on the distant horizon.

That investors valued Twitter at nearly $4 billion reflects its potential, not its actual business. Twitter will bring in $150 million in revenue this year, more than triple its revenue of $45 million in 2010, the first year the company sold advertising, according to research firm EMarketer. By 2012 Twitter’s revenue will reach $250 million, far less than Facebook but more than News Corp.’s MySpace, EMarketer predicts. But that’s only if Twitter can live up to its hype and show advertisers it’s a must-buy.

In addition to advertising, Twitter gets millions of dollars from Google and Microsoft Corp. to show tweets to users of their search engines. Twitter does not disclose its financial information, but those distribution deals, worth about $25 million, were enough to make it profitable in 2009.

Twitter’s challenge is twofold: making the product easier and more engaging and making money.

Social networks have been reluctant to flood their sites with ads. Instead they have sought out less obtrusive and more natural ways to connect users with marketers. For Twitter, that has meant trying to come up with ads that are so relevant and useful that users don’t think of them as ads.

Costolo claims Twitter has “cracked the code” on that kind of advertising and predicts advertisers will soon spend millions of dollars on Twitter. Analysts say Twitter’s efforts so far are promising.

Called Promoted Tweets and Trends, these ads show up at the top of Twitter feeds or trends. Advertisers pay anytime someone interacts with the Twitter update by clicking on a link, forwarding the update to friends or replying to it.

On average, 5 percent of Twitter users who see a promoted Tweet interact with it, a rate that Costolo said was “an order of magnitude greater” than most online ad campaigns. Promoted Trends go for as much as $100,000 for a single 24-hour campaign.