There's something missing in Twitter's S1 IPO prospectus. There's only a fleeting reference to the midichlorians that power the dark side of the "Twitter economy" - that is, fake accounts.
A company's S1 document is supposed to list "the factors which the Company considers to be the most substantial risks to an investor in this offering in view of all facts and circumstances or which otherwise make the offering one of high risk or speculative" and the 1933 Securities Act is strict about these transparency obligations. Here's what a company planning to issue public stock should heed.
Twitter says it has 218m monthly active users. However, fake Twitter followers can be bought cheaply and easily: the going rate appears to be £9 per thousand followers. If you shop around you can get a better deal.
Twitter obfuscates the issue by munging together fakes with spam. We already know Twitter has a serious spam problem. How so? Because it says so:
"Our actions to combat spam require the diversion of significant time and focus of our engineering team from improving our products and services".
But spam and fakes are not the same thing. Not every fake account spams - and most don't. Fake accounts exist primarily to inflate follower numbers, and they're the result of Twitter's sloppy and permissive procedures. Here's what Twitter wants you to think:
"…there are a number of false or spam accounts in existence on our platform. We currently estimate that false or spam accounts represent less than 5% of our MAUs. However, this estimate is based on an internal review of a sample of accounts and we apply significant judgment in making this determination. As such, our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have currently estimated."
Again the conflation of spam and fakes. The real cost of the fakes is that it devalues the advertising proposition, which is how Twitter makes all of its money today. Or as it says:
"…if we discover material inaccuracies in our user metrics" - which is to say, the metrics used to guess how many Twitter accounts are fakes - "our reputation may be harmed and advertisers and platform partners may be less willing to allocate their budgets or resources to our products and services, which could negatively affect our business and operating results."
Twitter could find other ways of making money - it could charge a premium and it could bundle the service, so the user doesn't see the premium payment. Just as RIM mulled the opportunity of being "SMS 2.0", so could Twitter. One developer created a paid-for Twitter alternative called App.Net last year - and it gained a small but avid following, with over 100 third party apps. It's since added a limited, free tier - you can only follow 40 accounts. But you can be fairly sure that with membership costing $36 or $70, the incentive to creating thousands of fakes is simply not there. It's a fake-free environment.
Last year the BBC's Rory Cellan Jones set up a spoof business on Facebook and attracted thousands of fake 'Likes'. If you want a metaphor for a fake economy, that couldn't be more appropriate. What was extraordinary was that Facebook didn't seem to care.
The last time an entire industry ignored serious structural quality issues was in the world of finance a few years ago. The financial institutions stopped caring whether the things it sold were real, or worthless.
You can all recall what happened next. ®