Yahoo Approves $1.1 Billion To Buy Tumblr

Yahoo recently voted to pay $1.1 billion to acquire popular short-form blog and social networking platform, Tumblr. Tumblr was created in 2007 by David Karp, a 26-year old software consultant from New York City. Tumblr currently host over 108 million blogs and is valued at about $800 million. Tumblr’s growing usage can create a synergy with Yahoo’s ad technology. According to sources, Tumblr will continue to operate independently. Notably, Facebook acquired Instagram, a popular photo sharing website, for almost the same price of $1 billion last year.

Is Tumblr Worth $1 Billion

How can Yahoo pay for a micro-blogging platform that raked in $13 million in 2012? Critics find a disconnect between the premium that Yahoo is willing to pay and Tumblr’s current worth. However, Tumblr does have very special qualities. It is not just a blogging platform. It is estimated to publish 90 million posts daily from its 100 million users. At the beginning, Tumblr never accepted any form of advertising. It just started accepting sponsored posts last year after it hired Lee Brown, head of ad sales from Groupon. Tumblr also beefed up its ad analytics so advertisers can measure the cost versus the effectivity of their campaign.

Tumblr is a hybrid website that publishes mutimedia blog posts. It is similar to Twitter in the sense that it provides a feed or “dashboard” that you can follow or reblog. Tumblr users comprise teens and college-aged students fom 15-25 years old, one of the most coveted demographic in advertising. That said, Tumblr is very easy to monetize in the future. The question is, how will Yahoo take advantage of Tumblr’s user base without deviating from the core of the website that attracted the users in the first place?

Tumblr’s early venture capital investors include Union Square Ventures, Spark Capital and Sequoia Capital. In late 2011, Tumblr received $85 million in venture capital investment.

Yahoo Needs Tumblr To Drive Revenue

Yahoo’s revenue is stuck at $5 billion for years because it is focused on its presence in personal computers and has not yet translated into mobile devices. For example, Google has a smartphone operating software, Android, to push its products in mobile devices. As Facebook and Google demonstrated free content can drive revenues significantly.

Tumblr has a huge following that creates and shares multimedia posts such as photo (e.g. gif), audio, text, and videos. Tumblr users can also connect their account to Facebook and Twitter for easier sharing.

Marissa Mayer’s vision for Yahoo when she became CEO last summer was to freshen up its sites, trancend to mobile, and increase its revenue. So far, Mayer executes acquisitions to be the first phase of implementing her vision. She engaged in early-stage talks to acquire video, social-networking and advertising technology companies. More recently Yahoo pulled out plans to buy a controlling interest in video website Dailymotion with $200 million because of objections from the French government.

Yahoo has to create a clear product vision, business engineering, and account management to avoid upsetting Tumblr’s user base and monetizing Tumblr’s platform to drive ad sales. Tumblr operates has very low barriers to entry, making Tumblr very susceptible to new entrants. In the first quarter, Facebook saw $219 million in net income on almost $1.5 billion in sales, as mobile advertising soared to about 30% of its total ad revenue. Last year, Twitter generated $288 million in advertising revenue, according to research firm eMarketer Inc.

For more market updates and stock picks, sign up on Tradespoon today!