Yahoo's recent $1.1 billion acquisition of Tumblr seems problematic for several reasons. First and foremost, Yahoo overpaid. It's basic financier math: the buyer should pay less than the present value of the seller's future cash flows. And at this time, it is hard to see Tumblr generating near enough cash flows to justify the hefty $1.1 billion price tag. There is clearly a reason why Facebook, Microsoft and Google steered clear of Tumblr. Furthermore, Tumblr sustains a very loyal, close knit community that borders on anti-establishment, will they embrace the Yahoo brand name?
Most importantly, however, is the issue of advertising. In this regard, Tumblr and Yahoo are like water and oil. Tumblr's installed base is so high because its end users are drawn to its aesthetic. More precisely, the lack of advertising. Tumblr's CEO David Karp has shunned the standard, clickable display advertising model, in favor of "interactive campaigns", which, it turns out, have performed poorly from an ROI perspective. Yahoo, on the other hand, is a stalwart of the display advertising industry. It's entire revenue model revolves around building and curating content and then pushing advertising out to its web of content. Karp has been notoriously resistant to Yahoo's display model, and there are major question marks about whether he will succumb post acquisition. Furthermore, Tumblr's pages and content are owned by the bloggers themselves and even if Yahoo imposes its display ad based model on Tumblr, it will have to negotiate some sort of revenue sharing mechanism with the bloggers as well. All this sounds like a recipe for disaster.
Most importantly, however, is the issue of advertising. In this regard, Tumblr and Yahoo are like water and oil. Tumblr's installed base is so high because its end users are drawn to its aesthetic. More precisely, the lack of advertising. Tumblr's CEO David Karp has shunned the standard, clickable display advertising model, in favor of "interactive campaigns", which, it turns out, have performed poorly from an ROI perspective. Yahoo, on the other hand, is a stalwart of the display advertising industry. It's entire revenue model revolves around building and curating content and then pushing advertising out to its web of content. Karp has been notoriously resistant to Yahoo's display model, and there are major question marks about whether he will succumb post acquisition. Furthermore, Tumblr's pages and content are owned by the bloggers themselves and even if Yahoo imposes its display ad based model on Tumblr, it will have to negotiate some sort of revenue sharing mechanism with the bloggers as well. All this sounds like a recipe for disaster.
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