Brainstorm video: Dick Costolo on Twitter's business model

July 19, 2011: 7:34 PM ET

Twitter CEO Dick Costolo sat down with Fortune's Adam Lashinsky at Brainstorm Tech in Aspen, CO to discuss the company's future.

Below is an unedited transcript of the talk.

ADAM LASHINSKY:  Dick, thanks for being here.

DICK COSTOLO:  Sure.

ADAM LASHINSKY:  Welcome back to Aspen.  You were here last year.  Biz Stone was with us the year before that.

I feel like we have a small elephant in the room, and we should get it out of the way right now, if we could just put something up on the screen, please, that I asked for.  That's not so interesting.  There it is, "Trouble@Twitter," our recent cover story.

I thought that would be a bit of a laugh line, but I guess it really wasn't for this -- (scattered laughter) -- okay, thank you.

Is there trouble at Twitter?  Is there turmoil in the management ranks?  Is there difficulty growing?  Are you having trouble making money?  These were the central points of the story.

DICK COSTOLO:  I'll answer those six in reverse order or some order.

We're growing faster than we've ever grown before.  You heard some of the statistics just now when we were introduced; they're actually already higher.  When I was onstage at D9 last month, I said that it took three years for the first billion tweets to be sent, and now a billion tweets are sent every seven days.  It's now a billion tweets are sent every five days, and it's growing ever faster.

Last month, according to third party Google Analytics, 400 million uniques just to the website, just to Twitter.com, 400 million uniques.

Mobile use is growing 160 percent year over year, so 40 percent quarter on quarter growth in the mobile use of Twitter.

ADAM LASHINSKY:  And I think Stephanie had a user statistic, but I didn't catch it.  Was it -- how many --

DICK COSTOLO:  She said over 200 million registered users.  When we talk about users, we talk about them in terms of unique visits to the site in terms of -- that are measured by third parties, and registered users, because people will use the term "active users," but an active Twitter user can be someone who comes to the site and doesn't log in, reads the tweets that way, uses Twitter search, sees tweets in syndication.  Obviously we have a significantly syndicated model.  So, along any axis you measure us, we're growing faster than we've ever grown.

ADAM LASHINSKY:  Okay, and I want to have a whole conversation about the business.  So, we'll hold off on that for a moment.

You were named CEO in the fall.

DICK COSTOLO:  Yes, yep, late fall.

ADAM LASHINSKY:  And subsequently, I would argue rather artfully both of the cofounders have -- sorry, two of the three cofounders have left the company.  Can you give us a little color on that?  Why did they leave the company?

DICK COSTOLO:  Yeah, so Ev and Biz have gone.

ADAM LASHINSKY:  Evan Williams and Biz Stone.

DICK COSTOLO:  Yes, I'm sorry, Evan Williams and Biz Stone have gone back to start Obvious Corp, which was the incubator that launched Twitter.  And Jack Dorsey, who's the inventor of the product and the third founder, has come back to run product strategy.

When Ev stepped down as CEO, he just decided that he was more interested in a day-to-day role that was doing something else.  He spent the fourth quarter thinking about what he wanted to do next, and at the beginning of the year decided he was going to go do something else.

ADAM LASHINSKY:  And Biz?

DICK COSTOLO:  Yeah, and Biz has rejoined him in the last -- in the last month, and they've re-launched Obvious.

ADAM LASHINSKY:  I mean, you understand where with these companies it's the objects of fascination, I think for good reasons, for reasons that Twitter should be proud of.  You know, in the media and the people who pay attention to Twitter, we put a lot of energy into the story of Biz and Dev, right?

DICK COSTOLO:  Yes.

ADAM LASHINSKY:  Biz and Ev, excuse me.

DICK COSTOLO:  Right.

ADAM LASHINSKY:  And then all of a sudden, ah, the story of Biz and Ev is that Biz and Ev aren't anymore, he's decided he no longer wanted to do this thing we spent the previous two years saying he wanted so deeply to do.

DICK COSTOLO:  Yeah, so let me address that for a minute.

In late 2009, we started putting together a senior management team at Twitter.  I joined the company.  And the media has focused on the founders coming and going, but what's been going on really inside the company is we've been building out this senior management team.   Our CFO, Ali Rowghani, was the CFO at Pixar for five years, working with Steve and the great management team at Pixar, Lassiter and Ed Catmull there.  Our VP engineering, Mike Abbott, was running engineering at Palm and built the Web OS before coming here.  Jack Dorsey is director of product development, Satya Patel was at Google working for Susan Wojcicki, and the great operating executive David Rosenblatt at DoubleClick before that.

