But Wait. Didn’t Yahoo Try a Deal Like This Before? Yahoo’s deal for Tumblr raises questions about its ability to make money by selling ads, among other thorny issues

MAY 20, 2013, 9:00 PM

But Wait. Didn’t Yahoo Try a Deal Like This Before?

By ANDREW ROSS SORKIN

When Yahoo announced its headline-grabbing acquisition, it boasted that the deal gave it access to an “unduplicated” audience of users and that its target was a “popular personal publishing” platform.

“Yahoo will be able to integrate and distribute a powerful set of state-of-the-art editing tools and content published through personal home pages in an array of services,” the company declared.

But Yahoo wasn’t talking about Tumblr. Those quotes came from a news release Yahoo issued in 1999 when it acquired GeoCities, which allowed users to create their own Web pages — not unlike Tumblr — for $3.6 billion in stock. The site was closed in 2009.As investors and analysts size up Yahoo’s latest $1.1 billion acquisition, it is worth reflecting on the GeoCities deal, which has many similarities. Both companies were money losers when they agreed to be acquired. Tumblr had just $13 million in revenue last year, according to reports.

Both companies had loyal followers that quickly left in droves. According to Matt Mullenweg, the founder of WordPress and a competitor, Tumblr users were moving their posts over to WordPress at a rate of 72,000 an hour amid speculation of an impending deal this weekend. (Usually, he said, Tumblr users migrated 400 to 600 posts an hour). Still, for perspective, Tumblr users generate tens of millions of posts a day.

And GeoCities and Tumblr had at one point been averse to accepting advertising. Tumblr’s 26-year-old chief executive (and now multimillionaire), David Karp, said three years ago, “We’re pretty opposed to advertising,” adding that “It turns our stomach.”

The lesson of GeoCities raises this question about Tumblr: How can a company with zero profits (actually, multimillion-dollar losses) and just $13 million in revenue be worth $1.1 billion?

Inside Yahoo, officials dismiss the comparison to GeoCities. Instead, they compare the Tumblr deal to Google’s purchase of YouTube — that is, Yahoo’s management believes that Tumblr is one of a rare few transformative sites on the Internet. Google paid $1.6 billion for YouTube when it too made no money. At the time of that deal, it seemed heretical. Now, it seems genius.

To Yahoo, Tumblr is the equivalent of beachfront property. With more than 100 million user-generated blogs on Tumblr, there is no question that it brings Yahoo a younger audience. It adds a sense of hipness to a company that had lost its sense of cool.

According to Marissa Mayer, Yahoo’s chief executive, who drove this deal, Tumblr brings Yahoo a possible growth engine for the future.

But that’s a big if. It requires Ms. Mayer’s team to execute brilliantly and online users to continue to want to establish ways to communicate outside of places like Facebook and Twitter.

And then there is the pesky issue of selling ads on Tumblr’s pages without upsetting the site’s finicky users. (One user began a petition to block the deal.)

“It is difficult to justify the premium acquisition price for Tumblr given its low levels of revenue,” wrote Doug Anmuth of Barclays Capital in a note to investors. “In addition, we believe Yahoo needs to be careful about the manner in which it monetizes Tumblr, as a significant ad load and the perception of a large corporate owner could potentially alienate Tumblr’s core user base. Though we believe Tumblr’s model does have switching costs for users, we do not view its actual barriers to entry as particularly high.”

If you want to do the math on what it would take for Yahoo to justify the price tag, Brian Pitz, an analyst at Jefferies, has sketched it out. By his count, Yahoo will need to figure out a way to make $127 million a year in profit from Tumblr, meaning the site would have to bring in an additional $950 million annually in advertising revenue.

That’s a big challenge, especially considering that Ms. Mayer pledged that while she planned to add more ads to Tumblr, she would do so mostly on the site’s “dashboard” or newsfeed.

“We would like to look at them and understand how we could introduce ads — in a very light ad load — where the impact is really created, because the ads really fit the users’ expectations and follow the form and function of the dashboard,” Ms. Mayer said.

She said she might add advertising to user pages, but only with the permission of the blogger. That means a lot of Web pages will not be monetized.

And there is the issue of porn. Yes, porn. At least some of Tumblr’s users post images that are not exactly “work safe.” Indeed, Tumblr’s own terms of service allows for such content. Such content could make Tumblr a challenging environment for advertisers.

