That title should be read with sarcasm.
I’ve been reading all the posts over the past 24 hours attempting to dissect the financial
calculus of Yahoo’s $1.1 billion acquisition of Tumblr. I figured I’d quickly summarize the key metrics that should be considered here and argue why it’s a decent fit for Yahoo, but is not exactly an Instagram.
Web-Based CPM Rates Are Crap
Given that most of the analysis I’ve seen is based on web traffic, I thought it would be best to start here. Simply put, web-based advertising sucks. The ads suck, and on average, the CPMs are absolutely horrendous.
Unless you are a niche publisher, or advertising on a large company’s homepage (like Yahoo), good luck getting $10 CPMs. Seriously. Facebook, one of the world’s largest online display advertisers is currently pulling in something like $0.75 CPMs on desktop/web.
That means we should come up with revenue that looks more like this:
120M Daily impressions x 365 Days = 43.8B Annual impressions
43.8B / 1000 = 43.8M * $0.75 = $32.85 million dollars annually on web alone.
Given that Tumblr is most likely under-reporting their traffic a bit, we can round things up to a clean $40M a year if we’re being aggressive. There’s also all types of questions over the porn content on Tumblr, but I’ll avoid that for the sake of this discussion. There’s still some growth on web but let’s be honest: the future is mobile! Isn’t that why Marissa Mayer overpaid for Summly?
Tumblr Is A Big Mobile Company
Simply put, Tumblr has a lot of traction on mobile. In fact, something like 25 percent of their traffic is currently mobile (according to ComScore as Kara Swisher points out).
Why is this such good news? Currently, mobile appears to be monetizing pretty well for the largest mobile behemoth: Facebook. According to a TBG Digital report last year, Facebook’s mobile CPMs are over $10. While we may expect these rates to fall as inventory expands and the mobile ad platform becomes more widely used, these ad rates are incredibly promising.
With Tumblr being the 7th most popular app in social networking in the iTunes store (yes, I know, a single data point), things are looking pretty good for the company. Who knows how much time is spent in the Tumblr apps, but my guess is that it’s a lot! That could spell many more additional impressions. Yet right now all of the analysis I’ve read is based exclusively on web traffic. Why?!?!?!
If we were to use ComScore’s numbers on mobile traffic, we could say that the company can produce at least 10 billion annual impressions on mobile (although this math is not exactly fair or accurate, but stick with me). If we are conservative about the mobile CPMs (which currently appear to be boosted by primarily mobile app install advertising), we can say they’ll make $2.50 CPMs. That results in the following math:
10B / 1000 = 10M * $2.50 = $25 million in mobile advertising. That’s on the low end.
If we were to use Facebook’s CPMs on mobile, we can quadruple that estimate to $100 million.
The Final Number!
With all these numbers, we could project a relatively aggressive revenue target of $200 million a year (in a couple years). I should really emphasize aggressive. That’s because it’s not clear how likely mobile will be able to keep the ridiculous CPMs that Facebook has been generating. My guess: not likely. However if we consider the aggressive revenue targets, and with Yahoo currently trading at 6X revenue, we can set the price of Tumblr at $1.2 billion. It’s that simple!
In Support Of An Acquisition
The numbers accomplish one thing: they are used to justify the acquisition to investors. You know, those people who care about the financial state of the company? If you want to look at a more detailed financial analysis, click here.
Yet the numbers are skin deep. As a product, Tumblr could potentially be a perfect fit. Over the past few months it has become increasingly clear that Marissa Mayer is doubling done on the content business. That’s exactly what Tumblr is: content. Yes, it’s user-generated, but it’s a content play. Yahoo! also needs to stay relevant in the younger demographics, and that happens to be Tumblr’s core audience.
Mix together a hip brand, content, and the potential of paying back the cost of the business, and you have a solid acquisition. Who cares about that whole revenue thing, right?!?
The Flip Side
The downside is also pretty clear. Tumblr is actually a runner up in the mobile space. The hip apps in social mobile right now are Vine, Instagram, and Snapchat. Tumblr ranks below each of those.
The company also isn’t profitable. Even if the company had $100 million in revenue, who knows what the costs are? The company has a dwindling bank account because David Karp, understandably, doesn’t want to just throw up ugly web-advertising. The lack of advertising is part of what keeps the company hip!
Also, who wants to run a display advertising business? Oh wait, Yahoo.
If we were to look at opportunity costs, why wouldn’t Yahoo get a little more aggressive and go after a mobile messaging app that’s taking off (aka. growing faster than tumblr)? Isn’t messaging the future of mobile anyways? Or why not try to make a play for Pinterest? The main reason may be that none of the other private companies in this space want to sell for $1.1 billion. If that’s the case, Yahoo! is simply taking the best it can get.
Who wants to be a runner up though?
For Tumblr, this seems like a great exit opportunity. While it may not be the ideal outcome, the company has yet to figure out an incredibly lucrative business model and David Karp doesn’t want to be pigeon-holed. Once the company does begin to serve up advertising though, they’ll be able to immediately plug into Yahoo’s existing infrastructure. Will it be incredibly profitable for Yahoo? Probably not. Yet if we’re going with the same recurring motto of Marissa Mayer making Yahoo hip and cool, Tumblr seems like a pretty good fit. So yeah, just view this acquisition like your standard pair of billion dollar jeans!