So, while people like to focus --

ADAM LASHINSKY:  One of your board members.

DICK COSTOLO:  That's correct, one of our board members, David.

While people like to focus on the comings and goings of the founders, and they've always said that they would do what was appropriate at the appropriate stage for the company, and they've continued to do that, what's been really going on inside the company is we've been building out the senior management team, and that team has been working together now for months.

ADAM LASHINSKY:  And is your team complete?

DICK COSTOLO:  We still have probably a couple roles we need to hire for.  We need a couple more senior engineering leaders.  We've got -- we're hiring engineers as fast as we can.  We need a couple more senior engineering managers, and we're constantly looking for those folks.

We are going to be bringing in a senior marketing executive.  One of the interesting things about Twitter is it's one of the most powerful brands in the world already in its short life.  The bird is recognized around the world.  But we don't really have anyone internally curating that brand or thinking about how to curate, and we need to bring that person in.

ADAM LASHINSKY:  And what's the background of that marketing person you're going to bring in?  Are you far along on that or are you just --

DICK COSTOLO:  We're far along on that, and the background is someone who really understands thinking about brands in concrete terms, right, what are the sorts of concrete ways of describing this brand that you can use when you talk about it.

ADAM LASHINSKY:  Can you go ahead and tell us who that person is going to be?

DICK COSTOLO:  I cannot tell you who that person is going to be.

ADAM LASHINSKY:  Okay.

DICK COSTOLO:  It's a very strict, don't break any news onstage rule.

ADAM LASHINSKY:  Oh, really?  I don't like that rule at all, but your discipline is admirable.  We've still got 16 minutes and seven seconds.

DICK COSTOLO:  Right.  You might break me, you never know.

ADAM LASHINSKY:  Okay, so we'll -- your point is there, in fact, is no management turmoil at Twitter; on the contrary.

DICK COSTOLO:  Yeah, on the contrary.  Like I said, we've been working together, the team has been working together for months now.  We work really well together.  Jack and I specifically work very well together.

You know, one of the things I like to say about him is he speaks with the fluency of the inventor of the product.  And what I mean by that is, you know, at any given point in a discussion about the product, you'll have engineering and design and product management, usually engineering and design in some perhaps contentious discussion about the direction in which you want to take something, and it's helpful to have the inventor of the product in the room who can clarify that discussion, focus everybody on one solution, and then that ends the discussion.

ADAM LASHINSKY:  I don't know if -- we were able to see earlier the great demonstration of the product.  By the way, people are tweeting here at the conference and the stream is flowing across.  So, I just invite people, if you have any ideas about who the top marketing person at Twitter should be, feel free to tweet that, and we'll watch that flow across the screen.

Okay, the business.

DICK COSTOLO:  Yes.

ADAM LASHINSKY:  I think there's no debate to be had about whether or not Twitter has tremendous engagement, all these millions of people you talked about.  It's a wonderful broadcast mechanism, you can be voyeuristic, you can -- or you can send your messages out into the ether.

The question that I think is still not understood or not definitive is, is this a business.  So, could you explain to us how it is?

DICK COSTOLO:  Sure.  So, the business is doing fantastically well.  I mean, you know, you just had the CEO of one of the most magnificent brand companies in the world onstage talking about the success of the Old Spice campaign.   Twitter was central to that campaign.

ADAM LASHINSKY:  So, approximately what did P&G pay you for that?

DICK COSTOLO:  Well, we don't have to go into the details of what they spent on a per campaign basis, but I'll use that as an example to highlight how the business is doing.

ADAM LASHINSKY:  But I don't just mean to be joking around.  I know I'm not going to get a campaign figure out of you, but describe qualitatively what P&G pays for something like that.  Who do they pay, who else gets a cut?

DICK COSTOLO:  Who else gets a cut?

ADAM LASHINSKY:  Yeah.  I mean, I assume they use an ad agency.  That's the --

DICK COSTOLO:  I don't know how those particular pieces of it work and who gets a cut, but I'll describe how the platform works and why it's working well.