Tumblr’s users also regularly post copyrighted images and other content Yahoo will have to find a way to police. When Tumblr was just an upstart, content owners were unlikely to pursue claims against the company, but now that it might be owned by a big public corporation, you can bet that copyright owners, some of whom compete with Yahoo, will be contacting their lawyers.

Given all of that, you might expect me to say that Yahoo should have never proposed acquiring Tumblr. But I won’t.

It may actually turn out to be the right bet. The key is recognizing that it is a shoot-the-moon gamble. It might work out. It might not.

And even if it does not work out, analysts note that Yahoo can afford to experiment given the billions of dollars it has in cash.

As Jordan Rohan, an analyst at Stifel Nicolaus, wrote: “Even a squandering of $1.1 billion in cash, however unlikely that might seem to Yahoo management, would only move the sum-of-parts slightly.”

May 20, 2013

A Flashy Bet for Yahoo on a Shift in Social Media

By JENNA WORTHAM

Yahoo’s $1.1 billion proposed acquisition of Tumblr is a huge coup for the young founder of the even younger start-up and a splashy move by Marissa Mayer to shake up her company.

It also heralds a larger shift in social media. Facebook arguably invented modern social networking, and is still the king. But increasingly its approach is seen as passive and outdated as people flock to sites like Tumblr where they can be more actively engaged in creating personal, expressive content to share — and which could potentially translate to advertising dollars.

“People love a stage or a pulpit from which they can broadcast,” S. Shyam Sundar, a director of the Media Effects Research Laboratory at Pennsylvania State University, explained. “The genie is out of the bottle. Everyone loves it and it’s very seductive for users to get online and be a source of content, rather than just consuming passively.”

This is behind the appeal of sites like Tumblr, where millions have created signature blogs; or Reddit, the news aggregator, which is encouraging users to make and upload video content to share; or video sites like YouTube. Also, Vine, a Twitter app that allows people to easily make and post six-second videos has been wildly popular since its debut in January. One of Vine’s creators, Dom Hofmann, said its initial success was “rooted in the simplicity of the tool.”

Snapchat, the messaging application, which lets people add text or draw cartoons on top of photos and videos, is processing upward of 150 million images each day. And Instagram, which Facebook acquired last year, has attracted more than 100 million users in its short life span — letting people add vintage effects and other filters to their photos.

The more services like Vine and Tumblr can “come up with ways to let people control and generate content and project identity,” Mr. Sundar predicted, the more successful they will be.

Still, these newer sites have not yet proved they are moneymakers, which makes Yahoo’s move a big bet. And as much as Tumblr’s sale can be seen as a success story for the small company, it also hints at the darker struggles of a social media service that is rich in users and nothing else.

Plus, Facebook is still a force to be reckoned with. The company has a billion-plus users and generated $5 billion in revenue last year. But except for the Instagram acquisition, Facebook has been slow to introduce tools to let members make and create interesting content beyond uploading photos and videos.

The result is that it has evolved more into a social directory, a kind of yellow pages of the Internet, where people spend time tending to their public image and endlessly tweaking security settings to keep their party pictures private. And signs have begun to emerge that users are becoming bored and disenchanted with the site.

A recent report by Piper Jaffray that surveyed 5,200 American teenagers on their online use found that while Facebook was still the most important media destination for teenagers, its popularity slipped by 9 percent from spring of 2012.

Gene Munster, one of the lead analysts on the survey, said that if anything, the results showed that the taste and interest of Web users, particularly younger ones, was fickle and fleeting.

“It’s not a question of whether or not Facebook will stay relevant,” Mr. Munster said. “On the margin, they will still be relevant. It’s about the potential for declining engagement and what that impact is over the longer-term for making money.”

People have so many news feeds, sites, apps and in-boxes competing for their time, said Kim Celestre, an analyst with Forrester Research, that the sites and services where they are active participants are more likely to hold their attention for longer, attracting advertising dollars. Tumblr says its members spend 24 billion minutes on the site each month.

“Big marketing campaigns are looking to bring people into their brand and immerse them,” she said.

Tumblr, though, has not made much money. It made its priority the sale of premium products, like designer “themes” or formats for blogs, and sponsored content over advertising, neither of which were enough to push it into a net profit. The same appears to be true for a few similarly popular social networking services, like Path, Foursquare and Quora.

