1) When dealing with constrained resources, you’ll never release all the features your customers want.
2) In many cases you can directly monetize use of your platform, but even if you don’t charge, the value you enable others to create is an additional form of currency (call it power, force, momentum, whatever) that can be used to expand your reach in the marketplace.
3) Companies that only marginally expand Twitter’s value (such as TweetDeck, which I love) all directly contribute to the growth of Twitter.
4) Companies like FriendFeed, who got an early start by improving Twitter’s functionality and then grew from there, still expand Twitter’s reach. And as a “power user” tool, it is unlikely that FF will ever eclipse Twitter in terms of overall usage.
5) Even whitelabel service, which Ev staunchly opposes, has direct value, if monetized properly. Look at a service like Yammr, which only exists because Twitter hasn’t prioritized groups. If Twitter offered a whitelabel service, then they would further be cementing their place in the enterprise AND earning revenue, instead of sending people to another service. Win / Win vs Lose / Lose.

To put it most plainly, imagine you could go back a couple decades and *own* smtp. Would you honestly say “nah, I’d rather just make an email client”?