Twitter gives the lowdown on its new business model

The company says it will split the revenue from Promoted Tweets 50-50 for third-party apps

It's been a long time coming but a Twitter executive gave the first in-depth look on Wednesday at how the microblogging service plans to make its money.

There will be two "pillars" to Twitter's business model, Chief Operating Officer Dick Costolo said at the company's Chirp developer conference in San Francisco. The first, announced earlier this week, is Promoted Tweets, which lets advertisers pay for sponsored tweets that appear at the top of search results for certain keywords.

The second pillar is commercial accounts, which Twitter started to talk about last year. That service will allow a business to pay for a Twitter account in return for detailed analytics tools and the ability for several people to post to the same account. Commercial accounts are in beta testing with "a couple of hundred customers" and will be offered more widely in the future, though Costolo didn't say when.

It's a simple plan but one that has some potential pitfalls. Twitter will have to roll out Promoted Tweets in a way that doesn't put off users who have grown accustomed to an ad-free service, and in a way that is seen as fair and transparent to advertisers and the partners who build third-party applications like TweetDeck.

Twitter will also have to be careful how it handles the personal information it can glean about users' habits and interests from their Twitter feeds. Facebook and Google have already shown the type of backlash that companies can incur of they don't respect users' privacy.

Promoted Tweets show up today only in searches, Costolo said. Location-based information will likely follow, he said, allowing Starbucks to show a Promoted Tweet to users in a particular city, for example.

But Twitter is also sitting on a potential goldmine of personal information, since people's Twitter feeds reveal so much about their interests, taste in music and more. Costolo called it a "real-time social interest graph" -- a pool of valuable information about the topics its users are currently interested in.

"It's super-interesting and compelling for companies to be able to target that social-interest graph. It's our objective to prevent them from doing it in a way that's spammy or ... in some way negative for our users," he said. 'That's why we're rolling this out so slowly."

Journalist John Battelle, who interviewed Costolo on stage, pressed him further about how Twitter might use that information. Will advertisers be able to use the social-interest graph to target Promoted Tweets at specific groups of users?

"I don’t now if we're going to do it like that," Costolo said. "We're going to be very cautious and test a bunch of stuff in different ways before we target this beyond search. Maybe the only way it will work [apart from search] is geo," or based on a user's location, he said.

Promoted Tweets is in testing now with a handful of advertisers. Sometime before the end of the year -- Costolo didn't say exactly when -- it will be rolled out widely and developers will all have the option to display Promoted Tweets in their third-party applications. Today the ads are shown only at Twitter.com.

Twitter will split the revenue it gets from Promoted Tweets 50-50 with third parties that take part, after it has subtracted various infrastructure costs and other expenses that will probably amount to 8 or 9 percent, he said.

Twitter will sell Promoted Tweets initially using a traditional CPM (cost per mille, or cost per thousand) model, in which advertisers pay for the number of times their sponsored tweet is viewed. But it will soon move to a more complicated model that Twitter calls "resonance," which has to do with how many times a tweet is viewed, retweeted, replied to or marked as a favorite.

Costolo insisted that Promoted Tweets are not ads. They will function just like standard tweets, in the sense that people will be able to favorite them and retweet them. Twitter spent a long time coming up with a business model that is "organic to the platform" and can encompass partners as well as Twitter, he said.

Battelle called that a "compelling idea," but countered that they are, in fact, ads, however Twitter tries to define them.

Saying they are not ads is part of Twitter's effort not to put off its users. To keep the ads unintrusive it will stop showing Promoted Tweets that don't gain a high "resonance" score, Costolo said. That means if people don't click on them, retweet them or show approval in some other way, Twitter will pull them from the site. At that point businesses will stop paying for them.

Twitter cofounder Evan Williams joked about the need for a business model before he introduced Costolo on stage. "We've had a little bit of flack over the years about not having a business model. As much as we'd like to be able to tell people to shut up, money is important," he said. "It takes a lot of money to run Twitter, and it takes a lot of money to do what you people are doing building your applications, and there has to be a solid revenue model underneath it all."

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