Twitter starts move to economic rationality - will rest of Web 2.0 ?

The Twitter Business Model has been a mythical beast for some time, but some evidence is emerging that rational behaviour is starting (as seen on TechCrunch UK) - if you can't make revenue, you may as well start to reduce costs - starting with no longer paying for people's SMS messaging in countries where sender pays:

Twitter had been footing the bill for the costs up until now, according to a post on its blog. The problem is that while sending an SMS update to the service is easy and cheap enough, Twitter has to turn around and send out SMS updates to all of your followers who have chosen to use the SMS notification feature. That could be hundreds if not thousands of people. And it will only get worse as Twitter continues to grow.

The reason it’s keeping the service alive in the U.S., Canada and India is simply because Twitter has established reciprocal relationships with mobile operators in these countries. It’s been known for some time that Twitter actually makes a little bit of money off of text message updates, and it’s likely all from these three countries.

I recall chatting about this exact issue about a year ago with TechCrunch UK's Mike Butcher, and it was clear this was the direction when SMS's were limited in November last year (Mike wrote about it here at the time), wondering how long it would take for them to feel they had enough users (or not enough money) to have the confidence to turn the free SMS off. Clearly taking the recent investment has allowed them to avoid the "run out of cash" scenario - but clearly there has also been a view taken that enough customers have been recruited now to be able to start to exit the "FreeConomic Giveaway" mode that nearly all startups start up with.

So - some fascinating price elasticity questions will be answered in this real life laboratory. Will this destroy Twitter as the mobile chatterati desert in droves? Will Google resurrect Jaiku and offset fund this game along with so many others they subsidise? Will the sms freeloaders actually pay, and if so how much?

This is also a golden opportunity for Planet Mobile to step into the breach and offer acceptable bulk deals for Twitternuts. Will they do so - on past history, yes - but it always take time and a few false starts.

And is this the tipping point for Web 2.0 - when it becomes clear that unless (or even if) VC's or Google are subsidising you, you have to stop drinking the FreeConomic Kool Aid?

Update - a commenter on the TechCrunch article left this comment for me, so I've put it here:

Your blog talks of them turning “the free SMS off”. That’s not what Twitter did here. What they did was turn off the SMS completely for users in many countries - no alternatives (like non-free SMS) were offered, no notice was provided. And that’s why I wouldn’t now be willing to pay Twitter for its service. It pulled the IM. It pulled the tracking feature. Many users still don’t have pagination back on the website. Many of us have stuck with Twitter through all of that - but this move removes the central functionality, and the way it was implemented has ensured many of us will not be supporting Twitter in future.

Good point - why do it so summarily, its almost guaranteed to maximise user irritation.