Twitter's Facebook Smackdown

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If I HAD A WEB 2.0 COMPANY…

…that had more than its share of technology issues…

…and no clue about what business model would enable it to actually generate revenue…

…and some firm came along offering me $500 million in stock for my company…

I WOULD SELL IT BEFORE THE ACQUIRER CAME TO ITS SENSES.

But faced with the (well, kinda) same set of circumstances, Twitter decided to pass on a $500 million stock offer from Facebook.

Is this a reflection of Twitter’s belief that its worth a lot more than $500 million? Possibly, but I would hope not.

All Things Digital reported:

It’s more about timing,” said one person familiar with Twitter’s motivations. “There is a strong feeling that there is still an opportunity — even with the economic downturn — to blow this thing out.”

One commenter on the site remarked: “In my opinion, the two communities just wouldn’t mesh well.”

Just my opinion, but neither of these views nails the real issue (Facebook can hardly be considered a single community, and the overlap between Facebook and Twitter users is huge, so the commenter is really off-base).

My take: Twitter’s rejection reflects its take on Facebook’s future valuation.

I said this during the dot-com boom eight years ago, and it holds true today: For all these (now Web 2.0) firms to succeed and thrive, advertising is going to have to account for a greater portion of GNP than healthcare and financial services — combined.

And that’s simply not going to happen.

It doesn’t add up. On one hand, to garner a multi-billion dollar valuation, a Web 2.0 firm needs to have mass appeal. But on the other hand, the pundits yell that “mass media advertising is dead!” If shoving advertisements in the face of people on TV, in magazines, and on other Web sites doesn’t work, then why would it work on Facebook?

 Even Google is diversifying its revenue stream, and has seen its licensing revenue (which admittedly only accounts for about 3% of revenue) grow by 2.5 times its 2007 level through just the first three quarters of 2008.

Twitter is making a smart move by passing on this deal. Not because it’s worth more than $500 million today, but because that $500 million might not be worth as much in the future with Facebook as it would be with some other firm.

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