(Courtesy: Knowledge@Wharton)

It was a tweet like many others from Starbucks, promising free refills to customers who brought in reusable tumblers on Earth Day.

But the message came to users in a different way — it appeared at the top of Twitter search results pages, even for those who weren’t among the coffee giant’s followers. And there was a tiny tag in the corner of the update, outlined in yellow and reading “Promoted by Starbucks Coffee.”

The ubiquitous Seattle-based chain is one of the first guinea pigs in an effort by Twitter to generate revenue from the micro-blogging service. The new ad system was unveiled last month with five participating companies, including Best Buy electronics stores, the Red Bull soft drink company, Sony Pictures, Starbucks, airline Virgin America and the Bravo TV network. Twitter Chief Operating Officer Dick Costolo recently told Reuters that the San Francisco-based company hopes to add hundreds of new “Promoted Tweet” partners into the mix by the fourth quarter of 2010.

“We’re going to live in a world where we need to be generating hundreds of millions of dollars in revenue,” Costolo told Reuters. “We’re thinking about big, big numbers.”

Twitter’s user ranks include high profile names that run the gamut from Paula Abdul to Lance Armstrong. The company’s value was put at $1 billion last year. But Twitter has yet to generate a profit. Wharton experts and others — some of whom tweet and others of whom don’t — say finding a successful model for the Promoted Tweet is only one of the challenges the company must overcome to avoid the fate of former “next big things” like Netscape, Excite or Pets.com.

The company’s set of business conundrums are intertwined. How can it help businesses create a level of engagement with consumers that turns the service — which allows users to communicate in bites of 140 characters or fewer — into a useful tool for marketing and customer service? And how can Twitter then parlay those efforts into a viable, income-producing strategy?

Twitter has had plenty of success at gaining public exposure. According to an Edison Research/Arbitron study conducted in February, 87% of Americans 12 and older know what Twitter is — about the same number as those who were aware of Facebook. But while 41% of that group actively used Facebook, only 7% were actually sending updates to Twitter.

“Seventeen million people , which is nothing to sneeze at,” says Tom Webster, Edison Research’s vice president of strategy and marketing, who oversaw the survey. “Businesses are certainly using it as part of an overall marketing strategy, at least for now. It is a question of whether Twitter will, in the long run, be something mainstream America deems necessary, which will determine its business value.”

Twitter began as part of a brainstorming session at the small San Francisco podcasting company Odeo, in March 2006. The company’s principals saw that the podcast business was being usurped by bigger companies like Apple and wanted to find a new product on which to concentrate. The idea that came to the fore was a way for someone to send short messages to tell small groups of friends or contacts what he or she was doing at a given time. Twitter limited itself to 140 Short Message Service (SMS) characters and initially was used for communication among Odeo employees and friends before launching to the public in July 2006.

Twitter made its biggest initial splash at the South by Southwest music and interactive media festival in March 2007, when it placed plasma screens in the hallways of the conference venues to display the tweets attendees were sending about their activities. Conference speakers mentioned it, bloggers enthused over it, and the service ultimately won the festival’s Web award. Twitter then began to grow more quickly, with the company reporting 500,000 tweets per quarter in 2007 and then 100 million per quarter the next year. For the first quarter of 2010, the company reported that more than four billion tweets were sent using the service.

“The real challenge, though, is how Twitter is going to monetize this. It is not obvious at the moment,” says Eric Bradlow, a Wharton marketing professor and co-director of Wharton Interactive Media Initiative (WIMI), noting that the trick for Internet businesses has been implementing money-making modifications without alienating, and losing, users. “Maybe they can start charging for longer tweets or start putting in a two-tier pricing model for businesses. Maybe they can have some charge after a certain number of tweets or they can have advertising somewhere on the Twitter page or in tweets themselves.”

Turning Tweets into Dollar Signs

The Promoted Tweet is just that — an advertising message that appears on the top of the results screen in response to a user’s search. In Starbucks’ case, for example, anyone looking for updates containing the word “coffee” might see Promoted Tweets from the company. Companies pay Twitter to run the ads, which look and function like any other tweet (for example, users can send reply comments) except for a “promoted by” tag in one corner.

