It is too soon to confirm Yahoo’s $1.1 billion acquisition of micro-blogging site Tumblr as a complete change in strategy, as it still has plenty of cash to spend and has been knocking on a lot of doors lately. But it does signal an attempt to make up lost ground in one of its three key target sectors for its online ambitions – social networking where it appeared to have left it far too late.
Having been left by the wayside by Google in search, it has also failed to make much impact in its other two target sectors, mobility and online TV. The Tumblr acquisition does provide some opportunities in mobility, while for IP video it has been recently pursuing Hulu, while being rebuffed in its attempts to acquire a majority stake in the French online video site Dailymotion from Orange-France Telecom, after objections by the French Ministry of Culture.
The government, which owns 27% of Orange, voiced misgivings over a US firm taking over one of France’s few preeminent internet companies, in echoes of the EBU’s campaign to have TV excluded from trade talks between the EU and US.
The Tumblr acquisition is the biggest and boldest since Marissa Mayer moved from Google to take over as Yahoo CEO in July 2012, coming in at a time when there was cash to spend. That was the result of Yahoo’s one really successful move over the last decade, its acquisition of a 40% stake in Chinese search engine and e-commerce site Alibaba for $1 billion in 2005. Since then on the back of China’s economic boom and online proliferation Alibaba has mushroomed to become the world’s biggest e-retailer, achieving $170 billion sales in 2012, more than Amazon and eBay combined. Yahoo cashed its stake for $7.6bn early last year, selling it back to the Alibaba Group, representing very good business and generating a windfall that could provide Yahoo with its last chance to regain its position at the top table of online players.
To do that Mayer knows she must be bold and the Tumblr buy is a gamble, given that the site only made $13 million in 2012, so Yahoo is paying a whopping 85 fold multiple of that. The tag is also a significant premium on its recent $800 million valuation when it last raised money from private investors, and is the largest acquisition of a social networking company, surpassing Facebook’s $1 billion purchase of photo sharing site Instagram last year.
But there are not many opportunities to get a fast leg up into social networking and Tumblr is one of the very few active fast growing sites that appears to have a winning formula for competing against, or to an extent co-existing with, the big two of Twitter and Facebook. The graveyard of social networking history is littered with corpses of ventures that expired through growing inactivity, despite having, on paper, large numbers of users. At present Tumblr is gaining in activity with 108 million blogs now hosted and over 50 billion posts. The appeal has been based on simplicity in combining blogging with social networking, adopting a Twitter like formula in allowing users to follow the blogs of others. It has a dashboard interface in which posts of followed blogs appear with the option to post content, which can include video. There are 110 million registered users but not all of these are active, and probably around 40 million visit its dashboard at least once a month. Yahoo’s claim to have acquired 300 million new users is clearly hyperbole.
Yahoo then faces the eternal question of how to convert these new eyeballs into money, without alienating users in the process. This is a question Tumblr itself has failed to answer so far, and after initially resisting advertising introduced to them on a limited scale in April 2012. Mayer has now stated she will work with Yahoo to create ads that “are seamless and enhance the user experience”.
The problem here is that Yahoo is up against Google, which dominates the online advertising sector, with its ad revenues up 50% to $43.7 billion in 2012. Meanwhile Yahoo has seen its ad sales slip, with display revenues falling by 11% to $455 million for Q1 2013, so running at about $1.8 billion a year, now less than 5% of Google’s. This resulted from a 7% decline in the number of ads sold combined with a 2% fall in the price per ad. Even Google has suffered from the latter, with the growth in mobile advertising bringing down prices per click.
Given the nature of Tumblr’s activity it does not look likely it will ever become a major source of conventional online advertising revenue anyway. The motive for paying $1.1 billion can only therefore be related to the opportunities for bringing in new revenues from content, including user generated of course but also from other premium sources. The deal increases the logic of Yahoo’s attempts to cut into the content scene by acquiring Hulu and whatever happens we can expect much of its remaining cash mountain to go in that direction. So the Tumblr deal does signify a shift in strategy away from over reliance on advertising towards content. It may not find the going much easier there.