Forget Advertising: Twitter's Data Has Huge Potential

Twitter's IPO was a resounding success, with the stock jumping up more than 72 percent the day it debuted. The company was valued at $18.1 billion, an astounding figure that suggests Wall Street sees huge potential despite its $300 million in losses over the past three years.

While advertising far and away makes up the majority of Twitter's revenue, various commentators have noted some obstacles in its way: falling ad rates by as much as 70 percent for mobile, a smaller user base than Facebook and user churn. While ads may be Twitter's bread and butter at the end of the day, the micro-blogging site needs to focus on expanding other revenue streams, especially data monetization.

In 2012, Twitter earned $47.5 million from data licensing, a bit more than 13 percent of overall revenues of $350 million. This has the potential to substantially increase as more tech companies find applications for its raw data beyond just marketing. Twitter disclosed in its IPO filings that revenue from data monetization grew by 53 percent in the past year, according to the Wall Street Journal. The three exclusive U.S. authorized resellers of Twitter data --Topsy, Gnip and Datasift -- are set to forge a new industry from data mining. Additionally, a new crop of new social listening firms serving various industries find Twitter to be an invaluable resource of real-time streaming social "chatter."

In April this year, the Dow Jones Industrial Average dropped precipitously due to a false AP tweet that the White House was under attack. Within a few minutes, the tweet erased $136 billion in equity market value, though it later recovered. Carl Icahn's tweets about Apple are market-movers in and of themselves. Clearly, social media activity has the ability to influence the market. Those investors with access to real-time social data analysis could have a strong advantage in trading.

Dataminr and HedgeChatter are two forward-thinking startups looking at social data for insights into the direction of publicly traded securities. Where financial communications platforms like Stocktwits organize streams of social information around stocks and markets, these analytics firms determine the tone of the conversation while attempting to weed out the fluff and irrelevant "noise."

Mining social conversations for investment analysis is just one example of the potential revenue Twitter and other social networks can generate from data monetization.

"Social data, including real-time data from Twitter, can be an incredibly rich source of information for the finance industry," says Jamie de Guerre, SVP of Product at Topsy, which has indexed and organized every tweet since Twitter's founding. "Analysts and fund managers need real-time insights on public sentiment and market-moving discussion around products, companies, industries and national economies."

Social data will play an increasing role in investment analysis as networks like Twitter continue to attain mass adoption. Sentiment analysis -- in essence, interpreting the significance and tone of real-time social conversations -- will be the first new trading indicator in decades. The effectiveness of any particular social data and sentiment analysis company will hinge on its ability to separate credible and influential chatter from the noise.

Data mining is a small revenue line now, and Twitter has been largely hush-hush about it, perhaps because of public sentiment about data mining or the company doesn't see that segment as a significant source of future revenues. But as more companies across multiple industries rely on this data to understand their particular market and customers, the more power Twitter and other data-rich social networks will have to increase their licensing fees.