Wednesday, May 22, 2013

The worries of Tumblr

You can’t help but wonder what Yahoo’s top corporate executives
are doing.  Sure buying blogging site Tumblr appears, at least on the
surface, to be a fine idea but what about that price?

According to newspaper reports, Yahoo paid $1.1 billion for Tumblr,
a company that generated only $13 million last year. 

Apparently making the deal irresistible was that Tumblr, according
to published reports, has between 117 and 300 million unique monthly
visitors, many of them younger – perhaps even slimmer – than the
average Yahoo user, described, in a blog at the Los Angeles Times,
and another, in Digital Trends, as “Overweight women ages 18 to 49,
who tend to be in relationships of only one to five years with children, 
residing in the suburbs or rural areas.”

The pending acquisition raises many questions and points that, perhaps,
weren’t vetted as closely as possible, including whether Tumblr’s
hipsters will want to be part of a web portal that fat, middle aged women
find attractive?

There are also other questions, too, including the following:

The information about the number of unique monthly visitors isn’t clear.
According to The Wall Street Journal, Tumblr has about 117 million
but according to Tuesday’s Investor’s Business Daily, it’s around
300 million. 

For the sake of shareholders, can Yahoo provide a unique monthly
user number that holds up to what ComScore reports, 117 million?

While apparently it’s difficult but not impossible to sell ads on Tumblr,
a more worrisome issue for Yahoo is Tumblr’s users, who, based
on what’s been reported, have no reason to remain with Tumblr.

In other words, they can flee to other micro blogging websites or
start one of their own.  If that’s true, what’s the value of Tumblr to
Yahoo?  Is this really a technology play?

Did Yahoo consider the possibility that if Tumblr’s revenues never
move north of $13 million, it could take it close to 86 years to earn
what it paid for the site?

If it can generate, as one former Google executive said on his blog,
about $100 million a year, it will only take Yahoo about 10 years
to have Tumblr paid off.  Does that number hold up if the users flee?

If there really are only 117 million unique monthly users for Tumblr,
then Yahoo paid about $9.40 for each of them.  Do they have a plan
in place to keep them?  What will it cost?

While Yahoo’s Tumblr acquisition might make sense – let’s assume
CEO Marissa Mayer knows what she’s doing – what’s not certain
is how this acquisition will move Yahoo’s stock price.

Based on what’s happened this week, so far, the stock market
appears to have welcomed Yahoo’s acquisition, modestly moving
its stock price up from where it had been on Monday, meaning that
while Wall Street approves the deal, it’s far from excited about it,
and, quite possibly, doesn’t understand it.

The larger, overriding issue is that economics catches up with
every industry.  It might not happen for a decade or 20, possibly,
even 30 years but, in time, economics determines how industries
mature, prosper, fall apart and work.

Right now, we appear to be seeing the maturing of the Internet
industry as it consolidates.

When an industry is new, entrepreneurs and companies of all shapes
and sizes often step in because they see an opportunity to thrive.
Only a very limited few will succeed but, as with PowerBall gambling,
if the winnings are viewed as being high enough, many will throw
their hat into the ring.

But eventually there’s a contraction as investors cash out, taking their
earnings and banking them for another future opportunity while
others shut down, not always able to sell the assets they once
used in the new industry.

This activity – of one company buying another – usually leaves
fewer players, making the new industry look like an oligarchy,
with a few dominant companies keeping a close eye on one another.

While it’s hard to believe today, the U.S. automotive
industry back in the late 19th and early 20th centuries, was
composed of about 2,800 companies.  They included mom
and pop shops to long established companies in the horse-drawn
wagon business trying their hand on a new idea – mechanized

The automotive industry’s new technology was so successful,
disruptive even, that it killed off horse draw wagons.

Today, there are three automotive companies headquartered in
the United States, Chrysler, Ford and General Motors, but only
two are U.S.-owned, Ford and General Motors. Italian carmaker
Fiat owns Chrysler.

The U.S. daily newspaper industry suffered a similar fate, from
being an industry once composed of more than 5,000 titles, back
in the late 19th century, according to, to one that publishes
just over 1,400 different papers today.

Little deals like Tumblr, at a shocking price of $1.1 billion, are
small.  Tumblr will become a division of Yahoo – not something
that fundamentally alters Yahoo.

Deals like Tumblr – where the company was valued at nearly 85
times more than its annual revenues – can’t continue.  If Tumblr
never brings in $800 million, or even $1 billion – and it’s hard to
see how it will – Internet executives will hesitate, and likely refuse,
to pay such extraordinary multiples for the next company whose
revenues don’t come close to backing up the valuation its
investors claim.

The wild-eyed optimism of the Internet -- $1 billion for Tumblr
or Facebook’s recent valuation at $500 billion (when it’s only
doing over $5 billion a year) – will end. 

As the Internet industry matures, the question that needs to be
answered is what’s the future for Yahoo, Google and Bing?
Which one of these players will buy the other to provide it
with the long-term competitive advantage it needs?

Growing up is hard to do, says the adage, and anyone
who’s been in an industry’s infantile stage knows excitement
dims as the adults move in to make sure it lives up to its claims.

So, David Karp, for your sake, let’s hope you’ve cashed out
handsomely and stashed the money where it’s safe because
you’re about to be upbraided by Marissa Mayer as she holds
your feet to the fire.

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