"There's this contagion of protest," Time managing editor Richard Stengel said on NBC television. "These are folks who are changing history already and they will change history in the future."
The shared honor for protesters beat the traditional individual contenders, who included Admiral William McRaven, commander of the US mission to kill Al-Qaeda founder Osama bin Laden.
Last year, Time picked Facebook founder Mark Zuckerberg, whose competitors included another 21st century communications guru, WikiLeaks maestro Julian Assange.
This time, the list centered on heavyweight political figures such as McRaven, Chinese dissident Ai Weiwei, and influential Republican Congressman Paul Ryan.
There were also an emotional nod for Kate Middleton, who was credited for putting a spring back in the British monarchy's step with her wedding to Prince William.
"Admiral McRaven captured bin Laden and (Middleton) captured our hearts. They represent people who affected us in one way or another who swayed the conversation -- captured our imagination," Stengel said.
But he said that in the end, the selection committee was unanimous in backing street protesters, "the men and women around the world, particularly in the Middle East, who toppled governments, who brought democracy and dignity to people who hadn't had it before."
"We thought 'these dictators are not going to be toppled.' And then these people who risked their lives, risked their livelihoods to go out there and brought about change that nobody had expected.
"It really is a transformational thing and I think it is changing the world for the better," he said.
The Time award, which is purely honorary and dates back to 1927, noted that while the first and most dramatic protests took place in Muslim countries, they inspired demonstrators across the world.
Popular backlashes against economic turmoil and corruption among elites sparked months of large-scale demonstrations in Spain, Greece, Israel and other countries.
In September, the Occupy Wall Street movement began in New York, quickly spreading to other US cities, while now Russia is seeing rare protests by large crowds against election rigging.
"Loathing and anger at governments and their cronies became uncontainable and fed on itself," Time's cover article reads.
A protester at the OccupyDC camp in Washington, Kelly Canavan, said the Time magazine honor was "very exciting."
"It's inspirational. It shows people are paying attention to us, which is what we're hoping for," Canavan told AFP.
"Given how many occupations and how many mass movements there are... (this) demonstrates that we're gaining a lot of legitimacy."
Time magazine, featuring a cover photo of a female Arab protester, goes on the newsstands Friday.
"The stakes are very different in different places. In North America and most of Europe, there are no dictators, and dissidents don't get tortured," the cover article wrote.
"Any day that Tunisians, Egyptians or Syrians occupy streets and squares, they know that some of them might be beaten or shot, not just pepper-sprayed or flex-cuffed."
