How does Twitter make all its money?

Umm... I don't know... the internet I guess.

First of all, a site's valuation does not necessarily reflect its revenue. Using Twitter as an example; it currently has a valuation of around $8 billion to $10 billion, but in 2010 its revenue was $45 million. It makes money in a variety of ways but its value clearly outweighs its revenue.  The valuation mostly relates to the site's user data and its potential to monetise this. It is a figure that will fluctuate but it really comes down to what the market is willing to pay if the site was for sale.

Get to the part where social media sites make money

This is by no means a definitive list of all the ways social media sites use to make money, just an outline of the most common methods.

VENTURE CAPITAL

A lot of social media sites don't actually generate any income, at least not initially. You've probably read about companies opening up a round of financing, this is when venture capitalists are invited to invest in the hope of a large payoff down the road; either by the site developing a way to make money or by selling to a larger company.

ADVERTISING

The most common way to create revenue is through advertising. The more members a site has the more valuable the advertising space is. According to eMarketer, Facebook generated $1.86 billion in advertising revenue in 2010 and will earn $3.8 billion in 2011. Twitter on the other hand is only projected to make a paltry $150 million.

PREMIUM CONTENT AND FEES

Most social media sites are free to use, but as the venture capital money is exhausted they need to create new revenue streams. After advertising, adding premium content is the next logical step. For example, LinkedIn is free but offers a series of paid packages for job seekers. While remaining free to public users, Twitter charges a licence fee to Google and Bing for access to the Twitter "Firehose" - the full feed of all public tweets. This data is then included in real time search results.

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