Pondering the Economics of Twitter

The online world is abuzz about Obvious Corp's Twitter product. It's a fun service but I wonder about the business model. Who makes money on Twitter?

Let's follow the money. Suppose I have 50 followers. When I update my status, 50 SMS messages get sent out.

Each of my 50 followers pay between .$10 and $.15 per message to their cellular provider. Even if they've bought an "unlimited" message package ($20/month for 2500 messages) and they max it out (but don't go over), they're paying 0.8 cents/message each. Let's say on average they're paying $.05/message. So for every update I make on Twitter my followers are paying their cellular carriers $2.50.

Obvious is in all likelihood paying about $.02 per message terminated via their short code (this is an assumption). So the carriers earn another $1 from Obvious Inc.

Twitter messages are limited to 140 characters, I'm guessing the eventual business model is advertising and Obvious plans to use the remaining 20 characters (less addressing info) as their ad inventory.

So what do we have...

The cellular carriers are getting filthy rich. For every little update I make to my status on Twitter the cellular carriers get paid $3.50. The carrier costs for this are really low (I'd estimate well under $.05)

Obvious needs to be able to sell their ad inventory for more than the cost of terminating the SMS'es. So Obvious needs to sell out their inventory at a $20 CPM to break even. Obvious has some demographic data, but no real time geographic data on my followers. Do they parse my messages for context and content (a la gmail)? That could greatly increase the CPM they could command.

If the carriers were smart, they would waive the message termination fees they charge Obvious. Sure, it's great for them to get paid on both ends, but it really behooves them to foster the adoption of opt in, push, subscription services that use SMS.

Jason Devitt had a great post a while back on the economics of SMS.