It is not clear how any of these sites will make money — unless perhaps they are also purchased by a giant company hoping to revitalize its image and curry favor with a hipper audience of Internet users.

The new social sites have all sorts of different ways of content creation. On Tumblr, users can easily and quickly create a diary or journal of images, GIFs, links and ideas. They can even change their user names each day to evade nosy parents and teachers — something that is impossible on Facebook and becoming more difficult on Twitter and even Instagram.

Some older sites are also joining the creation bandwagon. LinkedIn, the business social network, has begun to encourage its users to contribute blog posts. Gawker is rolling out a comment system, Kinja, that lets readers create and moderate their own conversations and reactions to posts and articles.

BuzzFeed, the hip young news site, is also encouraging its readers to submit their own posts to the site, and make and upload their own GIFs to the service.

People like Kyle Williams, a 32-year-old designer who lives on the Upper East Side, have found themselves drifting away from Facebook in favor of creative tools that encourage them to make things, rather than share every bit of minute detail about their lives.

“Facebook is dying in my social media calendar,” he said. “I hardly tap into that anymore. It’s just so expected and just what my friends are doing. There’s something about the creativity of strangers on these other platforms that seems more interesting and creative, even more than the people I know in real life.”

Mr. Williams said he preferred Vine, Twitter’s new video tool, over all other social media services, even Instagram.

David Karp, the 26-year-old founder of Tumblr, said in an interview that he did not view his microblogging service as a social networking service. “It’s so not my domain,” he said. Instead, he said he views it as a creative technology, like Adobe, which makes Photoshop, among other things, or like Dell or Apple. Each time the company has added a creative functionality, like the ability to upload GIFs or panoramic photos, usage has exploded, he said.

“There is an obsession with social right now,” he said. “But most of the media we enjoy is increasingly fueled by an army of independent creators.”

The 300 million people who visit the site each month come “not because their friends are here,” Mr. Karp said. “It’s because the content they want to consume and make is here.”

 

Yahoo didn’t buy Tumblr. They bought Tumblr’s market position

BY CHRISTOPHER LOCHHEAD 
ON MAY 20, 2013

Critics of Yahoo’s purchase of Tumblr think buying a company with little revenue for $1.1 billion dollars is dumb. They argue Yahoo is paying too high of a premium, based on Tumblr’s financials. These critics do not understand what Yahoo is buying.

The rationale for this acquisition cannot be plugged into a spreadsheet. Yahoo isn’t buying revenue, profits or even technology. Yahoo is buying Tumblr’s market leading position in the social blogging category.

Tumblr has stunning usages stats: 300 million unique visitors a month and 120,000 new blogs created every day. This positions Tumblr at the forefront of how people (especially younger people) are sharing content digitally. If, and some say it’s a big if, Yahoo can monetize Tumblr’s users and content and if Tumblr can help drive users to other Yahoo properties, this deal will be a steal.

Additionally, with this acquisition, Yahoo is playing both offense and defense at the same time. Yahoo is getting a leading position in a fast growing market category while keeping Tumblr away from Facebook, Google, and other rivals.

This strategy is essentially the same one Google used with the purchase of YouTube for $1.65 billion in 2006.  At that time, user-generated content was emerging as a big new market category. Google made a giant bet that the category would explode and there would be numerous ways for them to monetize YouTube’s UGC. They were right.

According to Citi’s Mark Mahaney, Google generates net revenue of approximately $2.4 billion annually from YouTube. More importantly, YouTube is by far the category king in the market for video UGC.  And it looks like the category growth is not slowing. comScore says YouTube is growing 20 percent quarter after quarter. Furthermore, Mahaney estimates YouTube’s revenue is roughly equal to Netflix’s total subscription revenue. All of this means Google will most likely continue to extract the majority of the economics in this large and growing category for a long time.

This is more than likely the type of thinking that lead Yahoo to buy Tumblr. They are betting the category of social blogging will be ginormous and that Tumblr will be their YouTube. If they are right, this purchase could give Yahoo something they need — the dominant position in a high-growth category.

Regardless of how this plays out, two things are very clear.