So, the beauty of the Twitter advertising platform is the ads are just tweets, right, and instead of just going organically to your followers, they go to your followers and then whoever else you want to target them to.  You can target search terms, you can target trends on the homepage, you can say I want to target people who are interested in these kinds of things to follow my account.  So, we have lots of different ad products, and those ad products go everywhere the tweets go.  So, promoted tweets go everywhere tweets go.  Promoted accounts go everywhere we show people what kinds of accounts they can follow.  Promoted trends go everywhere we show trends.  So, the ad system is organic to the platform and goes everywhere the content goes.

I think the fascinating thing about the ad platform philosophically is that when you think about the future of Twitter where tweets are being distributed frictionlessly to browsers, desktops, Smart Phones, feature phones, television, et cetera, when you've got ads that can go globally everywhere those tweets go, it creates this opportunity for advertisers to do the kinds of things that these two folks from P&G were just talking about:  one, real time marketing campaigns.  We already see that from studios on Twitter.  The week before the film comes out, they're promoting trailers on Twitter.  The moment the movie comes out or the moment after the movie comes out, they start to show some of the quotes that people have been tweeting about from the movie.

So, this ability to edit and manage a campaign in real time as it happens and distribute that globally has never existed before, so I think that's fascinating.

ADAM LASHINSKY:  And is there also an AdWords like component --

DICK COSTOLO:  Yes.

ADAM LASHINSKY:  -- that I could just put my credit card in and do it?

DICK COSTOLO:  It's not self-serve yet, but yes.

The thing I thought you were going to go for on the AdWords component is we charge people on a cost per engagement basis.  So, you only -- like AdWords, you only pay when people engage with the tweet.

The important point to note there is our engagement rates are through the roof.  We are seeing ads literally with click-through rates and engagement rates of 30, 40, 50 percent.  I think the highest one of all time was Volkswagen ran a promoted tweet for their new VW Beetle that actually had an engagement rate, where an engagement is a click, a reply or a retweet, of 52 percent.  So, you were in the minority if you saw the ad and you didn't engage with it, right?

ADAM LASHINSKY:  And how does that compare with Google AdWords?  You were at Google, so you have --

DICK COSTOLO:  It compares favorably with AdWords.  It compares order of magnitude --

ADAM LASHINSKY:  I've never bought one.  What's the --

DICK COSTOLO:  It depends on what kind of thing you're buying in search, but it compares very favorably with search.

ADAM LASHINSKY:  So, all your sales right now are direct sales, is that right?

DICK COSTOLO:  That's correct, it's all direct sales.

I would say that, you know, we actually divide our sales team into a direct sales force that calls on the top 250 brands in the world, and then an inside sales force that calls on sort of the trunk.  We'll roll out self-serve later on.

ADAM LASHINSKY:  And analogize, if you would, where you are in your development of that.

DICK COSTOLO:  Sure.  Yeah, sure.

So, the number of advertisers on the platform is up 600 percent this year, was low hundreds at the end of last year, and is up 600 percent.  Advertisers --

ADAM LASHINSKY:  I'm sorry, you said low hundreds of numbers of advertisers at the end of 2010?

DICK COSTOLO:  Yeah, it's up like 600 -- yeah, that's right, 2010, it's up 600 percent this year.

The number of advertisers that renew campaigns is 80 percent.

You know, so along any axis you want to measure the financial health of the platform and the company, it's fantastic.  It's going according to plan.  We've got a very specific and methodical way we're thinking about rolling out promoted tweets broader and broader and broader, and we're only going to do that as we ensure that the user experience is good when we do that.

ADAM LASHINSKY:  What's an average annual spend of those users?

DICK COSTOLO:  What's an average annual spend of the advertisers?

ADAM LASHINSKY:  Yeah, like the top 200.

DICK COSTOLO:  So, I mean, I think that we'll increase dramatically year to year.

ADAM LASHINSKY:  Well, I'm sure you will, but -- (laughter) --

DICK COSTOLO:  I mean, it's growing, it's growing dramatically.  I'm not going to go into the financial details of what they spend with us.

ADAM LASHINSKY:  It's a small number now?

DICK COSTOLO:  It's a significant and growing number.  (Laughter.)

ADAM LASHINSKY:  Okay.  But, you know, Google, what big brands do on Google is small compared to what they do on television.  Would I be correct in assuming that what big brands do on Twitter is small in relation to what they do on Google?

DICK COSTOLO:  So, I'll try to -- I'll try to be -- provide, give you a helpful answer.

ADAM LASHINSKY:  Thank you.

