With Tumblr's untapped ad potential, no wonder Yahoo wants a slice

Amid a decline in its display ads revenue, Yahoo continues to spin its advertising platform. Thankfully, it's just acquired a untapped cash-cow in Tumblr.
Written by Zack Whittaker, Contributor
Image: Yahoo, via CNET

Overnight, Yahoo became important again, and bounced back to relevancy.

A little startup named Tumblr, as you likely already know, was formally acquired by the former Web giant for $1.1 billion on Monday. What's on many minds is exactly what the rate of return will be.

Yahoo has already said that its own and Tumblr's audience don't overlap. Yahoo also wants to make sure it won't "screw it up" and will keep its "hands-off" the social blogging platform — at least in the beginning. (Tumblr has a "porn problem," but that will be fixed over time, according to Yahoo executives. It's a hint that other changes may come in due course.)

Tumblr chief executive David Karp will remain in charge of the company, and the site will not be forced to integrate Yahoo products and features into its own service. The company won't even have the Yahoo logo on Tumblr's website.

With such an apparent hands-off approach to its billion-dollar-buy, what does Yahoo get out of it? Potentially billions of dollars in potential, untapped revenue over the course of the next few years. 

Yahoo's ad platform took a nosedive at its recent first-quarter earnings in April. The Web giant's display ads fell from $511 million in 2012 to $455 million in the same quarter a year later. That's an 11 percent drop since Yahoo chief executive Marissa Mayer took charge. For Yahoo's core business, that dinged the whole quarter. Yahoo's stock tanked following the news.

It's no wonder the company is looking for a way to bolster its ad platform. And Tumblr is the perfect target for such affections.

According to sources speaking to The New York Times, the Yahoo-Tumblr seems to tie in with Yahoo knowing that it would announce poor results in its first-quarter earnings. The broadsheet said the deal came together after less than a month's worth of discussions, pegging the start date near the time Yahoo had its final figures in for its January-March quarter.

Putting ads in any way, shape or form on Tumblr seems to go against the grain of what the blogging platform's chief said in recent years. 

In 2010, Karp said he was "pretty opposed to advertising," and that "it really turns our stomachs." Two years later, he admitted he was an "idiot" and offered a first-step solution to monetizing his company's blogging platform.

Yahoo may have just bought a rough, clunky looking rock, but it knows what lies inside: 24-carat advertising diamonds.

Tumblr hosts close to 110 million blogs with more than 50 billion posts in total. In April, it received more than 13 billion global page views. But the company isn't yet profitable but has a large and growing base of users.  Last year, Tumblr had a mere $13 million in revenue last year, while reports suggest it could generate as much as $100 million this year.

For Yahoo to get its money back for seemingly little return — at least on the face of it, besides potential future Yahoo users — it has two options.

Either it can, as Mayer suggested, seamlessly integrate the 50-billion-plus into Yahoo's search engine, thus generating revenue while boosting traffic. Or, Yahoo has to start plugging its own flailing ad platform to the Tumblr faithful.

Except, it can't. Not just yet, and not as aggressively as the company may want to. Slowly, slowly; softly, softly.

From the Yahoo investor call on Monday, Mayer said: "We see some opportunities to work with bloggers who want ads, to provide ads on their websites. That would always be done with [the blogger's] permission."

She stressed that the advertising load would be "very light," and follow in Tumblr's existing advertising flow.

Of course, this indicates that users would be able to opt-in to the advertising platform. Exactly what the bloggers get out of it remains unclear. But what Yahoo needs to do next is to find that delicate balance of adverts versus Tumblr's fickle, young audience.

Mayer promised not to "screw it up," hinting a cautionary tale from the not-so-distant past. The Web may be free, but in fact it's powered by ads — if you didn't realize, it's why there's one at the top and to the right of this very article (for your viewing pleasure, of course).

But Yahoo has to tread very lightly in the near future to ease in its users to the idea of ads in a a up until now mostly ad-free environment.

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