How Freewheeling Twitter Became a Money-spinning Juggernaut

SAN FRANCISCO —  Around midnight on Christmas Eve of 2009, a handful of employees at Twitter received an unconventional holiday greeting from Dick Costolo, then the chief operating officer.

“It was an email that said, 'We have to move really, really fast. There's no time to rest because we have a massive opportunity in front of us,'" recalled Anamitra Banerji, who headed the team that built Twitter's first advertising product. “It was kind of crazy because we were all on break, but that attitude was exactly what we needed at Twitter.”

The company is now on the verge of fulfilling the opportunity Costolo foresaw as it prepares for the most highly anticipated initial public offering since Facebook's debut last May. The offering is expected to value Twitter at up to $15 billion and make its early investors, including Costolo, very wealthy indeed.

Yet Twitter's quick transformation from an undisciplined, money-losing startup into a digital media powerhouse took every bit of whip-cracking that Costolo could muster, along with a rapid series of product and personnel decisions that proved effective even as they disappointed some of the service's early enthusiasts.

Costolo was a comparative late-comer at Twitter, joining the company three years after it's 2006 launch, but the company increasingly bears his imprint as it hurtles towards the IPO: deliberate in decision-making but aggressive in execution, savvy in its public relations and yet laser-focused on financial results.

Costolo has not flinched in pruning and reshaping his management team, while Twitter, the company, has been ruthless in cutting off the smaller companies that were once a part of its orbit. A one-time comic actor who cut his teeth in business at Andersen Consulting before starting several companies, Costolo may never be as closely associated with Twitter as Mark Zuckerberg is with Facebook, yet he is arguably just as important.

“The founders consider Dick a co-founder, that's how deep the connection is,” said Bijan Sabet, an investor at Spark Capital and a Twitter board member from 2008 to 2011. “He's not this hired gun to run the company. He understands building out the business but also the product, strategy, vision.”

Twitter declined to make Costolo available for comment, citing the pre-IPO quiet period.

Birth of the promoted tweet

When Twitter's then-CEO Evan Williams brought on Costolo, an old friend and colleague from Google Inc, as COO in September of 2009, the three-year old company was already under pressure.

The microblogging service was gaining hip, young users at an unprecedented pace, and its trio of co-founders - Williams, Biz Stone and Jack Dorsey - had been splashed across magazine covers as the embodiment of San Francisco cool. Yet the whispers in Silicon Valley were growing louder: Twitter didn't have the technical chops to make the service reliable at huge scale, and it didn't have any way to make money.

“Having been on the core original team of engineers, we didn't have the skills among us to build a world class service,” said Alex Payne, an early Twitter engineer, noting that many of the team members came from smaller start-ups and non-profit organizations rather than established Web giants like Google.

Williams viewed fixing the site's notorious technical problems as the top priority but was ambivalent about the business strategy. For months, people familiar with the situation say, Williams weighed options ranging from display advertising to licensing Twitter's data to becoming an e-commerce hub to offering paid “commercial” accounts to businesses.

Costolo - who had sold Feedburner, an advertising-based blog publishing service he founded, to Google for $100 million - had no such doubts. By his second month on the job, he had helped persuade Williams to green-light engineering positions to build Twitter's first ad unit, which would become the “promoted tweet” - the cornerstone of Twitter's business today.

“Dick's conversations with Ev were key,” said Banerji, now an investor at Foundation Capital. “He had a fundamental belief that this was the future of Twitter monetization and said, 'You have to do it.”'

Over four months in early 2010, Costolo, working closely with Banerji and Ashish Goel, a Stanford engineering professor who specialized in the science of auction algorithms, to refine the promoted tweet. It resembled an ordinary Twitter message in every way, except that advertisers could pay for it to appear at the top of users' Tweet streams and search results.

Costolo threw his heft within the company behind the advertising strategy. In early 2010, as the ads team drew up a related product called “promoted trends,” Costolo privately told them to make sure he was in the room when they pitched the product to Williams, so it would get pushed through.

A central mechanism governing the promoted tweet was “resonance,” a concept coined by Goel. Because Twitter users can re-circulate or reply to tweets, including paid advertisements, the company had the real-time ability to gage which ads were most popular, and those ads could then be made more prominent. And because the ads appeared in the same format as other tweets, they were perfectly suited to mobile devices, which could not handily display traditional banner ads.

Paid ads that are inserted into a stream of status updates have since become something of an industry standard for mobile advertising. Its adopters include Facebook, which has enjoyed a 60 percent rise in its stock price in recent months due to its newfound success in mobile.

