Yahoo Could Score A Big Win By Letting Facebook Sell Ads On Tumblr

  • Yahoo is considering a deal that will allow Facebook to place its ads on Tumblr.
  • Tumblr has been a disappointment for Yahoo despite its hefty price tag.
  • The deal has good potential to substantially increase Tumblr's and Yahoo's ad revenue due to Facebook's high Return On Investment (ROI) in online marketing.

Reports have emerged that Yahoo (NASDAQ:YHOO) is mulling a move that will allow rival ad company Facebook (NASDAQ:FB) to display its ads within Tumblr’s popular mobile app with the two companies splitting the resulting revenue. If Yahoo’s board gives thumbs up to such a deal, it would come as a welcome respite for Yahoo which has lost its once dominant position in online ads to rivals including social media companies and even Microsoft’s MSFT Bing Search. Yahoo is heavily reliant on ads to drive its top line, with the company realizing ad revenue of $3.37B, or 68% of its revenue, from search ads and display ads in 2015.

Yahoo’s ad revenue fell 2.2% Y/Y in 2015 with eMarketer projecting that the metric will grow an anemic 2.7% in 2016 and 3.0% in 2017.

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Source: eMarketer

Yahoo bought Tumblr for $1.1B in 2013. But current indications are that the company is having trouble trying to monetize the site, despite the fact that Tumblr boasts of more than 500 million monthly active users. Tumblr failed to meet Yahoo’s revenue target of $100M in 2015 leading to a large write-off, which points to a really poor performance considering that a company like Twitter (NYSE:TWTR) with 305 million MAUs finished 2015 with revenue of $2.2B. Analysts have posited several reasons why Tumblr has been such a disappointment for Yahoo. But perhaps the biggest reason why Tumblr is unable to make decent money can be chalked up to the kind of return on investment that marketers get by advertising on Yahoo sites.

A recent RBC survey of more than 2,000 marketers found that Google and Facebook gave the best ROIs in online marketing while Yahoo and AOL were ranked dead last. Meanwhile, Facebook was ranked ahead of even Google in some categories with 62% of marketers who advertise on FB saying they were likely to increase their ad spend on the platform in 2016 compared with 54% for marketers on Google.

Facebook boasts some of the best ad rates (CPM and CPC) in the online ad space. This is good news for Yahoo because a Tumblr deal would involve Facebook’s Audience Network, a platform that Facebook recently revealed was on a $1B annual revenue run rate (including publisher payments). In comparison, Yahoo’s own mobile ad network Flurry is only a third the size of Facebook's Audience Network.

The biggest reason why Facebook ads give such good ROI is mainly because of Facebook’s nature as a social platform. Facebook is able to leverage its huge cache of user data including their likes, preferences, and dislikes on its platform and use this information to design highly relevant ads that target the right users.

Tumblr reportedly only manages to sell 10%-20% of its ad inventory, which points to a serious credibility problem with marketers. As long as marketers associate Tumblr with Yahoo, the social site might have a hard time attracting decent ad rates or even selling enough of its ad inventory. There is a good chance that Facebook will bring at least some of its ad tools to Tumblr which could go a long way in changing how marketers perceive and advertise on the social site.

Ultimately Yahoo needs to do everything it can to make itself appealing to a potential buyer. Although Yahoo rarely talks about its user growth trends nowadays, a recent report said that the only Yahoo sites that were seeing positive user growth include Tumblr, Yahoo Sports, and Yahoo Weather while other platforms including Yahoo Mail, Yahoo Search, and Yahoo Homepage were all posting negative growth. Anyone who acquires Yahoo is likely to pay close attention to the company’s user growth problem which it could leverage during negotiations to get a more favorable price. If Tumblr, however, is able to finally start making decent money courtesy of a Facebook deal, then Yahoo might still be able to attract a decent price.

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