What Tumblr Can Learn From LinkedIn as It Searches for a Revenue Model
Tumblr raised another $85 million from investors despite having no revenue model. How do these investors expect to get their money back? There are two ways:
- Cash out in an eventual IPO and leave later investors holding worthless stock in a bankrupt company.
- Start selling ads immediately and hope to become profitable.
Twitter, Pandora (P), Demand Media (DMD) and Groupon (GRPN) are all grappling with this same problem. Each of these companies is in the electronic media business, meaning that they generate content to sell ads next to it. And all of them have found that their staffing and content-generation costs have left them unprofitable.
Twitter is the possible exception, but its forays into revenue-generation have been thus far modest, and it has at least 300 employees on top of its server cost. The company also took in $800 million in venture funding recently, $400 million of which was used to cash out the founders. Companies that make money don't need venture funding, so it is highly likely that the microblogger is not yet profitable.
Tumblr's situation is analogous to Twitter because it, too, is a blog platform with a focus on users who don't want to do a whole lot of heavy lifting before hitting "Publish." Currently Karp has only 50 employees, per the Wall Street Journal. This is good news: He doesn't need much revenue to cover those costs.
Look at LinkedIn
But the reason he has so few employees, of course, is that they're all employed maintaining the site. Almost none of them are employed to generate revenue. Before Karp sets about hiring 1,000 ad salespersons, as the still-unprofitable Groupon did, he should take a look at how Linkedin (LNKD) handled the challenge.
Linkedin is profitable, which means all web based publishers should look closely at it. And it has 1,515 employees, according to its most recent 10-Q filing with the SEC. Its $121 million in revenue last quarter came from a healthy mix of help wanted ads, display ads and premium subscriptions. (On paper, Linkedin is basically a newspaper without the newspaper.) Without the subscriptions, Linkedin could not make a profit.
Tumblr does have a subscription service -- you can pay a little to use an advanced, fancy editorial interface. But that doesn't seem like a very appealing choice for consumers when there are so many free competitors. So Karp's challenge is to find a way to make people or advertisers pay for part of its services.
Of course, if his strategy is in fact choice No. 1 -- the stock scheme -- that seems to be working out too. Even his own investors say they don't yet care whether they'll get their money back:
Roelof Botha, a partner with Sequoia Capital and a Tumblr director, said in an interview this May that he is impressed with Tumblr's growth in users and page views and believes it will find a way to make money from this young, active audience.
"Questions around monetization still exist," he said. "But the company has absolute scale, massive traction, and huge growth and money-making potential."If only Botha was able to say what that "money-making potential" is.
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