Another Look at Tumblr: More Users, but Its Business Model Is Still Iffy

Recently there was news that microblogging service Tumblr received another big round of VC money. Yesterday, I wrote how this segment of high tech -- in which I included Tumblr and Twitter -- seemed on its way to a late 1990s-style bubble.

Early this morning I received an email from Tumblr president John Maloney who strongly disagreed, essentially saying that everything in the post was wrong. My being completely incorrect wouldn't be a first. However, in this case, reflection suggests that the industry's approach to start-ups -- and the fundamental difference between a cool idea and a business -- is still off.

Here are the four points that Maloney made:

The company sees "explosive growth and adoption."
In comparing Twitter and Tumblr, I took two entirely different services that solve separate problems, and so I didn't have a handle on what made Tumblr unique.
Users can run ads in their blogs if they want, so my quoting Tumblr about not forcing ads, banners, or logos into a user's theme is not the same as users not having access to ads.
Advertising is not the core to the company's monetization strategy.

Let's take these one at a time.

Tumblr traffic

I generally use publicly available sources of information because it gives a point of comparison. In my previous post, I referred to Compete.com data on unique users for both Tumblr and Twitter:

I did some additional checking and found a significantly different picture from Quantcast.com. Maloney verified that Tumblr directly reports numbers to Quantcast, so this different picture rests on actual data rather than an estimate. Here's a graph of daily unique visitors shows:

Here's a monthly view of unique users:

Maloney says that the company has over 9 million subscribers, with 30,000 new subscribers signing up daily. That rate puts the number of additional subscribers at 10.95 million a year. However, these graphs don't differentiate between blog owners and audience. With 9 million subscribers, there are 47 million unique people monthly. That's an average of 5.22 people per subscriber, suggesting that most of the blogs are very thinly read. If the same ratios and subscription rates hold, at this time next year, Tumbler would have about 20 million subscribers and 52 million people coming to the site per month.

The number of people coming from the outside may misrepresent the dynamics of the site. Maloney wrote that over the last six months, the Tumblr dashboard -- the user's control center â€" has driven more page views than the blogging platform. He wrote that this "is very telling of the fast-growing media consumption, in-network, aspects to Tumblr. Incredibly engaged communities around interests."

I just set up a Tumblr account to see the structure. Like many social networks, you can follow others and be followed in return. It's not surprising that the dashboard drives page views, especially since it provides a long list of featured bloggers. My sense is that the staff finds and promotes its more prolific bloggers, and that probably gets users to at least check some of them out. This social network approach, as is true with a site like Open Salon, generates activity.

Microblogging segment

Twitter and Tumblr certainly offer different services. And yet, that doesn't mean they don't both belong in the same industry segment. Both are about communications. Tumblr advertises itself as "the easiest way to blog," and so has an outward-facing function for its users. And yet, blogging has little value ultimately if no one reads.

Twitter calls itself "a real-time information network that connects you to the latest information about what you find interesting." The company emphasizes the user as audience. That makes sense, as only a small portion of Twitter users actually generate material. Nevertheless, this is the conceptual counterpart of Tumblr, because listening doesn't matter if no one speaks.

If anything, I'd argue that instead of considering them high tech companies, we might better discuss them as media ventures that use technology as the communications venue. From that viewpoint, you could compare either with magazines, newspapers, or broadcast. That actually helps better frame the monetary issues.

Advertising

I'll address both the advertising points together. My point in quoting Tumblr was not to say that users didn't have access to advertising, but that for the company to avoid running ads is a significant limitation on its potential business models. Generally, a media company will charge for its services, make money from ads, sell something else to customers, or sell customer data to others.

Tumblr has been clear in its dislike of the advertising route. That means needing another source of revenue sufficient to justify the investment it received. And so we have getting money from users, whether those who write the blogs or the people who read them.

So far, Tumblr has explored charging for custom themes. Maybe the company could sell virtual goods or sell products that somehow tie into blog posts. In a way, the specific is just a detail. Overall, the remaining question is how much money the company could make.

A good first estimate would be using figures from freemium business models, where a common conversion rate for free users into paid is about 2 or 3 percent. That also happens to be a highly coarse rule of thumb result you might expect from a decent direct marketing campaign, so at least there is some consistency.

Now look a year out with 52 million visitors a month, of which 20 million are subscribers. I'd argue that the subscribers represent the group of people that are most likely to spend money. Otherwise, Tumblr would have to make the argument that it could get money from an an otherwise passive audience better than just about any other media company.

Even 3 percent of 20 million means 500,000. But how much could Tumblr reasonably get per person per year? Even $20 would mean annual revenue of $10 million. Remember -- no ads, so the company would depend on what users were willing to spend on a "free" service, no matter how well thought out or cool it seems.

Perhaps VC investors would find that adequate with a valuation currently running about $135 million. And, granted, with as lean a staff as Maloney describes -- currently at 14 -- that's still a lot of up-front investment for the return. Or maybe there is some plan that will actually get people to pony up more. But from what I've seen many companies -- particularly those in the media space -- do, I wouldn't bet on it.

It's not that a media company is incapable of getting an audience to pay its way. Look at Cooks Illustrated or Consumer Reports. But those are rare exceptions. Tumblr's problems are, by and large, those of electronic media. Too many consumers like what they see, but don't feel they should pay for it. Whether accurate or not, it's common for people to think there are always other sources.

Furthermore, users often feel entitled to what they get for free, and so are prone to a kind of faux moral outrage if the conditions change or if a service shuts down. Unless someone figures out how to make an unusual strategy work on the Web, the microblogging service isn't the only one facing potential trouble.

Related:

Image: RGBStock.com user weewillyd, site standard license.

Erik Sherman

Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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