How Yahoo Will Wring $1.1B Out of Tumblr

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How Yahoo Will Wring $1.1B Out of Tumblr

 Photo: Andrew White/Wired

Yahoo just laid down a $1.1 billion cash bet it can make Tumblr, the indie blogging-and-arguing platform, a profitable part of its advertising business. Here are some back-of-the-envelope calculations of what has to happen for that bet to pay off.

Sell out 60 percent of the current “Radar” section: Tumblr says it delivers more than 120 million impressions per day through its “Radar,” a showcase of interesting Tumblr posts that appears to the right of the Tumblr “Dashboard,” the content stream consumed by users that contains posts from Tumblr blogs they follow. Sponsors can buy their way into Radar at a rate of $4.16 per thousand impression, according to one published report. If Tumblr were able and willing to sell out its entire inventory of Radar impressions, it would have a nice annual revenue stream worth upwards of $182.5 million.

Now, Yahoo needs to make around $108 million per year off Tumblr to cover its opportunity cost, former Google and NBC exec John Saroff figures (in an analysis I heartily recommend). So it “only” needs to sell around 60 percent of Radar capacity.

Trouble is, selling all or even a majority of Radar’s inventory isn’t really possible as Radar is now configured, with one content slot to the right of the main content stream. The whole reason Tumblr can demand a $4+ CPM for ads in this slot is that users have been trained to look there for organic, unpaid content, and it’s a standalone showcase for a single piece of content. To sell around 60 percent of current capacity, Tumblr would need to add slots so it would show two or three pieces of content at a time. This would probably reduce clickthrough rates and bring down the CPM – hopefully not too much to erase the doubling or tripling of inventory.

Selling Radar slots is also complicated by the fact that only Tumblr posts can go in those slots, so Tumblr can only sell these sponsored positions to brands that have (or are willing to create) their own Tumblr, and who are willing to use Tumblr posts as their ads.

Convince top Tumblr bloggers to run ads: Tumblr could enable individual users to “flip a switch” and run advertising, either in the form of cheap network/remnant ads or premium sponsored posts. With around 79 billion U.S. pageviews annually, Tumblr would need to sell all domestic inventory at a CPM of around $1.37 to get to $108 million per year entirely off U.S. network ads.

This sort of CPM is entirely plausible, Saroff says. But of course Tumblr can’t sell its full U.S. inventory. Many Tumblr owners would balk at running ads, especially of the cheap-looking remnant sort; Tumblr CEO David Karp himself famously said advertising “turns our stomachs” in 2010 before recanting. And other Tumblr owners will never be eligible for ads because they run porn or other such content, which Yahoo has already said will be excluded from its advertising programs.

To make up the difference, Tumblr will need to grow traffic, take advertising international or move upmarket. Indeed, if the blog network can build bridges between premium advertisers and its more elite contributors, it could become a home for crafted ads, like sponsored posts, that are more palatable to finicky members.

Sell 31 million ads annually to small businesses and egotists: There are the big brand advertisers mentioned above and then there are the small-time, self service advertising customers, often small business owners or individuals. Tumblr has options for the latter group, too: For $2, they can ensure a post gets a highlight sticker so it stands out in followers’ Tumblr Dashboards, and for $5 they can a post to the top of followers’ dashboards. To get to $108 million exclusively on these small-time ad options, Tumblr would need to sell around 31 million promoted posts a year, assuming buyers divide evenly between pinned posts and the cheaper highlighted posts.

Before you scoff at that notion, consider that promoting small business posts to existing followers has been the focus of a major revenue push for Facebook as the social media giant tries to grow its more than $5 billion in annual revenue.

Some combination of the above: Of course, Yahoo and its new toy Tumblr probably aren’t banking on any one of the above revenue opportunities so much as a combination – plus new revenue lines (like video ads) not yet on the table. Some creativity will be required to make the Tumblr acquisition pay off – but not as much as you might think at first blush.

Between Tumblr’s massive user base and Yahoo’s many available ad options, Yahoo should be able to make its acquisition pencil. The trick is not alienating too many Tumblr-ers in the process.

Story by Ryan Tate, Senior writer at Wired Business