DICK COSTOLO:  We have since -- we have multiple kinds of ads you can buy.  You can buy the cost per engagement ad and promoted tweets or promoted followers, promoted accounts where you simply bid whatever you want to bid on, you know, I'll pay this much for a new follower or I'll pay this much for people who engage with this ad.

And then we have a promoted trend which is sort of the homepage takeover, it's the first trend on the page, which is a flat fee that you pay for a global distribution of that trend for the day.  And that increases as the number of views to Twitter.com increase.

ADAM LASHINSKY:  One of the controversies around Twitter right now is this tension between what Twitter wants to do for itself, either buying or building, versus what your ecosystem is going to do for itself.  So, can you -- articulate, if you would, what you wanted -- what Twitter wants to do and what you're content with others doing for the ecosystem.

DICK COSTOLO:  Sure.  So, when Jack came back to the company earlier this year, he and I articulated a very clear vision to the company for what we wanted to do, and that is that we want Twitter to be the world in your pocket, okay?  That's the way we describe it to the company, Twitter will be the world in your pocket.  And we have several things we need to do to the product to fulfill that dream, and where we need to go.

And the way we think about the ecosystem is providing value-added services for our core product.

So, as we think about the ecosystem, we want them to be able to do things like provide CRM services to folks like P&G, analytics dashboards to folks like P&G.  You just heard Bob from P&G say that Twitter is one of the core components of their customer pulse dashboard that they have.  Well, there are lots and lots of companies out there in the ecosystem that are building tools to provide companies around the world with these sorts of analytics' dashboards, and we need more of them.

ADAM LASHINSKY:  And does that mean definitively that you won't?

DICK COSTOLO:  We will provide probably a core set of analytics, but there are always additional kinds of analytics that companies are going to want.

I'll give you just a very simple example.  In the film industry they don't just want analytics around how people are interacting with their tweets, they want sentiment analysis, right, what are people saying about the movie Super 8 that's coming out this week and what's the positive and negative, and we're not going to do that kind of stuff.

And on a vertical by vertical basis there are all sorts of value-added services that these verticals want.  The financial services industry wants to know what kind of spikes people are seeing around particular stocks.  That's not anything we're ever going to do.  You could go on and on by industry.

ADAM LASHINSKY:  I see.  And obviously we're -- do you feel that you've adequately communicated to the developer world what you are and are not interested in?  Because just to make a point that I don't think gets made typically, if you think about it from an investor's perspective, if I were an investor in Twitter, I'd be glad that you've stepped up and are doing certain things that help you make money, right?

DICK COSTOLO:  Yeah.

ADAM LASHINSKY:  And give you control.

DICK COSTOLO:  Yeah, I think we've been very clear with the ecosystem that we are going to provide a Twitter owned and operated experience on all the major platforms, and that we want to encourage the ecosystem again to move up the value chain and provide these value-added services.  There are countless services you could imagine describing.  Radian6, which was bought by Salesforce for several hundred million dollars, provides value-added services to folks like FEMA in understanding when there are natural disasters where people are using Twitter to describe what they need in terms of help.

ADAM LASHINSKY:  So, two things real quickly.  How concerned are you about this FTC investigation?

DICK COSTOLO:  You know, it's something we have to -- we have to engage them with, and we'll do that and we'll provide them with all the information they want.

ADAM LASHINSKY:  What's your assessment of Google+?

DICK COSTOLO:  So, Google is a powerful global company, and I fully believe that they will leverage their tremendous reach to pull people into this experience, and they're already doing that.

So, the way you have to think about that as a company operating in that space is you need to focus on your own goals, right?  Now, I already said we want Twitter to be the world in your pocket, right?  So, we have this very clear and concise way of describing what we want Twitter to be.  And we view ourselves as focusing on offering simplicity in a world of complexity.

Now, having said that, you have to pay attention to the competitive landscape and understand what's going on, and not just what's going on but how your competitors are doing things and why they're doing things.

But, you know, if you just look in the side-view mirror at what are particular companies doing, and then you start to say Twitter is going to be the world in your pocket, now with video chat, then you lose your way, right?

So, we're going to offer simplicity in a world of complexity, focus on our goal, while we understand what everyone else is doing.

ADAM LASHINSKY:  Questions, please?  Okay, let's get the mic right over, and please identify yourself before you ask your question.

QUESTION:  Michael Snyder (ph), Mobile Ready.

Dick, I'm curious if you see advertising as Twitter's core business going forward, and what you think of third party platforms like Ad.ly that leverage Twitter as their entire business?

