Why Twitter Explored Spending $4 Billion on Clubhouse

Clubhouse has been garnering an increasing amount of attention in recent months, with growing interest among users for the audio-only social networking platform. The service is still in invite-only mode where you can only sign up if an existing user sends you an invitation.

Major tech leaders including Elon Musk and Mark Zuckerberg have even joined Clubhouse, substantially raising the service’s profile.

Meanwhile, Twitter (NYSE: TWTR) has been aggressively expanding its own platform in recent months with a spate of new features. It turns out that Twitter was also interested in scooping up the hot startup.

Clubhouse Valuation Soars 4x in Three Months

Twitter held negotiations to acquire Clubhouse for an estimated $4 billion, according to Bloomberg. That would have been a significant premium compared to the $1 billion valuation that Clubhouse fetched in late January during its Series B funding round, less than three months ago.

However, talks fell through and Twitter is no longer actively seeking to buy Clubhouse, according to the report. Keep in mind that Twitter has been beta testing out Spaces, a competing feature that offers audio-only chat rooms, since December. Twitter Spaces are expected to be deployed more broadly to all users this month.

After the negotiations with Twitter fell through, Clubhouse has been seeking additional funding from private investors at the same $4 billion valuation, according to Bloomberg. Beyond Twitter, the app’s soaring popularity is drawing interest from larger tech giants who are working to develop competing offerings. 

With Zuckerberg’s debut on Clubhouse, Facebook (NASDAQ: FB) is already said to be building a rival service, according to The New York Times. Facebook has a long history of replicating any startup that gains traction in the social media sector, with mixed results. Perhaps Facebook’s greatest success was copying Snap’s (NASDAQ: SNAP) Stories format across its own platforms.

The social media conglomerate also established a New Product Experimentation (NPE) team back in 2019 with the explicit purpose of exploring new ideas and launching new apps, but many of those efforts have failed.

Why the Top Catalyst For Twitter Stock Could Be “Revenue Durability”

Twitter has been looking for various ways to diversify its business beyond just advertising revenue, launching a plethora of new features over the past year while also acquiring paid newsletter startup Revue, which competes with Substack. The company refers to this as increasing its “revenue durability,” which CFO Ned Segal recently said was Twitter’s top priority right now.

After the advertising market took a temporary hit at the onset of the COVID-19 pandemic, the company realized that diversifying revenue sources would make its business more resilient during periods of macroeconomic uncertainty.

Twitter is already said to be exploring different ways to potentially monetize Spaces, although it remains unclear how the company would do so or if users would be willing to pay for additional features.

For reference, Clubhouse does not currently monetize its service, which is free and has no ads. However, Clubhouse plans to allow content creators to offer paid subscriptions, taking a small cut of that revenue.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

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