When the world's 20 million or so Twitter users click links in their feeds, most of the time, they're routed through bit.ly's URL shortening service, like sands through an hourglass. By channeling people through the service on their way to the rest of the web, Twitter has created a valuable opportunity to make its famously revenue-free service pay — which is probably why rumors continue to circulate about Twitter acquiring bit.ly, which raised $2 million earlier this year.

Twitter didn't respond to e-mails sent to its press department, and Bit.ly general manager Andrew Cohen wouldn't address the Twitter buyout question. But he did tell us about his company's plans to make money — whether as part of Twitter, or as an independent entity. It appears advertising will not be a part of that revenue equation. When we raised the possibility of bit.ly serving contextual, interstitial advertisements between Twitter and the web — even for only one or two percent of outgoing links — Cohen said, flat-out, "I'm not going to do that."

Instead, he's going to mine those links to create a real-time news service that would work somewhat like Twitter trends, except that it would track the hottest links rather than the most-used words. The result would be a Digg-like news service comprised of links determined to be important by bit.ly's analysis engine.

"We're seeing more than a billion clicks in the course of a month," said Cohen. "Looking at that volume of data, we can see the most interesting and the most important content that is being shared across the whole of the real-time web. Sometimes that's humorous stuff — the other day, the most shared video we saw on the web was William Shatner performing a dramatic reading of Sarah Palin's farewell address.

"But it's also occasionally very serious. We were able to see the Neda video out of Iran trending well before CNN linked it in, and we've begun to refine our capabilities there to be able to pinpoint stories like that." He said part of this technique involves looking for links being shared by unlike people, because that means they have universal appeal.

Another potential revenue source for bit.ly (and for Twitter, if it acquires the company) is that marketers could pay for deep data access and analysis. The service already lets anyone see how a given bit.ly link is performing by adding a "+" after at the end of the URL. For instance, the link "bit.ly/info/44u4E+" tells me that just over 500 people clicked on a link I tweeted about my Spotify-for-the-iPhone review. Bit.ly plans to expand those analytical tools to the point that companies will pay to use them.

"What we see are people, and marketers, coming to bit.ly and using it almost as an ad server — running campaigns on Twitter, but becoming interested in the ROI (return on investment) on those campaigns," he explained. "If I send out a tweet about dogs versus a tweet about cats, what is my average click rate normalized by the number of followers I have today? Did dogs perform better than cats? Did dogs perform 20 percent better than cats, and if so, if I share a URL about dogs again, has it performed two standard deviations beyond what I would normally expect for sharing a dog-related URL at noon on a Thursday?" Helping companies answer questions like that is another revenue opportunity.

A service for shortening URLs seems rather meaningless from a business perspective — after all, it's just an algorithm for associating short, unique identifiers with longer strings of text. The concept is so simple that a software engineer friend of mine who developed the redirx URL shortener, told me he would sell it to Twitter for $47 — quite a deal, when you consider that high-profile investors have judged bit.ly to be worth at least $2 million.

My friend made redirx before Twitter existed, and before there was so much data to analyze about who is clicking on which URLs. Now that 140 characters has become such a widespread communication limit, though, URL shorteners, as simple as they are, hold at least two keys to Twitter's eventual profitability.

So, what will bit.ly do if Twitter drops it, or develops its own URL-shortening service? Cohen says he's not too worried about that, because people also need to shorten and share URLs for e-mail, instant messaging, and so that they can verbally transmit web page locations to each other.

Nonetheless, bit.ly's fortunes are closely tied to its status as Twitter's default URL shortener. What remains to be seen is whether it will become a part of Twitter too. And for now, mum's the word on that, as far as bit.ly and Twitter are concerned.

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