“The closest thing before this was the contextual advertising that Google was selling, but the problem was that it was clearly an ad,” said Charlene Li, the founder of Altimeter Group, an online research and consulting firm. “Promoted tweets look just like every other tweet. The form factor, the way it is displayed in stream - that was a breakthrough.”

When Costolo unveiled the promoted tweet in April 2010, Twitter announced it as a trial for only five brands, including Starbucks Corp and Virgin America, and users almost never saw the ads.

But by the summer of 2010, Costolo felt confident enough in his concept that he began seeking a deputy to ramp up the company's sales effort. For months, he courted Adam Bain, a rising star at News Corp, and at the same time began assiduously courting marketers, from corner suites on Madison Avenue to industry conferences on the French Riviera.

Under Bain, the Twitter ad team set it sites on the most lucrative advertising market of all: television. Twitter attached itself to TV programmers and major brand marketers by positioning itself as an online peanut gallery where TV viewers could discuss what they were watching.

“Hashtags,” which help people find the conversations they're looking for on Twitter, soon grew ubiquitous on TV, appearing in Super Bowl commercials, at Nascar races and on the Oscars red carpet.

“It wasn't easy for Twitter to explain to people why they should buy content on Twitter until they sold it as a companion to TV,” Ian Schafer, the chief executive of Deep Focus, a digital advertising agency. “Now you're even seeing the networks selling Twitter's inventory for them. That's magic.”

Twitter has steadily refined its targeting capabilities and can now send promoted tweets to people based on geographic location and interests. This month, the company paid more than $300 million to acquire MoPub, which will enable it to target mobile users based on websites they have visited on their desktop computers.

As the promoted Tweet became a reliable revenue engine -generating a substantial chunk of the estimated $580 million in ad sales the company is expected to earn this year - Twitter began to evolve the service beyond its 140-character text messaging roots. Tweets today can embed pictures, videos, page previews and are expected to eventually have more interactive features, including those for online transactions and deals.

Focused and ruthless

While Costolo has been widely credited with bringing management stability to a company that had struggled to find the right leadership formula among its three founders, he hasn't hesitated in making changes in the executive suite.

“Jack always said he 'edited' his team, and Dick looked at it the same way,” said a former employee. “He wanted to choose the top people around him, but he was ruthless with replacing his top people.”

Bain and Ali Rowghani, Twitter's influential chief operating officer, have emerged as Costolo's key deputies. A string of recent high-profile hires includes former TicketMaster CEO Nathan Hubbard as head of commerce; Geoff Reiss, former Professional Bowlers Association CEO, as head of sports partnerships; and Morgan Stanley executive Cynthia Gaylor as head of corporate development.

Meanwhile, once-powerful executives including product guru Satya Patel, engineering vice president Mike Abbott and head of growth Othman Laraki have left the company, with each departure stoking chatter about Twitter's unusual rate of employee turnover.

Rank-and-file employees described a chief executive who will pause from his workday to laugh with them at YouTube clips but who will also nudge them to put in long hours.

At a conference last fall, Costolo told the audience he had sought out a new office for Twitter in central San Francisco partly because it would allow employees who lived in the city to go home for dinner with their families and still come back to work at night.

Despite his on-stage charisma, several employees describe a CEO who can seem aloof.

“He's always very cordial,” said one former employee. “But try to get into a deeper conversation with him, and he's thinking about how much time he has to do that, because his schedule is tight and he has a lot to do. He's all business.”

Costolo's single-minded focus on Twitter's business goals has not been welcomed by everyone. It alienated many early Twitter enthusiasts who were interested in the political, social and technical potential of a unique new service that could fairly claim to express the sentiment of the world in real time.

Twitter has slowly shut off third-party access to its data, preferring to keep the information for its own business purposes. It has cut off many developers that want to build new features that would interact with the Twitter platform.

Its status as the most aggressive of all the global Internet companies in defending free speech and protecting its users from government spying is also in question. After years of essentially ignoring foreign governments that wanted it to comply with local laws, it announced last year that it had developed the technical capability to block Tweets by country, and it has recently begun to use it in countries including Germany and Brazil.

Twitter is currently banned in China, where the country's own Twitter-like service, Sina Corp's Weibo, has 500 million registered users.

“The most obvious effect of the IPO will be that it will push Twitter to go more international,” said Jillian York, the director for international freedom of expression at the Electronic Frontier Foundation.

“I don't think there's much evidence that their position on free speech has softened in the U.S, but internationally, yes. I think they've absolutely run into the complexities of opening offices in other countries, potentially even made some promises that they couldn't keep.”

Yet Costolo has clearly kept his biggest promise: turning Twitter into a major media business. And in that regard, the IPO may be just the beginning.