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Why Twitter's most important asset is at risk

Twitter is loved by famous people -- something it's counting on to keep driving its business as an unsuspecting rival grows up.

An older version of Twitter's home page emphasized following your interests.
Oli Scarff/Getty Images

To the casual observer, Twitter and Instagram appear to be worlds apart. One is for following what's happening right now. The other is for sharing pictures. But the two social apps share something so essential that it has changed them from friends to foes: For their services to flourish, they both need celebs.

Or, as social networks like to call them, "influential users" -- and the battle for them is critical as both Instagram and Twitter try to turn their popular apps into money-making, ad-filled playgrounds.

How well a person or brand can distribute information and attract newcomers -- the most important kinds of influence to Twitter -- matters. Twitter surely measures and monitors such things closely. We know the company maintains an internal metric for scoring member influence, something co-founder, largest shareholder, and former CEO Evan Williams revealed back in 2010.

Facebook, Instagram, LinkedIn, Pinterest -- heck, even Viddy -- have influencers. But Twitter deems itself top dog with this bunch. "The public, real-time nature, and tremendous global reach of our platform make it the content distribution platform of choice for many of the world's most influential individuals and organizations," Twitter said in its S-1, filed earlier this month with the Securities and Exchange Commission.

Here's how Twitter would like you to interpret that statement: The most important people in the world prefer Twitter. It has plenty of proof to back up that claim. You heard it first on Twitter, from the Iranian President himself no less, that Hassan Rouhani and President Barack Obama spoke on the phone in a historic call in late September, for instance.

Accounts such as these lure people back for more 140-character bits. They are the essence of Twitter, a key reason to visit it at all. But of equal importance is what you reveal when you connect to them, or they to you. Herein lies the special sauce that makes Twitter of value to advertisers: the "Interest Graph."

That's its map of all the people, connections, and interactions on Twitter. In official, investor-speak, Twitter's Interest Graph, previously referred to as its "follow graph," "maps, among other things, interests based on users followed and actions taken on our platform, such as tweets created and engagement with tweets," according to the S-1.

The graph is valuable to advertisers, which, ultimately, will determine how well Twitter does as a stock. Twitter, like Facebook, is an ad business; 87 percent of its revenue came from advertising in the first half of 2013.

As Twitter said: "We believe a user's Interest Graph produces a clear and real-time signal of a user's interests, greatly enhancing the relevance of the ads we can display for users and enhancing our targeting capabilities for advertisers."

This is where Instagram comes in. It's a faster-growing social app, has a follower model akin to Twitter's, and counts many celebrities and other influencers as users. Its owner, Facebook, also has a war chest of data linked to people's real identities, all of which could lead to a more interesting Interest Graph for advertisers.

Twitter's monthly active users. Twitter

Now at 150 million active users, the 3-year-old photo-sharing app is quickly closing in on Twitter's 218 million active users. Instagram grew 66 percent between January and September, adding 60 million active users in that time. That's more than twice as much as Twitter grew in the nine-month period between September 2012 and June 2013.

That Instagram is growing at a faster clip isn't on its a face a huge problem for Twitter. In the world of social apps, people don't have to pick just one.

The side-by-side rise of Instagram, Snapchat, Pinterest, Tumblr, WhatsApp, and others, all while Facebook has continued to grow in size and attention, attest that variety can be the spice of our social lives.

"People jump in and out of apps all the time," Brian Blau, a Gartner analyst, said. "They can be Instagram users and Twitter users and be full participants in both of those kinds of conversations. So I don't think that one excludes the other."

This issue isn't audience -- until advertising comes into play. Instagram is set to turn on ads for US users in the coming weeks, in the form of sponsored photo and video updates to the home feed. Twitter and Instagram will be battle for advertising dollars, Blau said.

As Instagram gets bigger, Twitter's pitch about being one-of-a-kind falls flat. Twitter has already said there's a problem.

"We understand that there's great value associated with Twitter's follow graph data." That's what Twitter said last July when it crippled Instagram's ability to let members find and follow their Twitter friends on Instagram. Twitter was so afraid of handing over its relationships, its graph, to a rival that it took what was perceived at the time as a pretty drastic action.

A bigger, ad-supported Instagram threatens to erode the value of Twitter's greatest asset.

Twitter and Instagram don't play nice for that very reason. In fact, they don't play at all. Let's let Twitter's S-1 explain:

Facebook disabled Instagram's photo integration with Twitter such that Instagram photos are no longer viewable within tweets and users are now redirected to Instagram to view Instagram photos through a link within a tweet. As a result, our users may be less likely to click on links to Instagram photos in tweets, and Instagram users may be less likely to tweet or remain active users of Twitter. Any similar elimination of integration with Twitter in the future, whether by Facebook or others, may adversely impact our business and operating results.

If there's one area where Twitter may have partial immunity, it's in the TV arena. Twitter has been pushing with all its might to deepen its link to television. It recently kicked off remote-control tie-ins with Comcast and an ad-sharing deal with the NFL. The Comcast deal in particular gives Twitter a way to stand out with broadcasters and media companies wanting data on how influencers directly affect tune-in.

Real time is also Twitter's game to lose. Though Facebook and Instagram love to remind us how relevant they are to current affairs and breaking news, Twitter, at least when it comes to perception, has cornered the market for now. But exactly how big the market is for letting advertisers ride the wave of public chatter is a variable unknown.

Or as Blau put it, "To some degree, Twitter and social is a big grand experiment."