CORRECTED - UPDATE 2-Twitter chases first revenue with ad service

Tue Apr 13, 2010 6:26pm EDT

(Fixed day of week in first paragraph)

* Twitter unveils 'Promoted Tweets'

* Starbucks, Best Buy among handful to initially run ads

* Advertisers to eventually bid for Twitter keywords (Recasts, adds Twitter, analyst comments, San Francisco dateline)

By Alexei Oreskovic

SAN FRANCISCO, April 13 (Reuters) - Microblogging service Twitter introduced a new advertising program on Tuesday, in a first step to prove that its popularity among web users can translate into a self-sustaining business.

Known as "Promoted Tweets," the ad program represents a much-anticipated move to address concerns about the revenue generating potential at Twitter and marks a key milestone on the road to an initial public offering, analysts said.

"Over the years, we've resisted introducing a traditional Web advertising model because we wanted to optimize for value before profit," wrote Twitter co-founder Biz Stone in a post on the company's blog on Tuesday.

Twitter, which lets users send short, 140-character text messages, or Tweets, to groups of "followers," is among the new breed of popular Internet social networking services, along with Facebook and LinkedIn.

The company struck deals to provide its stream of Tweets to Google Inc (GOOG.O) and Microsoft Corp (MSFT.O) for inclusion in their Web search results last year, but Tuesday's ad service represents the first fruits of an effort to build a business model around a recurring revenue stream.

Twitter said that it was currently testing Promoted Tweets with a handful of advertisers including Starbucks Corp (SBUX.O), Best Buy Co (BBY.N), Sony Corp's (6758.T) Sony Pictures and Virgin America. Under the program, a Twitter message, such as a promotional offer by Starbucks, will appear at the top of search results on Twitter for keywords that companies specifically purchase from Twitter.

As Twitter broadens the program to include more advertisers, spokesman Sean Garret said, keywords on Twitter's search engine will be opened to competitive bidding by advertisers, similar to the way that Google's lucrative paid search advertising program operates.

Twitter also said on its blog Tuesday that the company planned to eventually serve Promoted Tweets ads beyond its search feature, offering the ads directly within users' message streams.

Josh Bernoff, a Forrester Research analyst, said Twitter needs to roll out the ad program more aggressively to advertisers if it hopes to turn its service into a money-making tool that can generate hundreds of millions of dollars in revenue.

"A handful of advertisers is not going to get them where they want to go," said Bernoff. "Scale is where the success is."

Twitter does not release information about its number of users, but comScore said the site had 22.3 million unique visitors in March in the United States, up roughly 140 percent year-over-year.

The ad program represents Twitter's latest move to evolve from a hot start-up into a financially focused enterprise. The company has filled out its management team with executives with experience at Google and Walt Disney Co's (DIS.N) Pixar Animation Studios over the past year.

Twitter's Garrett said that Twitter has no plans for an initial public offering, though as one of the Internet's most popular Web companies, analysts believe Twitter could eventually make for an attractive IPO candidate.

Cowen and Company analyst Jim Friedland said Twitter needed to first show investors that the new ad model can deliver sustainable revenue.

"Even if this ad opportunity is incredibly successful, it's still going to be a while before they have the track record to go public," said Friedland. He pointed to Google, which unveiled its AdWords program several years before floating shares to the public in 2004.

Twitter is backed by investors including Benchmark Capital, Spark Capital and Union Square Ventures. In September, the company raised $100 million in a funding round that valued the company at $1 billion, according to a person familiar with the matter.

"Twitter has great potential as a marketing and advertising channel with opportunities to create viral buzz around a product or service," said Eden Zoller, analyst at technology research firm Ovum.

"The flip side of Twitter's immediacy is that if advertising messages are not very carefully positioned users can hit back at brands and in real time, and brands will have little control over this." (Additional reporting by Shrutika Verma in Bangalore and Georgina Prodhan in London; Editing by Simon Jessop and Steve Orlofsky)

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