First, Marissa Mayer has cojones. She’s got Yahoo playing to dominate in the future. Will it work? Who knows. But this move is both smart and forward leaning.

Second, technology entrepreneurs should take heed. The companies that win big are those perceived to be the leader in a category that matters. That is what investors and acquirers pay big premiums for. They do not pay massive premiums for “just” revenue or technology.

 

Why Yahoo’s track record with acquisitions isn’t relevant to Tumblr

BY SARAH LACY 
ON MAY 20, 2013

What a mix of emotions over the Yahoo/Tumblr deal today. In corners of the New York scene there is celebration at a consumer Web company crossing the symbolically important $1 billion mark (although just barely) while also echoes of sad trombone that one of its two most promising consumer startups (the other being Foursquare) failed to become a standalone company. There’s the typical user fear that something great will be destroyed — prompting Yahoo chief Marissa Mayer’s almost defensive “Don’t worry we won’t screw it up” salvo in confirming the deal.

A lot of the press is questioning that — citing past Yahoo acquisitions like Delicious and Flickr that ruined everything great about what they bought. As if Yahoo itself doesn’t have a blemished enough track record, there’s nearly every other tech giant in the world to point to. But such comparisons offer almost no insight to how this will go for a few reasons.

Don’t consider Yahoo’s track record — consider Mayer’s. What Yahoo needs Tumblr to be is a YouTube. Tumblr gives Yahoo a strong stake in user generated content, a far younger, hipper audience to sell ads to, and ton of potential ad inventory. Then there are all the intangibles. If Yahoo has Tumblr it becomes a more attractive company to go work for or sell to.

Mayer knows better than most what made that YouTube deal work so well, as one of the senior members of the Google brain trust until recent years. She doesn’t have the dysfunction of past Yahoo CEOs, and she’s in a far more desperate situation. At Google, she’s had experience making these things work.

Consider the context of the deal. Those previous deals were done at a time when Yahoo was far less beleaguered than it is today. Yahoo is desperate for a success story. The Yahoo of the mid-2000s was playing around with user-generated content and could afford to squash what it purchased. The Yahoo of today cannot. This has to be the great hope — the future. The glimmer of hip and modern in a company that’s still essentially peddling the same portal product only now on iPhones. Everyone is waiting for Yahoo to fail, and the Yahoo team knows it. If Mayer has any ability at all as a CEO, she won’t let Yahoo ruin Tumblr because of all that’s riding on it. So much of Yahoo’s position in the market isn’t her doing and, sadly, isn’t in her control to fix. This one is.

And then there’s the price tag of the deal. A sub-$50-million deal just doesn’t have the level of strategic importance of a $1 billion deal. It’s a smaller injection of startup DNA into a company. Its business is far less baked if it’s selling for that small of an amount, and its founders likely have less clout. That all makes it harder to fight the inevitable laws of big company physics that squash small teams. There’s symbolic importance of a price tag, and a company that is valued at less than $50 million can die without someone losing their job or a stock price collapsing. If a big company can screw something up without repercussions, it most likely will.

The track record between acquisitions in tech that worked and didn’t work doesn’t always correspond to the amount paid, but they frequently do. Consider the big companies we consider “good” at this — or at least better than Yahoo. Look at eBay: Smaller deals like StumbleUpon were mostly neglected; PayPal was one of the best acquisitions in the history of the Web. And while the monster purchase of Skype made little sense and was spun back out, eBay didn’t destroy it in the process. Look at Google: It’s stunned many people (me included) by keeping YouTube independent and helping it take on even more cultural importance. Meanwhile, smaller bets like Blogger and Dodgeball fared poorly.

When it comes to Amazon, people have criticized the company for doing little with IMDb, but it’s left Zappos alone to keep its own quirky culture customers loved, even indulging Tony Hsieh’s $350 million Downtown Vegas experiment. Even Facebook — one of the best companies at sucking acquired talent into the Facebook borg while killing the acquired products — took a different tack with Instagram. It erred when it introduced ads too aggressively — and quickly back-pedaled.

Don’t get me wrong, I don’t think Tumblr can save Yahoo. I still think the company continues its slide into irrelevance — although maybe a bit slower now. But Yahoo won’t kill Tumblr. It won’t innovate on it much, but it’ll find a way to turn it into a larger business, and it’ll be a good custodian of what users love until something better comes along.

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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