Why Pinterest Is Playing Dumb About Making Money

By Alexis C. Madrigal

Despite the company's protests to the contrary, Pinterest already knows how to make money, and may already have a model that would work for users, retailers, and itself. 

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Over the past few weeks, we've seen Pinterest rise out of the pack of next-next-next-gen social networks after humming along in relative obscurity for a couple of years. We presented our take on the visual bookmarking site a few days ago. Along with the explosion of interest, the company's sole source of revenue came into the spotlight: affiliate links. Pinterest had been using a service called SkimLinks, which is helmed by Australian native, Alicia Navarro, and which, has been in business itself for several years without a bunch of hoopla. SkimLinks' software looks at links users post to websites, determines if there is an affiliate program to which they can be linked, and appends a code that ensures Pinterest gets credit for (and data from) the referral.

To be honest, I don't see much wrong with this practice. The only people it could possibly hurt are merchants who are posting things to Pinterest and then having people click through the site, picking up an affiliate code that costs them a small percentage of the sale. For the average user, it's a non-invasive way to generate revenue for a site they like that doesn't require putting up with advertising.

Nonetheless, once the story broke that Pinterest was quietly making money off its users (the horror!), the company started to backpedal on its practices. That reached full bloom in a Wall Street Journal article yesterday in which various Pinterest parties (CEO, board member) fell all over themselves to declaim that the company knew anything about making money.

"Pinterest's monetization strategy isn't in the oven and it's not even off the baking table. We have one hundred ideas but no execution as of yet," Jeremy Levine, a board member of Pinterest and a venture capitalist at Bessemer Venture Partners, told the WSJ.

Ben Silberman, Pinterest's CEO, struck the same "Money, well, golly?!" chord. "My hope is that if we build a service that a lot of people use to plan and discover things, that will be really valuable," Silberman said.

Now, all of this is pretty standard Silicon Valley speak. They pretend that they don't care about making money off of users and we users pretend that we aren't the product. It's all about "building value" and "creating a better experience" and all that. Which is fine and good. I find the Valley's deep and starry-eyed belief that money flows to all the right people to be very endearing.

But let's get real here: Silberman's company had been happily using and making money with SkimLinks for 2 YEARS. Then, suddenly, $37 million of venture capital falls into their hands and suddenly all they care about is building that "a lot of people use to plan and discover things."

An anonymous source also told the WSJ that the company, VC-valued at $200 million, "isn't yet making much revenue and is unprofitable" and furthermore, "affiliate marketing isn't a major part of Pinterest's business model right now, according to the company and its venture capitalists."

This is a bit strange because:

1)We know Pinterest is driving truly massive traffic to retail sites, by some accounts more than YouTube, LinkedIn, and Google+ combined. It is, after all, a platform that's perfect for shopping!
2) We know Pinterest used SkimLinks to add affiliate links.
3) Affiliate links generate revenue.

Should this add up to chump change? Let's do the math just to get an order of magnitude estimate.

Commissions on sales for affiliate links vary widely, but they average around 5 percent. After SkimLinks cut, that'd be 3.75 percent (although SkimLinks says they can sometimes negotiate deals that would keep the percentage closer to the original number).

So, Pinterest has 10 million users. Let's say that the average across all of them is that they buy items valued at $10 in a month through affiliate links on Pinterest. That's $100,000,000 of sales for which Pinterest would get credit. That's $3.75 million in monthly revenue, or $45 million of annual revenue.

Is that going to make you the next Facebook? It doesn't look like it when your user base is 10 million. But what about when the site has 100 million users? Assuming revenue scales linearly, affiliate revenue would stand at $450 million. And if the site had 800 million users like Facebook? That revenue would go to $3.6 billion, just $100 million less than Facebook's 2011 haul.

These numbers are far from exact, but they aren't totally out there, either. The key to this model here is the Superman III principle: they are making pennies on a retail shopping market that is truly gigantic, and they are taking their cut from the top-line. Forrester estimates that the online retail market, in the US alone, will total $279 billion in 2015.

And really, what a win for everyone. Users get a great service and don't have to look at advertising. Retailers get a new outlet for marketing. Pinterest connects all these buyers and sellers.

I don't know Pinterest's financials, but I can't think of a time when a company has run harder away from what seems like a good business model that I don't think its users would object to.

What I think is going on here is that Pinterest's backers don't want the company's revenue engine (i.e. SkimLinks) to be located outside the company. Because while there's no doubt Pinterest is a viral product, the actual IP for generating data and affiliate income was located in Navarro's, not Silberman's. 


This article available online at:

http://www.theatlantic.com/technology/archive/2012/02/why-pinterest-is-playing-dumb-about-making-money/253273/