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Wish life was this simple
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the future
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This one is of Christians protecting Muslims during prayer in Cairo, Egypt
Here is a short report I made for CS 207: The Economics of Software. I made some quick rough estimations to try to guess how hard it would be for Tumblr to become profitable. I thought it would be relevant to post here:
Tumblr, a microblogging platform founded in 2007, has grown to an alexa rank of 44, over 6 billion pageviews a month, and to over 27 million blogs. With the rise of cloud computing and different software development tools, internet companies can be started with very little cost. This has allowed many startups to defer concern about revenue generation and profitability and instead focus on product and marketing. With venture capital, startups can defer profitability even longer and grow to a fairly large size without having to generate any revenue. Tumblr has benefited from this. To date, Tumblr has gone through 5 major rounds of fundraising, raising a combined $125 million valuing it somewhere in the range of $800 million despite not having a proven business model. With its $125 million in venture capital, Tumblr has the time to scale its business with more servers and employees while continuing to refine the product and figure out its business model. But will it ever become profitable?
Instead of taking the traditional route taken by many web companies of monetizing their page views through advertisements, Tumblr has decided to instead focus on a pseudo-freemuim/virtual good model on its journey to profitability. Tumblr’s founder David Karp says that “Making money off of Tumblr would be incredibly easy,” but he prefers making money in ways that “enhance the experience of [their] users.” [Schonfeld, 2011] Tumblr’s first attempt at monetization came through a $9 fee for users to be added to the site’s blog directory. Tumblr also began selling premium themes. Users can pay anywhere from $9 to $49 to use a premium design for their blog. Users also have the option to post their own premium designs on the site for others to buy and share the revenue with Tumblr.
Tumblr is built on the free and open source LAMP stack with an in house MVC PHP framework they have developed. Building on this stack allows them to save on software maintenance costs since many other websites are built on this technology and maintenance of this software is handled as a community. Tumblr has two datacenters and hosts its photos on Amazon’s Simple Storage Service (S3). Receiving criticism for its high downtime rate, Tumblr is investing heavily in its infrastructure. Its recent $85 million round will be used to high more employees and pay for more infrastructure.
As with most web companies, Tumblr’s two biggest costs are infrastructure and employees. Tumblr has close to 60 employees. Based on typical starting salaries for engineers, an estimate of Tumblr’s average salary cost is $100,000. Paying 60 employees $100,000 a year would cost Tumblr $6 million. Based on comparisons between two data centers Facebook is paying for (Miller, Facebook: $20 Million a Year on Data Centers, 2009), it can be estimated that Tumblr is spending about $10 million a year for its two data centers as well as its Amazon S3 space. If we include the cost of real estate in New York, where Tumblr is located, and other business costs, we can estimate Tumblr’s rough cost to be around $18 million a year. These costs are only increasing as Tubmlr is rapidly hiring new people and gaining new users.
At an estimate of $18 million a year in costs, Tumblr would need 7% of its 27 million blogs to pay $9 each to be listed in their directory or buy their lower cost themes to break even. This is a reasonable number given the conversion rates of other freemium online models (Club Penguin at 25%, Ning at 3%, and Flickr at 5-10% (Anderson, 2008)). To compare what Tumblr could be making from ads we can take the current click-through rate for online display ads, which is over 0.2% (Stern, February), and assume a conservative $0.20 average cost per click. With these numbers, Tumblr’s 6 billion page views a month could generate more than $28 million a year if display advertisements were placed on every page. While Tumblr may be spending a lot of money, Tumblr has multiple feasible options for profitability as well as a runaway provided by venture capital to figure out a business model that will “enhance” the experience of their users. Given all of this, it is reasonable to say that Tumblr does have a path to profitability.
Alexa. (n.d.). Tumblr.com Site Info. Retrieved December 2011, from http://www.alexa.com/siteinfo/tumblr.com
Ante, S. E. (2011, August 26). The $800 Million Formula: Slim Sales, a Goofy Name. The Wall Street Journal .
CrunchBase. (n.d.). Tumblr | CrunchBase. Retrieved December 2011, from CrunchBase: http://crunchbase.com/company/tumblr
Eaton, K. (2010, April 20). Tumblr Is Turning a Billion Page Views Into Cash, but Not Through Ads. FastCompany .
Miller, R. (2010, December 20). As Downtime Mounts, Tumblr Adds Data Center. Retrieved December 2011, from Data Center Knowledge.
Miller, R. (2009, May 18). Facebook: $20 Million a Year on Data Centers. Retrieved December 2011, from Data Center Knowledge: http://www.datacenterknowledge.com/archives/2009/05/18/facebook-20-million-a-year-on-data-centers/
Schonfeld, E. (2011, February 22). (Founder Stories) David Karp: “Making Money Off Tumblr Would Be Incredibly Easy”. Retrieved December 2011, from TechCrunch: http://techcrunch.com/2011/02/22/founder-stories-karp-tumblr-making-money/
Siegler, M. (2010, March 23). Tumblr Rolls Out Make Money Plan Part 2: Beautiful Themes. TechCrunch .
Startups: What is Tumblr’s technology stack? (2010, September 16). Retrieved December 2011, from Quora: http://www.quora.com/Startups/What-is-Tumblrs-technology-stack?q=tumblr+technology
Stern, A. (February, 1 2010). 8 ways to improve your click-through rate. Retrieved December 2011, from iMedia Connection: http://www.imediaconnection.com/content/25781.asp
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Tumblr - There is an ASCII art logo in Tumblr’s HTML source.
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