When Yahoo! Inc. (YHOO) purchased Tumblr for $1.1 billion in 2013, many analysts compared the deal to Facebook Inc’s (FB) billion-dollar purchase of Instagram.
Unfortunately for Yahoo stock investors, the Tumblr deal hasn’t worked out quite as well. Last month, YHOO said it took a $230 million impairment charge related to the blogging platform. Meanwhile, Instagram’s business is booming.
In an effort to better monetize Tumblr, Yahoo is considering partnering with Facebook to place ads on Tumblr, according to The Information.
The deal would tap Facebook’s Audience Network, which extends Facebook ads to other apps and the mobile web. Yahoo has a similar deal in place with Google — the Alphabet Inc (GOOG, GOOGL) subsidiary — for its search business.
Yahoo Stock Needs All the Help it Can Get
Tumblr ads are pretty sparse right now. That’s because YHOO is only able to sell 10% to 15% of Tumblr’s ad inventory on its own. Partnering with a programmatic ad network like Facebook Audience Network will allow Tumblr to fill in the rest of its inventory, but the revenue and margins on those units will be significantly lower.
Still, for a company that was worth $1.1 billion to CEO Marissa Mayer and Yahoo stock investors less than three years ago, it ought to be churning out more revenue that it does. Any ad fill from FB will be incremental to ad sales from Tumblr’s sales team.
Tumblr recently restructured its sales group, regaining independence from Yahoo after a botched integration. Additionally, it has relaxed its rules for advertisers. It previously required advertisers to own a blog on the network, but that’s no longer the case.
Those changes open the door for Tumblr to attract more advertisers and partner with other ad suppliers like Facebook.
Of course, the problem isn’t confined to Tumblr. Yahoo already partners with Google to power search advertisements on its platform. In return it splits revenue with Google although the exact terms of the deal aren’t clear. Google typically takes 30% to 32% of revenue for ads on small publisher’s websites, but the deal in place may be more favorable for Yahoo. Facebook takes a similar cut for Facebook Audience Network ads.
YHOO Stock’s Failure Is Facebook’s Opportunity
A deal with Tumblr would be a big win for Facebook’s Audience Network. Tumblr has around 555 million monthly active users, according to Statista. And with 85% of 90% of potential ad inventory left unfilled, that’s a lot of potential revenue for Facebook’s burgeoning Audience Network.
Last quarter, Facebook announced that FAN reached a $1 billion annual run rate after about 18 months of operation. In January, it expanded the network to the mobile web. A deal with Tumblr would provide an opportunity for Facebook to showcase the product, showing publishers and developers that it’s capable of monetizing the app better than YHOO could do itself.
At this point, Yahoo investors should be welcoming any help FB is willing to provide. YHOO’s failure to monetize Tumblr effectively is evidenced in the 20% write down the company has already taken on the acquisition, and it could still take another hit.
While Yahoo stock investors won’t get maximum value on Tumblr with a partnership with Facebook, it would at least get something out of the 85% to 90% of vacant ad inventory.
Additionally, displaying the efficacy of Tumblr — even if it requires help from FB — could help Yahoo sell off its core business.
As of this writing, Adam Levy held no positions in any of the companies mentioned.
