If Yahoo! buys Tumblr for $1.1 billion — a deal that may get approved as soon as Sunday night according to AllThingsD — one fact is likely to get cited a lot when the acquisition is announced: That Tumblr had only $13 million in revenue in 2012, after taking $125 million in investor funding.
With lousy economics like that, why would Yahoo even consider such a high price?
It's worth comparing a putative Yahoo-Tumblr deal to Facebook's $1 billion acquisition of Instagram last year. And not simply because the headline price is the similar.
It turns out there are a lot of similarities between the way Yahoo and Tumblr might work together, and the way Facebook and Instagram now work together.
Clearly, Tumblr's business is embryonic at best.
Tumblr CEO David Karp used to be actively disinterested in advertising. (He once said it "turns our stomachs.") He preferred to perfect Tumblr's user experience and scale up its member base. Back in 2011, Tumblr's sponsorship efforts were a joke. It only began taking ad dollars a year ago.
More recently, however, Tumblr has taken several steps that show it is serious about monetizing its 90 million daily posts from its 100 million bloggers. A lot of them are reminiscent of Facebook's path to its IPO, and after that the acquisition of Instagram:
- Tumblr has started offering sponsored posts in the feeds of mobile users, just like Facebook does with "sponsored stories."
- It hired a new head of ad sales, Lee Brown, from Groupon. When Facebook hired Carolyn Everson as head of its ad sales, from Microsoft, it changed the way ad agencies viewed the site — and money poured in.
- Tumblr has named a Creative A-List of agencies it likes to work with — a bit like Facebook's Preferred Marketing Developer list of approved ad suppliers.
- Tumblr has begun to beef up its analytic offerings— because advertisers don't want to touch media if they can't measure what they're getting for their money.
- Tumblr suffers from the same initial problem advertisers had with Facebook: That once brands have made a few posts on their Tumblr, they get bored of using the free tools and their activity drops off. Creating free content that's cool and engaging is difficult and time consuming. It's easier to just advertise and pay for the forced exposure.
- And advertisers have grumbled about not "getting" Tumblr, just as they used to about Facebook. Digiday reported, "One provider of social management tools said literally no clients had pushed for Tumblr to be included. That’s a major red flag."
What most people misunderstand about Tumblr, and what Yahoo may feel is worth paying for, is that Tumblr is NOT best described as a "blogging platform."
Sure, users have blogs on which they post things. But once you're a Tumblr user, you find that the real fun of Tumblr is building a news feed that only you can see from other users you like. Want an all-skateboarding-all-the-time news feed? Tumblr. As members begin to follow each other, they start messaging each other.
The real party on Tumblr is going on behind the dashboard, not on the blogs' outer faces.
That party is why Tumblr has become so big among young people — it's basically a cool social hangout that their parents haven't figured out yet.
Tumblr's dashboard feeds are obviously easy to monetize in the future, just as Facebook and Instagram's friend feeds are and will be.
Which is why $1 billion suddenly doesn't seem completely crazy for a $13 million startup.
SEE ALSO: Here's Tumblr's Total Revenue For 2012 — And How It Will Make A Profit In 2013
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