Twitter executives have been careful to say the Promoted Tweets model is only in the experimental phase. Earlier this week, however, the company announced that it was banning third-party advertisements from the site, a move observers think is part of an effort to gain control over monetization of the service. Opinion is mixed among experts about whether Promoted Tweets — or, to be sure, anything else — will be the way to transform Twitter into a profitable business. “I think Promoted Tweets are a bad idea,” says Wharton marketing professor and WIMI co-director Peter Fader. “It’s one thing to have a relatively unobtrusive display ad above or next to a set of search results on a monitor, but this will really ruin the user experience on Twitter.”

Fader thinks Twitter ought to start looking for a different route to financial success: “The right business model for Twitter is to be bought by another company and have the user experience folded into a broader array of media services. I see little advantage to Twitter as a stand-alone entity.”

But Kartik Hosanagar, Wharton professor of operations and information management, believes patience is the best policy for those dismissing Twitter right now. “Promoted Tweets are the first major monetization initiative Twitter has announced,” Hosanagar notes. “Just as Google is successful with search ads because it is exceedingly good at matching results with user intentions, Twitter will need to be effective at providing Promoted Tweets that users find useful. They need and intend to do much more than just match keywords.”

Twitter has other monetization possibilities, Hosanagar says, but “the challenge is that it is still growing and it does not want to lock itself into … a strategy that might interfere with that growth…. For example, Twitter made several million dollars with deals to allow major search engines like Google and Bing to index data flows in real time,” he adds. “I have no doubt that Twitter can generate more revenue. The question is just how big an opportunity it has.”

Still, Fader warns that Twitter suffers from the very frivolity that generates a lot of the service’s publicity. The biggest buzz from the site comes from the mini-scandals and sound bites that arise from its use by celebrities — and that might make it more difficult for businesses and consumers to take the service seriously as an entrepreneurial tool.

“That people were tuning into CNN to see how many followers Ashton Kutcher got, Twitter a whole lot of publicity, but in the long run probably didn’t do it any good,” Fader says. “More serious people might say, ‘I won’t be using that.’ … It is a shame that it is saddled with this cutesy name and a bird for a logo and the race between Aston and Britney Spears for millions of followers. It would almost be better to split off the entertainment aspect into a different service really does have an opportunity to have real business and consumer uses.”

But Vivek Wahdwa, the director of research at Duke University’s Center for Entrepreneurship and Research Commercialization, says the more light-hearted aspects of Twitter don’t count it out of the business realm, especially in the area of Promoted Tweets. “I found there are two types of Twitter users: those who tweet every time they go to the bathroom, and those who have intelligent things to say,” notes Wahdwa, who was originally a Twitter skeptic, but now uses it for professional communications and thinks it is useful when employed in tandem with other social media services. “You can judge by the tweets of both groups what their general interests are — like Google does with web searches — and target messages to them. I can see as an opportunity for Twitter search ads are for Google.”

And Twitter has put some effort into showing businesses how the site can work for them. The company created a page on its website to offer suggestions for “tweet-based” marketing and customer service campaigns. For example, an employee of the New York-based ice cream chain Tasti D-Lite uses the company’s Twitter feed to answer customer questions and take suggestions. In another example, the Dell computer store posts coupons and special offers for electronics that are exclusive to Twitter.

But “by no means does have a monopoly,” on companies’ social media strategies, warns Fader. “LinkedIn and Facebook are trying things. Someone will figure it out. To have microblogs with other features out there seems an inevitable way for businesses to market. It is the Wild West out there right now with all these methods of communication.”

Engaging the ‘Lurkers’

Dell and Tasti D-Lite are examples of businesses that found a way to engage customers using Twitter. But experts question if companies will ever be able to reach broader audiences that way — and if the answer is no, how can Twitter keep itself on the “must” list for investment in social media and Internet marketing?

The Edison Research/Arbitron survey found that the majority of Twitter users are “lurkers,” or those who follow various people, but don’t take part in conversations on the service or contribute a significant amount of original tweets. “Twitter appears to be functioning as more of a broadcast medium compared to Facebook and many other social networking sites and services,” according to the report. Because of that, Twitter users might be more susceptible to sales pitches: “The percentage of Twitter users who follow brands is more than three times higher than similar behavior expressed by social networking users in general. Significant percentages of regular Twitter users report using the service not only to seek opinions about companies, products and services, but to provide those opinions as well.”

