Twitter just bought a company that will contribute a shrinking share of its ...

Twitter just bought Gnip, a company that repackages and resells Twitter's 'firehose'-the full stream of every public tweet on the site. Gnip is one of only a handful of companies to which Twitter gives access to the firehose, and was the first to get it, back in 2010. For big companies wanting to learn what people are saying about them or their industry on social media, researchers investigating large data sets, or financial firms looking for market sentiment, it makes sense to get structured data from a company like Gnip or its rival Datasift, rather than trying to monitor and analyze all of Twitter themselves.

Selling access to the firehose is a reasonably important business for Twitter. According to the annual report (pdf, p.53) that the company filed last month, 'In the year ended December 31, 2013, our top five data partners accounted for approximately 72% of our data licensing revenue, and approximately 7% of total revenue in the period.' Yet, 'We expect data licensing revenue to decrease as a percentage of our total revenue over time,' the company wrote in its annual report, echoing an identical sentiment from the IPO filing. The reason is that it expects ad revenue to grow much faster.

So why is Twitter even bothering with buying a company that it expects to contribute to a shrinking share of its business? There are three reasons: First, data licensing may decline as a percentage of Twitter's total revenue, but in absolute terms it will continue to grow. Twitter's revenue for full year 2013 came in at $665 million. A little more than a tenth of that revenue-$70 million-came from data licensing. The percentage may not be huge, but in dollars, it's a big jump over the $47.5 million data licensing brought in in 2012.

Second, not that many companies can make good use of the full blast of Twitter's firehose. A lot more, though, may have a use for selected, structured pieces of it, which is what Gnip sells. By buying Gnip, Twitter is making the data-licensing part of its business more sophisticated and giving it more room to grow.

Finally, Twitter has a history of buying out successful partners. It acquired the makers of popular apps such as Tweetie (now Twitter for Mac) and TweetDeck, another desktop application. Just as the company incorporates user behavior (witness the standardization of the @-symbol and hashtag), it brings in-house the companies that are doing what Twitter thinks are the most valuable things with its service.