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When Will the Microblogging Market Blow Up? Probably Soon

Blogging service Tumblr has raised even more money through another venture capital round, this time from Sequoia Capital. Supported from early on by Spark Capital and Union Square Ventures, Tumblr sounds like it's on the way to become the next Twitter.

That's the problem. If ever a tech sector showed signs of being in a late 1990s-style bubble, it's micro-blogging. Companies like Tumblr and Twitter receive huge amounts of venture funding and become darlings of media coverage. Founders turn into gurus, with other entrepreneurs hanging on every word. And, like those companies, most of which eventually flamed out, for far too long, too many people involved put off the question of how a business will make money.

Investor financial interest in Tumblr took a recent jump with the Sequoia participation. Dan Primack at Fortune pegged it at between $25 million and $30 million, making a total valuation of about $135 million. Peter Kafka at All Things Digital said that an inside source called that "not a bad guess."

It's not as though either company has shown promise of having stumbled upon a great way to make money. Twitter has been trying to backfill the revenue issue like crazy, but how successful will it ultimately be? That's hardly clear, no matter how confident its backers sound. The same is even truer for Tumblr, which is further behind on creating revenue. Look at this graph from of unique visitors over the last year:

Twitter seems to have peaked in traffic and Tumblr, while growing, is still at a level where even getting $10 per thousand in ad revenue would leave it with a relative small income.

Furthermore, each has some other limitations. Many people use Twitter from applications that don't show ads, other than the streamed ones that the company has begun to introduce. However, like all messages on the system, their persistence is generally low. There are the promoted trends, if someone is actually on Twitter's own site, but they are hardly compelling. And Tumblr? The company explicitly says that it "doesn't force any ads, banners, or logos into your theme," making it far more difficult to make a buck.

Given their levels of venture backing, neither has a revenue model that might justify the interest. What explains the phenomenon is that VC investors don't have the same view as "ordinary" people. They're in it for a period, but expect eventually to cash out. That means either an IPO or an acquisition. Given the still recovering IPO market, that probably means acquisition, and the current general Internet landscape lends itself to that hope, leaving getting acquired.

VCs are betting on a different Internet phenomenon: Facebook. The company has lots of other businesses scared -- Google (GOOG), Yahoo (YHOO), Apple (AAPL), Microsoft (MSFT). Facebook has not only recruited a startling number of people as customers, but its design and approach has begun to usurp the position of these others as a central online place for consumers to congregate. All this lets it make money off advertising whose power and price are enhanced by the large amount of personal data that Facebook keeps on its users.

So Google, Yahoo, Apple, Microsoft, and others want their own ways to take center stage and see mechanisms that seem to promise the collection of users as important. Tumblr and Twitter would seem to fit the bill, which is why the investors keep putting up more money. By doing so, they effectively make their properties too big for any but a huge company to purchase and keep and, in the minds of the investors and corporate executives, make the companies important enough so that someone has to buy them.

Only, I'm not sure that this is a wise bet. Google, Yahoo, and Microsoft, in particular, want an answer to Facebook, and neither Tumblr nor Twitter is even close. Facebook itself could conceivably bit, but it doesn't need either. And unless Twitter or Tumblr radically steps up its attraction of users, the question of relevance becomes sharper. In essence, the investment strategy might be a game of chicken in which, ironically, the goose gets cooked.