Yahoo.licio.us

The blogosphere is abuzz with the story of Yahoo purchasing del.icio.us.  Everyone knows who Yahoo is.  For those who don’t know del.icio.us, it’s the category leader in tagging (sometimes called bookmarking).  Many more people use del.icio.us to tag web pages than any of its competitors.  It’s been just eight month since founder Joshua Shachter left his day job at a brokerage firm and received first round venture funding.  Del.icio.us is free to use and doesn’t carry advertising so, to date, the company doesn’t have visible revenues.

So does this mean Bubble 2.0 is truly upon us?  Hard to say without knowing the price, of course, but I think not.  The deal makes a lot of sense without bubble psychology.

“But,” critics say, “without revenues let alone a path to profitability, this is not a real company. It was built to flip.” Or: “This is a feature, not a company.”

Even if true, so what?  Building value for resale rather than current income is good business.  Consider real estate.  Somebody buys property; gets a lot of permits; arranges for subdivision; maybe build roads and a little infrastructure; and sells the lots to builders.  Not a penny of current revenue during the process; just a gain at the end. Builders buy the lots; they build spec houses; they don’t get any income until they eventually sell the houses to some one else.

Even if Joshua and company built del.icio.us only for resale, they created real value in aggregating users and creating a folksonomy – a user defined categorization and ranking of web content.  They did a brilliant job of solving the dilemma of all network-value businesses – how do you get to critical mass when there is NO network value for the first users? 

Remember Metcalfe’s Law that the value of a network scales with the square of the number of users.  This implies that big networks have huge value but also that small networks have almost no value at all,  Makes it hard to get started.

Del.icio.us had value for user #1 even if it wasn’t “network” value.  Tagging is a good way to remember all the web pages you may want to find again.  That use doesn’t depend on any one else doing any tagging.  So more and more people used del.icio.us to bookmark web pages for later retrieval.

Since the tags are public, anyone can use everyone else’s tags as a way to find information.  So, as soon as enough people tagged for their own selfish purpose, their tags became useful to other people looking for web content.  Moreover, there is information in how many people tagged a particular web site or blog.  Popularity means something although it’s not always clear what.  Soon del.icio.us had real network value and was off to the races.

Del.icio.us got to a critical mass of users before its competitors.  That’s crucial to a network business because this lead kicks off a virtuous circle. The network service with the most users has the most value to each new user.  Other things being anywhere near equal, the larger network therefore gets more than its share of new users and grows faster than its would-be competitors.  Aggregating users faster than anyone else is why Skype succeeded and it’s why del.icio.us succeeded as well.

Yahoo understands the value of tagging.  Its taggable photo service Flickr, also an acquisition, is a runaway category leader.  Yahoo probably could have acquired tagging technology somewhere else.  If they’d bought a smaller competitor of del.icio.us, they presumably would have paid less.

Yahoo already has so many users – probably including a large number of del.icio.us users – that I doubt whether Yahoo acquired del.icio.us just to get what is, from their lofty point of view, a few more users.  My guess is that Yahoo wants to start as the category leader in tagging and never look back and that the number of active taggers and tag users aggregated by del.icio.us – estimated at around 300,000 and growing rapidly - is what made them a valuable acquisition.

Anyway congratulations are due Joshua and friends Fred Wilson and Brad Burnham at Union Square Ventures on creating value for web users and of finding a good path for the del.icio.us folksonomy.  It’s delicious to see del.icio.us as the most used tag on the web the last few days.