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How Yahoo Can Make Money From Tumblr

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It's just one of many websites that has to rethink its business plan, or lack of one.

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Here's a little dose of financial reality for Tumblr users who are upset that their free-to-use, nearly ad-free little corner of the Internet has been bought by big, bad corporate Yahoo (NASDAQ:YHOO): One way or another, probably sooner rather than later, you're going to pay for your free blog. You're going to see more ads, or pay to post, or be asked to subscribe, or pay for some premium level of service or information.

Some way or another, somebody's got to pay. That's the way the "content" business works, or that's the way it worked for a couple of hundred years before the Internet took hold and media companies jumped on board and tried to establish an audience before worrying about making money. Now they may rue the day, and for good reason.

So, how has Tumblr survived since its launch in 2007 with all-you-can-eat free service, no ads until last year, and very few ads since? It coasted on venture capital and took the long view for the payoff, which came this week at a cost to Yahoo of $1.1 billion in cash, including about $250 million for founder David Karp, who gets to keep his job as CEO, too.

Now it's Yahoo that gets to figure out how to make money from Tumblr. In announcing the purchase Monday, CEO Marissa Mayer hinted broadly that Tumblr's value to Yahoo comes with its advertising potential.

That potential is pretty juicy: Tumblr's very young demographic is at least a generation younger than Yahoo's. It has good mobile reach, and a strong international presence. According to Mayer, the sheer numbers are impressive: She expects Tumblr to boost Yahoo's user base by 50% and its Web traffic by 20%.

Moreover, Tumblr's community of users collect around their special interests rather than, like Facebook (NASDAQ:FB), around social and professional contacts. Advertisers are willing to pay a premium to advertise to a small but self-selected group of people with an expressed interest in golf or puppies or movies.

Mayer has promised "a very light ad load" on the Tumblr Dashboard, that is, the user's personal home page, plus ads on blogs, but only with the permission of the author.

So, all of this sounds like a business plan, and it's better than most big media business plans, particularly considering Tumblr doesn't have to spend a dime to acquire its user-generated content.

That puts Tumblr in a minority of sites devoted broadly to information, as opposed to transactions, that have a shot at making real money with their present business plans (assuming, of course, that it can get past that high barrier of a $1.1 billion upfront cost).

There are other ways that information websites can make real money, and these are business models that were around for a long time before print and broadcast media ceded their audience to the Internet. For instance:
  • The subscriber model. At the risk of landing in the cranky old geezer category, it must be said that Rupert Murdoch, head of News Corp. (NASDAQ:NWS), wasn't all wrong when he decided he wasn't giving everything away for free anymore. He owns a few properties that are worth paying a monthly fee for, notably the Wall Street Journal and the Times of London. The New York Times has made inroads with an online subscription model, and many others will follow soon. This is possible when a website has unique content of high quality with a loyal audience that advertisers need to reach.
  • The advertising model. The ultimate success story here is Google (NASDAQ:GOOG) which, like Tumblr, knows which ads might get your attention because you're telling it what interests you day in and day out. But Facebook -- maybe not so much, because the site is about staying in touch with social connections rather than exploring a mutual special interest. So far, Facebook seems to have been able to target ads according to age group, and previous Web browsing activity, and not much else.
  • The hybrid model. Minyanville is an example. It has a free advertiser-supported front for people with a strong interest in personal investing, and "MVP Subscriptions" for the high-rollers and pros.
There are many variations, of course, and smart people in the business are working on more of them.

Their problem is the advertising vacuum hose that is Google. According to an estimate from eMarketer, mobile advertising is expected to rise 77%, to nearly $7.9 billion, in the US in 2013. Google alone is expected to suck up more than half of that total.

Mobile ad spending is expected to hit $27.1 billion by 2015, according to the same forecast.

It's time for big media to get cracking, if they want a piece of that pie.

Also see:

The Video Game Industry Is Facing a Mobile Zombie Apocalypse

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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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