There’s been a lot of talk the last few days about Google’s rumored “late-stage” acquisition talks with Twitter. While current consensus is that they are merely discussing mutually beneficial product strategies, it doesn’t mean that this deal isn’t being thoroughly considered and dissected by executive committees (not just of Twitter and Google, but MS & Yahoo as well) and tech pundits alike.  In this post I will briefly give some background, describe the potential best and worst case scenarios for both Google and Twitter, and give a final opinion.

Background: Why is Twitter Important?

Microblogging (whether it be Twitter, Facebook Status’ or anything else), was always thought to be about about marketing.  The business appeal of social media is that you can have a two way conversation with customers directly, at almost no cost, and let them do the dirty work of promoting your product “virally.”  Personally, our iPhone-toting, attention-lacking, cause-of-the-day promoting, have-it-your-way generation thinks our opinions are important and should be heard…now.  Equal parts narcissism and genuine interest in enhancing communication.

Now that Twitter has achieved mainstream popularity people are no longer think of it as a niche, social network.   If it’s possible to organize, make sense of and data mine these millions of thought bubbles, Twitter becomes an incredibly powerful, real-time, social, search-engine.  In this light, it is obvious that Google wants a piece.

Why Google Needs Twitter

Although Google dominates search and remains increasingly profitable, there are still a number of factors which could contribute to a Google’s fall.

With the belts tightening and infinitely high expectations, Google is struggling to find their next big source of revenue.  YouTube has the viewers, but no revenue.  Other products like Lively (which always felt very pets.com bubbly to me), Jaiku (microblogging) and Dodgeball (location based services) were all killed off.  Not only is Twitter (real-time search), a natural compliment to Google’s core product (static search), but Google also has the knowledge and experience to monetize this effectively.  The sticking point is the cost.  Twitter turned down a $500mil offer from Facebook a few months ago (though mainly in overvalued FB stock).  Right now, a compelling offer from Google would have to be in the $750mil – $1bil range

What if Google Buys Twitter?

Best Case Scenario: Google develops an Ad-Sense for Twitter, and is able to elegantly incorporate Twitter into its search engine.  Twitter-sense comprises a significant amount of search revenue,  the real-time search offering creates a huge gap between Google and it’s closest rivals, and the perception of Google’s superior innovation and foresight lives on (profitably).

Worst Case: Twitter is unable to live up to the hype, a true monetization plan never pans out and people finally realize that no meaningful information is actually contained in a tweet.  Investors are angry that Google paid a $1.65bil for YouTube and $1bil for Twitter and haven’t made a dime back.  The next new thing is all the rage, Twitter is left to journalists, b-grade movie stars, politicians and retro-nerds.

What if Twitter remains independent?

Best Case Standalone Twitter:  Twitter remains open and partners with Google, Facebook and every other major site on the planet to publish conversations streams on every page of the web.  IM, SMS and newspapers die.  Consumers and brands are able to interact directly, in a powerful way to improve products, services, politics and communication.  Twitter is able to effectively generate revenue through a mixture of paid services for corporates and search monetization.

Worst Case Standalore Twitter: With VC money drying up, web valuations plummeting, and no clear revenue model Twitter collapses under it’s own inability to scale it’s services to meet demand.  Eventually sells to AOL for $50 and a cheeseburger.

Final Thoughts

Biz Stone and Evan Williams are already rich (having previously sold Blogger to Google), have funding from VC’s who don’t care about revenue (yet), have a product that’s generated popular, mass appeal and has the potential to change the world. The product is still in its infancy though the concept has been validated by the interest generated by the big players (FB and Google).  Just like Google can be called an operating system of the static web, by remaining open and allowing 3rd parties to develop useful, innovative businesses on top of Twitter, they can become the foundation for the real-time web. I say go for it, roll the dice, take the mystery behind door number two and build Twitter into a real value-adding, sustainable business.  Then again, there’s a lot you can do with $1 billion dollars…