How Twitter should think about addon companies

thomprice-goya-saturnWhen I read Fred Wilson’s comment about how Twitter would start “filling the holes” and building features to compete against Twitter apps I couldn’t help thinking of Goya’s paiting depicting Saturn devouring his son. I still haven’t figured out what was Twitter’s intention by making that statement a couple of days before announcing the acquisition of iPhone app Tweetie. If the strategy was to frighten potential targets to negotiate valuation, then I need to say it was not fair play…
Twitter needs to think about how to better manage the ecosystem to build a healthy platform and generate returns. They need to keep the lion share of the business but shouldn’t try owning every possible revenue stream. They don’t need to develop every feature users like. They need to define which are the core revenue generating functionalities and own those pieces, while creating incentives for third parties to come up with “complements” that enhance user experience without getting in the way of the revenue generating core. What’s the problem? Twitter still doesn’t have a clear and proven revenue model so it is forced to “play it by ear”. It needs to do so, however, without killing the ecosystem as those experience enhancing apps are key to Twitter’s growth and innovation.
An interesting article by David Yoffie and Mary Kwak, “With Friends Like These; The Art of Managing Complementors” provides a useful framework to think about complements. One of the key question they ask is “When should you produce your own complements?”
Right now we can say Twitter should produce some complements and have third parties produce most of them, as they need a wide assortment and have high capacity to invest (relative to the amount of money it takes to launch these features). Yoffie and Kwak go on to says that in a business, as in a war, you need to know yourself, you need to know your enemy, and you also need to know your friend. I don’t expect to see a clear application of these 3 rules by Twitter in the near future as they still don’t know themselves so they probably don’t know who their key competitors are and who their friends need to be.
The roll out of the ad model will give Twitter an idea of where the money will come from and with that information they should start defining their revenue model stating who they are, who’s their enemy and who are friends. In the meantime, they should have this notion of complements in mind to avoid turning potential friends into enemies as they did with Wilson’s announcement.