Twitter's new flight path

Very impressive, yes, well done – but how are you going to make any money? It is the question asked of the founders of every social networking site, from Friendster to MySpace, YouTube to Facebook and, most recently, the enfant terrible of the industry, Twitter.

And now, Twitter has come up with – part of – an answer. Here's the announcement, in less than 140 characters, of course: "Promoted Tweets, the unveiling: bit.ly/cdbPtt More info to come later this week @chirp. Stay tuned!"

It may be only one small step for mankind, but it is a giant leap for the micro-blogging service. Twitter's founders have spent several years disparaging the idea of allowing paid-for adverts to appear among the never-ending stream of great thoughts and mundane details, breaking news and distracting links. Yesterday, they caved, hoping to wring some value out of the company's 70 million-strong user base.

The ad industry appeared underwhelmed, at least for now, but several prominent brands said they have signed up to the experiment. Twitter users can now expect to see ads for the airline Virgin America, new movies from Sony Pictures, and for Starbucks and Red Bull from today onwards.

Twitter's monthly user numbers increased tenfold last year, leading founders to argue that the company was better off letting the site grow before introducing anything that might distract users. But things have evolved in the past few months. The company's venture capital investors, who put in $100m last autumn in a fundraising that valued Twitter at $1bn, are agitating for a return on their money, and a new chief financial officer – Ali Rowghani, from the animation studio Pixar – arrived at the company last month.

Rumours have swirled that Twitter has been examining introducing subscription fees for some users, or ways to sell access to data about the 50 million short messages that flow through its pipes each day. In the end, though, it has plumped for something entirely conventional: a system similar to the one operated by Google, which allows advertisers to bid for keywords and then see their ads appear alongside search results when users type in that word.

Biz Stone, one of Twitter's co-founders, said "promoted tweets" from advertisers will start appearing on top of the list of tweets that appear when a user searches for a particular topic. At the moment, advertisers will be charged for the number of times the ad appears; eventually, they could be charged only if users share or click on them. With online advertising rates consistently proving disappointing to media companies hoping to profit from the web, it remains unknown how much revenue Twitter might derive from promoted tweets.

"Stubborn insistence on a slow and thoughtful approach to monetisation – one which puts users first, amplifies existing value, and generates profit – has frustrated some Twitter watchers," he wrote on the company blog. "Believe me, when your name is Biz and you're a co-founder of Twitter, it also means putting yourself at the mercy of folks like [comedian] Stephen Colbert who hit home runs with lines like, 'So, I assume that 'Biz' in 'Biz Stone' does not stand for 'Business Model'."

The explosive growth of Twitter was the media story of last year, as it appeared the service was morphing into something big – even though it was far from certain what. It is still not certain. Many users sign up out of curiosity, never to regularly tweet. Most use it as a way to share details of their lives with a small number of friends, or to post interesting links. But from stories such as the American Airlines plane that crashed in the Hudson River, to the street protests in Iran, the service also last year proved its worth as a place to break news. By the end of 2009, Google and Microsoft's search engine Bing had paid a combined $25m for the right to pull the Twitter feed on to their own search sites, so that breaking news would appear more quickly in search results. Twitter seemed the very definition of the "real-time web", the buzz phrase of the year.

And many companies are already using it for marketing purposes, building a list of followers to whom they tweet information or respond to criticism.

Eden Zoller, principal analyst at research firm Ovum, said the medium is double-edged. "Twitter has great potential as a marketing and advertising channel with opportunities to create viral buzz around a product or service, encourage customer interaction, and respond more quickly to customers and issues. But 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."

The question, says Andrew Frank, advertising and marketing analyst for the research firm Gartner, is whether they really need to pay for "promoted tweets".

He said: "I am not convinced that the value of Twitter is self-apparent. It has taken centre stage in the media world as a channel where news is broken and where celebrities share their inner thoughts. The revenue model, though, is pretty elusive. The size of the opportunity on Twitter is bound by the size of the audience. It is large and it is growing quickly, but it is still much smaller than Facebook and much less so than Yahoo or Google.

"The central question is whether Twitter's promotion of the ads, as measured by brand lift or resonance or whatever the advertiser is looking for, will actually be worth more to an advertiser than simply putting their resources to cultivating a persona and an audience on Twitter in the same way they do now."

All sides agree, however, that yesterday's announcement of promoted tweets, timed to coincide with the AdAge Digital conference in New York, is not the final word on a revenue model for Twitter. Rather, it is the first step in a much larger process of figuring out what works. The company already says that promoted tweets that don't "resonate" with users will be taken down, putting pressure on advertisers to come up with 140-character blasts that twitterers want to share or click on. In the end, they could be placed not just on search results but on users' main Twitter page, whether or not they want to be following Sony, Virgin America et al.

This immediately raised a red flag for Gartner's Mr Frank: "We're a long way from this at the moment but it's not inconceivable that, if your Twitter stream starts to resemble spam, you are going to tune out pretty quickly."

Favourites: The web money-spinners

Facebook

Rupert Murdoch once dismissed the idea that Facebook could be worth $15bn, saying the social networking leader was a utility "like the phone book". That valuation, put on the company when Microsoft invested in 2007, looked bubbly back then – when it remained unclear how it could bring in substantial revenues. Last September, though, the company said it had started bringing in enough money to cover its costs, a year ahead of schedule, and its revenue is rumoured to be on course to top $1bn this year, thanks to its status as one of the most popular sites on the web. It makes money, like most sites, mainly from selling ads – both to brand advertisers and to smaller users, who can build their own ads to appear on targeted Facebook pages. It also makes money selling "virtual goods", such as birthday message icons.

YouTube

The video-sharing website was one of the pioneers of the Web 2.0 era, a 24-hour version of You've Been Framed that has morphed into one of the biggest entertainment websites on the web. Google, which purchased the company for $1.65bn in 2006, does not break out financial details for YouTube, and executives are fond of expressing patience about how the subsidiary will find its way to profitability. Google has been aggressively expanding the number of adverts that appear alongside – and now also within – the videos on the site, with a resulting upswing in revenue, according to Wall Street guesses. Mike Mahoney of Citigroup has predicted that YouTube's share of the revenue from those adverts (it has to share some with copyright holders) could top $600m this year.

MySpace

Facebook proves that scale matters in social networking, as advertisers flock to the most popular portals. This is why there is something of a crisis atmosphere at MySpace, which is on to its third senior management team in the space of a year. Mr Murdoch's News Corporation has owned the site since 2005, but revenues have fallen short of the old mogul's hopes as users have drifted away. Google signed a deal to sell advertising alongside search queries typed into the site, and guaranteed MySpace $900m over three years, expecting high traffic. But the actual results have been so poor that, under the terms of the contract, MySpace won't get all of that money. The deal expires this year, leaving MySpace casting around for additional revenue streams.