This is actually the complete opposite of what happened, and I think the key to where they went wrong.
Dalton created a Twitter-like messaging service as a way of showcasing what App.Net could do. But he seemed very intent on downplaying the service and focusing on App.Net as a platform. This is what caused all the confusion; most of the actual users of App.Net were primarily users of Alpha, and anyone who was creating a product with the App.Net platform were facing the confusion of people thinking that's like creating a product with Twitter. I believe the reason Dalton did this was because his dream was for him to solely care about the platform and for other developers to provide all the apps. But nobody else was going to provide an Alpha clone, nor should they.
What Dalton really should have done was immediately spun off Alpha into its own full-fledged product. Give it a snappy name (heck, Alpha isn't too bad, certainly better than App.Net), give it its own domain, and make it very clearly a distinct product from App.Net. Then he could brand it all he wants as "built on top of App.Net" or whatever, and having login, etc. go through the app.net domain, but ultimately it should have been immediately recognizable as what it was; a Twitter-like messaging service (with much better features), that was built on top of App.Net. Just like a third-party app would have been.
This would have made it much easier to understand. People talking about App.Net would be obviously talking about the platform, people talking about Alpha would be talking about the messaging service, and trying to encourage people to build new apps on top of the App.Net platform would have made far more sense than convincing people to build new apps on top of what they think is basically just a Twitter clone.