I got an email on Monday from Larry Kim, the founder and CTO of WordStream in Boston. His company does search marketing and research. It sparked a long exchange between us.
He has a positive take on the Yahoo purchase of Tumblr for $1.1 billion for 2 reasons which jumped out to me and which – to my eyes – haven’t really been discussed:
1. Display Ads are getting better and better relative to search.
Google has long seemed invincible with its search marketing ad engine. But last year, WordStream published research that showed that display ads out-perform search ads in certain industries like travel and automotive, and are close behind in most other industries. It’s because the display ad targeting is getting so much smarter and because search ads are not exactly cheap. Google asked WordStream to take down its research on this point, but here is a link to another study showing this result.
So why is this?
In Larry’s view, there are 2 factors:
– Some CPCs are getting just too high in search marketing. Auto insurance now has an average CPC of $50, for example. Larry believes many advertisers are maxing out their search marketing budgets and looking to increase spend in display and mobile instead.
– Display ad targeting technology has become a lot better. If Yahoo! – under Marissa’s leadership and knowledge of what Google is doing to improve their display ad targeting – can fractionally increase their click-through rates (CTR) for display ads and the post-click conversion rates, Larry believes Yahoo!’s revenue per page could increase 4x.
Now, if Yahoo makes these improvements and then applies them to Tumblr’s 300 million users, you’re talking about significant revenue coming from this new property — especially if Tumblr keeps up its recent explosion in growth.
2. Mobile Ads could be on the cusp of out-performing Desktop Ads.
This is the point that Larry seems to be out on a limb relative to the conventional wisdom these days. Most think that all the big ad-based websites like Yahoo! and AOL are struggling with the move from Desktop Dollars to Mobile Dimes. Given the form factor of mobile devices relative to desktops, it seems to be impossible to replicate the value of display ads for instance on mobile compared to the old web world.
But, hold on, says Larry (who’s blogged more about this here). WordStream thinks, based on its clients, that calls generated from mobile are 4x more likely to convert to sale/order than a desktop user filling out a “contact us” form. Their view is that mobile ad clicks (and calls) will cost more than desktop clicks in the next 6-12 months.
He also points to the fact that the time between searching and action (like ordering) on mobile is much shorter than on desktop.
Given this, Larry believes it’s just a matter of time before mobile CPCs pass desktop CPCs and he thinks it will happen within a year.
So, what does Larry think Tumblr is worth to Yahoo!? His logic breaks down as follows:
– Estimates are that Tumblr does around 16 billion page views per month
– Assume Yahoo! can get to a 0.4% CTR over time, which is in the range of what the Google Display Network averages. (Facebook is below 0.1% CTR.)
– Google’s average CPC for search and display is $0.53 and $0.35 respectively in the last year (those are worldwide numbers and not USA-only)
– But recall that Larry believes mobile is worth more because it converts much better
– So depending how you model the CPCs, and the growth in traffic, you can get to a big number. Current traffic levels suggest an annual run rate of $268 million in year 1 of Tumblr being part of Yahoo! (using display CPCs). If the CPCs increase like Larry thinks (more to a search CPC), you’re talking about an annual run rate over $400 million at today’s traffic .
There are actually great mobile “native ads” running on Tumblr today (for several movies for example). We will have to see how they monetize but they certainly look much more attractive than the typical Facebook ads you see on mobile.
It’s truly not bombastic to suggest that Tumblr could be like Yahoo!’s YouTube.
In 2005, Google bought YouTube for $1.6 billion. This year, YouTube is expected to generate $4 billion in revenues and $800 million in operating income.
I don’t know if any of the bloggers who ran DCF analysis at the time or calculated Google’s WACC are still around, but that was a good purchase even though YouTube made no money at the time.
Tumblr may not grow as much as YouTube has, but it looks solid at the moment and Yahoo! has gone out of its way to avoid the mistakes that they made with GeoCities or which Fox made with MySpace.
If things roll out the way Larry expects, it won’t take long for that $1.1 billion cash to get paid back to Yahoo!
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