How do you monetize gifs of cats?
Tumblr is known for launching internet memes, pictures of cats, fan blogs dedicated to popular shows like Dr. Who, and an incredible amount of pornography. It doesn’t seem like an advertiser’s dream, especially with all of the alternative advertising platforms out there.
In 2012 Tumblr generated $13 million in revenue and has a goal of generating $100 million this year. The costs to run Tumblr in 2012 totaled $25 million, and this will obviously grow as the user base expands. If Tumblr had stayed independent my guess would be that the company would eventually run out of money and fail.
Yahoo has a history of big acquisitions that ultimately fail. In 1999 Yahoo paid $3.6 billion for Geocities, which at the time was a very popular site that allowed users to create their own websites. Geocities eventually lost popularity and the site was shut down.
What happens when people get annoyed by ads on Tumblr and move to another free service? That’s the problem with free services like Tumblr – the moment you try to monetize people get upset. Does Tumblr add $1.1 billion of value to Yahoo! Inc. (NASDAQ:YHOO)? I don’t think so. Tumblr may never actually turn a profit, and if it does it will likely be far too small to justify the price tag.
Following Facebook’s lead
This acquisition reminds me of Facebook Inc (NASDAQ:FB)‘s $1 billion purchase of photo sharing app Instagram. Instagram had no revenue, and still doesn’t, but Facebook Inc (NASDAQ:FB) will eventually introduce ads in an attempt to monetize the service. But can it possibly generate enough revenue to be worth $1 billion?
I don’t really like business models where a service is free and supported by ads. It requires maintaining a huge user base while preventing the ads from driving people away. This gets difficult when there are competing free services pulling some users who are sick of ads away. The service has to become so indispensable to the user, like Gmail for example, that people are unlikely to leave. Neither Tumblr nor Instagram has that kind of stickiness.
If I were a shareholder of either Yahoo! Inc. (NASDAQ:YHOO) or Facebook Inc (NASDAQ:FB) I’d be pretty upset about the companies spending a billion dollars on companies that don’t make any money. You can call it bold, but I call it risky. There are only so many advertising dollars to go around, and competing with so many other advertising platforms will make the success of these acquisitions difficult.
The bottom line
Yahoo! Inc. (NASDAQ:YHOO) has spent $1.1 billion on a company that is unlikely to ever make enough money to justify that price. A majority of the blogs on Tumblr are likely unattractive to advertisers, and with other platforms like Facebook Inc (NASDAQ:FB) and Twitter to advertise on, I doubt Tumblr will have much success monetizing itself. Just because a company has a lot of users doesn’t mean it’s worth $1 billion. I think that Yahoo will have to re-learn that lesson.
The article Billion-Dollar Mistakes originally appeared on Fool.com and is written by Timothy Green.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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