NEW YORK (TheStreet) -- Dave Pell had an interesting tweet last night:
Twitter will have a bigger market cap than Facebook (FB) within three years.
It seems hard to believe when you first read that. Facebook is older, has always been bigger, appealed to more of a mainstream audience and had more revenue than Twitter. [Read: Why Wall Street Got Apple Wrong This Week]
Momentum is a tough thing to stop once it's rolling down a hill. Besides, Facebook is at around one billion users right now while Twitter should get to something like 400 million by the end of this year. So how is it possible that Twitter could surpass Facebook in three years' time in market cap? Here is one scenario to consider. Both Twitter and Facebook are eager to tap into the larger advertising budgets that are allocated by big brands to television and older media compared to online advertising. Facebook was big on spinning this potential growth for itself in its S-1 and I'm sure that Twitter will do the same. Back in the S-1, Facebook tried to spin an average day on Facebook as equivalent for an advertiser to reach an audience that is three times the size of an American Idol finale. Twitter has also been building connections with television and media as well. The Twitter hashtag is now almost on virtually all ads and TV shows today. Market cap is all about future expectations of how a business will grow rather than a reflection of that business today. Therefore, the only way that Twitter could have a bigger market cap than Facebook in three years from now would be if investors then expected Twitter's growth in the next five years (i.e., eight years from now) to be bigger than Facebook's prospects. [Read: The 5 Dumbest Things on Wall Street This Week: Sept. 13] For that to happen, Facebook was have to see its growth slow down and become something like a Yahoo! (YHOO) of three years from now (with a really big user base but not a lot of top-line growth). At the same time, Twitter would have to dramatically change its future prospects. We would all have to see Twitter as something more than a news service.
It would have to morph into something like a new type of television service. We would read it for news and media (video and photos). We would follow people like we do channels. Twitter would be at the center of this.
Beyond increased advertising revenue, though, if Twitter was going to make the leap to have a bigger market cap than Facebook, they would have to develop a new revenue stream from transactions or payments (while Facebook would have to fail at that).
This payments or transactions business could come from: sharing money between users (like Facebook's gifts), selling badges to users (like Japan's Line), selling games (like Tencent (TCEHY) or Facebook), selling stuff (like Amazon (AMZN) or Alibaba), selling geolocation information to local commerce (like Groupon (GRPN) is trying to morph into), or from getting a cut of electronic payments (like PayPal, or Square or Braintree is trying to do).
Of course, Facebook (and Tencent and Line and Alibaba, and others) is likely going to be seeking to expand into all these areas as well. And executing this type of strategy is going to require acquisitions (especially into payments). Twitter will be able to use its currency from its IPO to go after some of the bigger acquisitions on its menu. [Read: What U.S. Investors Should Do About Syria] The risks here are that it's very difficult for a traditional ad-based business to make the leap to become a transactions-based business. That's why eBay (EBAY) has stayed a commerce business and Yahoo! has stayed an ad-based business. For Twitter or any of these other social networks looking to be a "platform," their future success (or failure) will depend on them successfully being able to make this leap. Presumably, Twitter would take a long hard look at Square if they were going to go into the payments business. But there's one other critical success factor which will go into any of these future social network's success: big data. I've joked in the past that it's not really that helpful to me to see an ad for West Virginia singles when I log into Facebook. At the moment, we're still not seeing many targeted ads on any social network. These companies are just trying to make money any which way they can from mobile. But this will change dramatically over the next three years.
All of these social networks will become much more powerful at knowing who we are and where we are and making offers to us that will be much more targeted. An advertisers or sellers will pay up big time to get in front of such a targeted audience.
So, the final piece of the scenario in which Twitter outshines Facebook in three years from now in terms of market cap is if it turns out that Twitter knows not just a little but a lot more about its users than Facebook. If it turns out that the "interest graph" (i.e., what we care about) tells Twitter much more about its users than Facebook's "social graph," they should be able to monetize that much more powerfully. In this scenario, both advertisers and Wall Street will pay up for it big time.
I don't think it has to be either or though between Facebook and Twitter. Both will become much smarter about their users than they are today and share that with advertisers. Both will go after the additional revenue streams that I mentioned above. Both should be rewarded by investors and advertisers.
One thing is clear: The Twitter (or Facebook) we think we know today will be much smaller and more narrow compared to the Twitter (or Facebook) in three years from now. At the time of publication the author was long YHOO and GRPN. Follow @ericjackson This article was written by an independent contributor, separate from TheStreet's regular news coverage.Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007. Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University. He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson. You can contact Eric by emailing him at Dr.firstname.lastname@example.org.