Yahoo has concluded that Tumblr, the social blogging service, is worth a whopping $1.1 billion. Will the bet prove a good one? The answer depends on whether the combined company can turn its many millions of users into a interlocking set of services that no competitor can hope to replicate. In short, the question is whether Yahumblr, or Tumbloo, or whatever we want to call it, is more like Google or more like Craigslist.
The holy grail for any business, is to get to a place where you can bring in exceptionally high profits, and have some economic moat that prevents competitors from stealing them away. For Coca-Cola, that “economic moat” comes from a unique brand name and global reach that cannot be easily replicated. For Google, that is an interlocking system of tools that become so much a part of users’ lives that they can’t contemplate switching; I use Gmail and Google Search and Google Maps and Google Docs and all the rest so intensively that I wouldn’t consider switching to competitors unless Google messed things up royally.
Then there is a different variety of company, which seems surprisingly common in the technology sphere. It produces a valuable product used by millions of people, and with the network effects that tend to create an economic moat. Yet it doesn’t offer a pathway to tremendous profits.
The prime examples of this type are Craigslist and Wikipedia. Both dominate their categories, and at first glance have a lot of network effects that should give them a lasting advantage. But they’re both among the most popular services on the Web by explicitly not aiming to earn vast profits. Craigslist is organized as a for-profit company but makes only the most modest of efforts to get paid for its classified ad service, while Wikipedia is organized as a not-for-profit. It’s impossible to know for sure, but it seems completely plausible that if either one changed strategies and tried to earn the kinds of profits that would most please shareholders, their huge advantages could fizzle too. What’s to stop a new, free Craigslist from launching if the existing version got too greedy, or all the contributors who spend millions of hours updating Wikipedia entries for no compensation felt like somebody else was getting rich off their labors?
For Craigslist and Wikipedia, the very fact that they don’t try to extract any huge financial returns from their users that allow them to be so widely used. They like the Internet version of the water and sewer utility: What they do is important to everybody, but it’s not something that makes anybody rich.
There’s a decent case to be made that Twitter will turn out to be more like Craiglist than like Google in that regard. Half a billion people use it, but the company has had a devil of a time turning that into meaningful revenue (the company is private, however, so there is little hard data, and they still could find ways to put them in the latter category). Facebook has had more success, able to turn its billion users into $5.1 billion in revenue and $53 million in profit last year.
Which brings us back to Yahoo and Tumblr. Yahoo as it stands now has a few business lines where, if you squint, you can see that kind of advantage. Its financial message boards and stock portfolio tools, for example, are “sticky,” in that once you’re a user it’s a pain to move to another service. Same with its fantasy sports offerings, and its e-mail service. But much of what Yahoo does fits more in the category of perfectly competition: It tries to develop content that people will like, and sell ads off that content, but has few inherent advantages over an AOL or any media company across the land. Tumblr, meanwhile, is a wildly popular micro-blogging site that is particularly heavily used by young adults. It has minuscule revenue, but intense engagement among its users and huge network effects; people use Tumblr because other people use Tumblr. It has been at risk of being one of those public utility type of tech companies — providing an important and popular service, but in a way that efforts to pull money out of it might bring competitors and collapse the whole thing. Part of what its users like most is that it doesn't try to mess up an elegant screen of shared content with the obstruction of ads.
The optimistic story for these combined companies is this: Tumblr will bring a stickiness that many other Yahoo offerings lack, so that the combined company has more loyal users who can less easily vote with their feet in response to more ads. The pessimistic story is that the company has simply grafted one company in a perfectly competitive industry with no real economic moat to another that more naturally belongs in that public utility category, and the result will be an unwieldy Frankenstein’s monster of mismatched parts, none of them wildly profitable. Either one will be fascinating to watch.