Ultimately, then, says Wharton legal studies and business ethics professor Andrea M. Matwyshyn, Twitter’s penetration and success in its business applications will be whether those “lurkers” become really interested customers for the businesses who seek them. “Some uses of social networks, like Twitter, can be merely a time-killing mechanism if you are trapped in a waiting room,” she says. “Now with BlackBerries and other mobile devices, there is no time or space barrier to communications. But that doesn’t mean it’s a necessity for the customer either. Do I really want to know about the new Coke product at any moment? It isn’t certain yet, so we’ll just have to wait to see how it shakes out.”

Knowledge@Wharton queried several Wharton faculty members to see what kind of foothold Twitter had among that group. The sampling brought a wide range of responses.

Kevin Werbach, a professor of legal studies and business ethics, says he knows Twitter CEO Evan Williams and was able to try the service soon after it opened to the public. “For me, Twitter was the next step after blogging. Just as blogs dramatically lowered the barriers to personal publishing, Twitter lowered them still further,” notes Werbach, who has sent about 2,400 tweets since signing up. He has 3,300 followers and is following about 700 fellow users. “Tweeting is a wildly simple way to express my thoughts or share notes with friends and those with common interests…. I’m constantly pulling links out of tweets and into my browser,” he adds. “I follow a wide variety of users. Some are friends, some are people with smart perspectives on issues I care about some are publications or organizations.”

Marketing professor David R. Bell started an account to follow news organizations and other sources, especially during the swine flu epidemic in 2009. But he hasn’t sent a tweet in months. “I didn’t build up a habit of use. I don’t see a specific benefit from tweeting,” Bell says. “I need to re-evaluate the cost-benefit ratio. My guess is that it’s most useful for celebrities with large followings…. Some people really care about what Jay Z eats for breakfast. It’s probably also useful for certain brands.”

But other professors feel the service doesn’t provide enough benefit to be worth the time required to keep up with posts from various individual users and organizations. Legal studies and business ethics professor Nien-he Hsieh says he hasn’t tried it because “I suppose I feel that I already have too much communication to track and that the 140-character limit constrains the content too much.” Marketing professor Christophe Van den Bulte is more blunt: “I am not an attention-seeking narcissist,” he wrote in an email. “I am not interested in being kept up to date about the actions or opinions of attention-seeking narcissists, and I am not interested in being swamped by waves of too-short-to-be-thoughtful messages.”

Other professors use Twitter in limited doses. Marketing professor Leonard Lodish uses the service only to communicate with people about his annual ALS charity bicycle race. Hosanagar does not have a personal Twitter account, but has one for one of the courses he teaches, called Enabling Technologies. ” is a way to ensure that former students, current students and anyone else with an interest in high tech and new media can follow the course,” Hosanagar says. “This use of Twitter makes perfect sense for our course, which is ultimately a course on new media.”

Fader and Bradlow, who advocate businesses’ use of Twitter, are limited in their personal use of the service. Bradlow says he tweets, but not often, and typically during a conference or a talk. “As co-director of the Wharton Interactive Media Initiative, what I tweet about is what I do for a living.” Bradlow notes. “It is another form of me being able to share knowledge and information. I follow a few individuals in start-ups who are my friends, but that is about it. I’m not following Lady Gaga or Justin Timberlake. If I want to know about them, I will look in People magazine like the next person.”

Fader reads tweets from ESPN and The New York Times on his passions — baseball and technology — and sends out a periodic tweet about his research to his followers, who tend to be students or colleagues. “But it does beg the question that, if I have a Twitter follower list, why don’t I just have an e-mail list where I can write something longer if I have to?” Fader asks. “What was it about Twitter that made me do it that way? It may just have been because it was new at the time.”

He believes that his personal habits sum up why companies have to be conscious of Twitter and its efforts to expand and become profitable. “They have created a market in this. I don’t think we thought we were in need of a microblogging service , but now here it is. If you take Skype, for instance, we had been waiting for video phone services since they were shown on The Jetsons,” he says. “So it is prudent for businesses to see how they can capitalize on this. They have to be conscious of every form of communication in one way or another. It only makes sense to explore it.”

Copyright 2010 The Wharton School and University of Pennsylvania.