Dick Costolo on how Twitter makes -- and might make -- money

July 26, 2011: 8:34 AM ET
Dick Costolo

Twitter's Dick Costolo (left) with Fortune's Adam Lashinsky

With a multi-billion-dollar valuation and relatively small revenues, Twitter is Exhibit A for those who believe Silicon Valley is experiencing another bubble. At Fortune's Brainstorm Tech conference on July 19, the company's CEO, Dick Costolo, explained how the company's business works, including what ad products its customers are buying and how Twitters sells to them. He even hinted a major future product area: capitalizing on the commerce currently being conducted by others on Twitter. A lightly edited version of his description, in his words, follows.

The beauty of the Twitter advertising platform is the ads are just tweets, 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. 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, smartphones, feature phones, television, etc., 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 [the CEO and chief information office of P&G (PG)] were just talking about:  Real-time marketing campaigns. We already see that from [movie] 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. I think that's fascinating. We charge people on a cost-per-engagement basis.  So, like [Google's (GOOG)] 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 when 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%. So, you were in the minority if you saw the ad and you didn't engage with it. That compares very favorably with search.

Right now are sales are all direct. 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. The number of advertisers on the platform is up 600%. It was low hundreds at the end of last year, and is up 600%. The number of advertisers that renew campaigns is 80%. 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.

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I 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 I/O 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." [That's] $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 or so tweeted, "Sold those."

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. You could imagine all sorts of [ways] we remove friction from the process.  Right now, you have to go to a third site, enter a promotion code, something else.  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.  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.

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About This Author
Adam Lashinsky
Adam Lashinsky
Senior Editor at Large, Fortune

Adam Lashinsky is a San Francisco-based editor-at-large for FORTUNE, covering Wall Street and Silicon Valley. Lashinsky joined FORTUNE in 2001, after two years as a contributing columnist. Prior to joining FORTUNE, Lashinsky covered Silicon Valley for TheStreet.com and The San Jose Mercury News. A Chicago native, Lashinsky holds a B.A. in history and political science from the University of Illinois at Urbana-Champaign.

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