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
transportation.
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 About.com,
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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