Chris Woodcock picks apart Yahoo’s $1.1bn acquisition of Tumblr and asks – was it really a good deal?
Since Yahoo announced its $1.1bn bid for Tumblr on Sunday there has been no shortage of raised eyebrows, furrowed brows and watering eyes.
Is it possible to understand such a large sum of money being spent on a small internet property with almost no revenue? Are we headed towards internet bubble 2.0?
What exactly is Yahoo getting for $1.1 billion?
For sure they get users and content. Yahoo’s business model is to sell space to advertisers on its various sites. As much as this portal approach is the oldest of internet business models, they (somehow) have 700m unique monthly visitors.
When you think Facebook paid the same amount for Instagram and its 30m users, Tumblr looks good value
Notwithstanding their promise not to “screw it up” at Tumblr, 300 million unique monthly users is a lot of traffic to which to apply this model. Yahoo’s current visitors generate $5 billion every year for the firm, so paying $1 billion for another 300 million might be called reasonable.
When you think Facebook paid the same amount for Instagram and its 30m users, Tumblr looks good value.
But they also get some softer assets, like technological and design talent.
“David Karp (Tumblr’s founder) always had a vision for where he wanted to go next,” said a former colleague. “He has a lot of Steve Jobs-like qualities. He pushed me to do amazing work that I didn’t think was possible.”
Tumblr has 176 employees in total and are known for a strong user experience. A quick look at the Yahoo homepage will tell you they could do with a few lessons.
What is more, Yahoo has never been a great place for technologists, and yet in Marissa Mayer they have a new CEO who is just that, having cut her teeth at Google. With Tumblr they continue that shift in focus, building on the purchase of Summly earlier this year. The move for Tumblr is surely part of a much bigger strategic shift taking place rather than purely adding eyeballs for its advertisers.
Investors care more about Yahoo’s larger assets
The stock market was nonplussed on Monday after an initial flurry of activity, which is not surprising if you follow the company.
Yahoo has large stakes in several much more interesting assets such as Alibaba in China, and they dwarf the value of the internet advertising business. As interesting as it will be to see of Ms Mayer can reinvent the core business, investors are much more focused on selling these stakes for windfall profits.
Google’s basket approach worked – could it save Yahoo?
Are we heading for a bubble then? I do not think so at this stage. Technology companies more than any other industry have the ability to rise from nothing incredibly quickly. It often makes sense in tech to go for the moonshot even if it looks expensive at the time. That is what Google managed with Android, despite having struggled with Blogger, Picasa, and even YouTube. Academics have verified this ‘basket’ approach pays off over time.
Good news for startups
It sometimes leads to some controversial acquisitions, but this wider perspective is crucial to understand some of the investments that are made in tech.
Undoubtedly, Yahoo buying Tumblr is great news for startups.
It gives private equity and venture capital the confidence to back smaller firms knowing they have a good chance to find their exit. The top five technology firms are sitting on a staggering $500 billion of cash, and they will continue to look for the next big trend, technology or individual breaking the mould outside of the Silicon Valley.