DICK COSTOLO:  Yeah, so I do think of advertising as one of the major revenue components to Twitter going forward.

I think one of the only reasons I hedge and say one of the major components going forward is because we already see a tremendous amount of commerce taking place on the platform.

Just as a couple examples, when the Google IO conference was taking place, they tweeted the morning of the opening of the conference, "Hey, you know, 100 tickets left, 550 bucks a piece, use this promotion code," and then I think 11 minutes later tweeted, "Sold them, thank you," you know, $55,000 with one tweet in 13 minutes.

The San Diego Chargers tweeted on a Saturday afternoon, "We need to sell a thousand more tickets so the blackout can be lifted in San Diego tomorrow," and 40 minutes later tweeted -- or I think 40 minutes later or so tweeted, "Sold those."

As far as other third parties operating within the platform, what we've specifically said is you may not inject ads into the stream.  If you're doing things organically within the stream or around the stream, that's fine.

So, in the particular case of Ad.ly, they go to, you know, Twitter users and say, hey, we'll pay you to tweet about this.  That's not inserting an ad into the stream, that's getting someone to say something.  I can't worry about that or police that, because there are all sorts of tiers of sponsorship that are like that.

And so we let those folks do that, and if that's what people want to do, they should feel comfortable doing that; we're not going to disrupt that business.

ADAM LASHINSKY:  But to the first part of your answer, was there any revenue associated to Twitter from the Google IO and San Diego Chargers example you gave?

DICK COSTOLO:  No.  That's why I was saying I think -- as I was saying, when I said advertising will be one of the core ways that Twitter operates and one of the core revenue streams, what I'm saying is there's a commerce opportunity there for us to take advantage of if we want.

ADAM LASHINSKY:  But how would you -- you'd in other words charge a tariff on --

DICK COSTOLO:  You could imagine all sorts of -- no, I think the way you would think about it is how can we remove friction from the process.  Right now, you have to go to a third site, enter a promotion code, something else.  How would you -- what would you do to remove the friction from that transaction?  You know, classic sort of economics, there's money to be made when you can remove friction from transactions.

ADAM LASHINSKY:  Is that product under development?

DICK COSTOLO:  We are thinking about the kinds of things that we will offer to the market, and designing different things and experimenting with different things internally.

ADAM LASHINSKY:  I'll take that as a yes, thank you.  (Laughter.)

Okay, back there.

QUESTION:  Miguel Helf from Fortune.

ADAM LASHINSKY:  Welcome, Miguel, to Fortune Magazine.

QUESTION:  Thank you.

As the CEO of a very fast growing company that's hiring a lot of people, trying to retain a lot of people in a very competitive market, how do you see the secondary markets, the trading in private shares that your employees can engage in?  Is it helpful, is it a distraction?  How do you communicate to employees about it, and do you have any specific policies?

DICK COSTOLO:  It's a distraction.  I mean, the simple answer is it's a distraction.  I think that we and Zynga and Facebook have had to retroactively put lots of policies in place to sort of constrain that.

One of the concerns is because that's sort of a brave new world, you worry about people who might be buying through those second markets, whether they're accredited investors, what they've been told by the person who might be trying to sell them the stock, and who's going to get in trouble at the end of the day if it doesn't all work out with them.

So, they're definitely a distraction, and I think that going forward private companies and their investors will do things in advance of forming the company that restrict those transactions.

ADAM LASHINSKY:  Dick, two quick questions.  Is Twitter profitable now?

DICK COSTOLO:  Oh, we don't talk about our financial health of the company.  One of the beauties of being a private company is we don't have to let our competitors know how well we're doing.

ADAM LASHINSKY:  And will you -- do you anticipate raising more funding before an IPO?

DICK COSTOLO:  So, we absolutely need to continue to invest in our infrastructure.  As I said at the beginning, with the growth in the amount of content that's pouring into the platform, we need to invest heavily in the infrastructure that supports that.  Whether that's a public financing or more private financing, we will make those decisions based upon all sorts of criteria, including cost of capital and so forth.

ADAM LASHINSKY:  So, you very well may likely raise more money before an IPO?

DICK COSTOLO:  We're going to continue to invest heavily in the infrastructure we need to support the business.  (Laughter.)

ADAM LASHINSKY:  Dick, thank you very much.

DICK COSTOLO:  Thank you, Adam.  It's great to be here.

(Applause.)

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