The Battle Between Twitter and the Ecosystem

What would happen if you built a really expensive house only to see a never-ending number of guests have more fun in it than you? After a while, you would probably kick most, if not all, of them out so you could enjoy the house and its amenities yourself.

It’s a scenario being experienced by Twitter, which has invested millions of dollars to create a platform that thousands of companies have happily leveraged. The biggest problem is that Twitter’s “house guests” are have a better and more profitable time, while Twitter is starting to wonder whether extending invitations was such a good idea.

In making its API readily available and encouraging a growing ecosystem of developers to create new services, Twitter allowed the platform to be more interesting, useful and valuable. In the process, however, it also created competitors who have done a better job of meeting the needs of Twitter users.

This “problem” was thrust into the spotlight last week when UberMedia acquired TweetDeck for $30-million. TweetDeck accounts for able 20% of Twitter usage, while other services such as HootSuite and Seesmic also have a lot of Twitters users. Meanwhile, Twitter.com has seen the number of users dwindle, mostly because it has far less features despite some improvements in recent months.

Now it would have made sense for Twitter to acquire TweetDeck but now that it’s in the hands of a rival that just raised $17.5-million, Twitter finds itself in an uncomfortable position in which it is starting to battle well-financed and aggressive rivals.

Going back to the house analogy, Twitter has thrown a wild party for the past few years but things are getting out of hand. The guests are have broken into the liquor cabinet, they’re making out with your sisters, and taking the family car for joyrides.

To gain control, Twitter needs to either kick everyone out or establish a new set of house rules. For Twitter, it could mean a few things.

One, it could take some of its venture capital to acquire some of the more interesting services such as HootSuite or TwitPic. Second, it could charge to change the economics of its API by making companies pay more for using it.

While Twitter does make revenue now from access to the API, it hasn’t done a great job of really monetizing it because it wanted to encourage developers to use it. The competitive landscape has changed so Twitter has to take a new approach that would still let people use the API but give Twitter more control and, as important, generate revenue.

Maybe Twitter needs to take some lessons from Facebook, which has done a much better job of managing its application ecosystem. Facebook seems to have no problems changing the rules when it sees something not going according to plan; Twitter may have to do the same soon, whether it likes it or not.

For more, check out GigaOm’s post on how UberMedia’s Bill Gross is positioning himself to be a kingmaker within the Twitter world after a series of Twitter-related acquisitions.