There's been a lot of negative stuff in the press so far about how Yahoo is making a big blunder with its recent acquisition of Tumblr.
In this article, I'll explain why I think they're all wrong.
But first, let's address the critics, who in general, seem to be focused on two main points:
1. Yahoo Sucks at Integrating Companies (See Flickr)
In 2005, photo sharing site Flickr was at the forefront of the social media revolution. But, as some critics have pointed out, Yahoo's reign has brought with it a complete lack of innovation, and as a result the company failed to do anything interesting with the huge audience Flickr had.
All this is true – however, it happened under Yahoo's previous management, before Marissa Mayer took over the helm. This is backwards-looking, not forwards-looking. Yahoo has vowed "not to Screw up [Tumblr]", and I even expect to see stunning changes to Flickr in the near future as the company looks to re-invigorate its core products.
2. Yahoo Overpaid for Tumblr
According to Quantcast, Tumblr gets about 60 billion U.S. page views per year. Using current prices for ad inventory those page views will spin off $108 million per year if a net $1.79 RPM (revenue per thousand page views) is achieved – so Tumblr's $1B price tag works out to be rougly 10x this year's revenues, which is rich because it's not clear what the monetization model is or how users will react to more ads on their blogs.
Now here's why the critics are wrong (ha ha).
1. Display ads will not automatically ruin Tumblr.
Yes, it's true that showing stupid ads for weird weight loss tricks and finding singles in your area could potentially destroy Tumblr, but who says that Tumblr needs to adopt the Facebook model of ad serving? Google showed that serving relevant ads at the right time not only make them boatloads of money, but also add value to the user experience.
Yahoo CEO Marissa Mayer promises platform monetization will be done in a way that will follow the form and function of the platform "in a way that's meaningful" for users and their expectations. She and Tumblr CEO, David Karp, share a mutual love of pop culture and both desire to deliver online ad content "to be as great as the content".
2. Display ads are way undervalued.
A few months ago, WordStream did a study on average AdWords conversion rates, cost per actions, etc. Google asked us to unpublish the study results, however you can still see the data on third-party sites, like this one.
Basically what we found was that the average Cost-Per-Action for direct response marketing on the Google Display Network was lower than the average CPA for advertising on Google Search in certain industries, like Automotive and Travel.
You read that correctly – display ads were actually beating out search ad performance in certain verticals, when you took into consideration the entire purchase funnel including cost per click and post-click conversion rates.
What's driving this monumental shift are two things:
- Ridiculously expensive CPC's like $50+ for "auto insurance," which makes search marketing pretty pricy in lucrative verticals. Advertisers are getting stretched to the limit here and what's happening is that advertising budget is being shifted towards other options – stuff like display and mobile ads.
- Big advances in display ad targeting, like remarketing to deliver the right ad to right person at right time; this does wonders for advertiser ROI. We work with a bunch of vendors in the space including Google and display ad tech has advanced by leaps and bounds in the last year. I'm talking about stuff like:
- Search Remarketing (Search Companion)
- New Mobile Ad Formats for Display Ads
- Remarketing Lists for Search (RSLA)
- Etc.
And if Google can do this, all YHOO has to do is build-in better ad serving intelligence to increase CTR from the average 0.1% and improve post-click conversion rates by more than the industry average of around 0.4% which is already being done by Google Display Network.– if they build it, advertisers will pay for performance. Just achieving similar numbers could increase the average revenue per page view by 4x, and who says they can't do better.
3. Mobile is Worth Way More than Desktop
Approximately half of Tumblr users access the site content via mobile. Wall Street is completely confused about the value of mobile. Conventional wisdom is that because companies like Facebook and Google have struggled to monetize mobile, that mobile is somehow less valuable.
Here at WordStream, we're finding the opposite to be true: mobile clicks and calls are worth way more to advertisers. We're seeing that:
- The time between "searching" and "taking action" (like buying or ordering something) is much shorter on mobile
- Calls from mobile devices are 4+ times more likely to convert to a sale than someone filling out a standard "contact-us" form
While historically, mobile CPC's have lagged desktop CPC's, we believe that within the next 12 months, this situation will be reversed.
So in summary – billions more eyeballs and better display ad targeting monetization and more valuable mobile clicks = huge value to advertisers = big bucks for YHOO and that perspective is why it makes sense that Yahoo would want to pay over $1B to acquire Tumblr.
This post originated on the WordStream Blog. WordStream provides keyword tools for pay-per click (PPC) and search engine optimization (SEO) aiding in everything from keyword discovery to keyword grouping and organization.
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