Yesterday Yahoo! agreed to purchase the very popular blogging site Tumblr for $1.1 billion cash. In terms of today’s high price acquisitions, anything around $1.0 billion does not seem to be that large anymore (respective to the scale of today’s businesses). However, when looking at Tumblr from an ROI perspective, Tumblr only generated about $14 million in revenue in 2012.
$1,100,000,000 / $14,000,000 = 78.57 year ROI
Now the calculation above is very primitive and does not include operating expenses, but even if Tumblr’s revenue grows sharply to let’s say $50,000,000/year, then the ROI will be about 22 years. When thinking about how we will be blogging in 22 years, chances are Tumblr will be a page in a history book. However, in today’s digital world revenue is not the key component in valuing a company.
To name a few famous acquisitions where revenue did not seem to be a factor include: YouTube, Huffington Post, MySpace, and Instagram. Some have been successful such as YouTube (estimated $4 billion revenue in 2013), and Huffington Post (revenue estimated at $50 million). The case of MySpace was a $580 million failure, that later sold for $35 million. Facebook even paid $1.0 billion for Instagram, which had the biggest revenue problem of all; none. To be fair, Instagram is still an experiment. In spite of these revenue problems why would Fox, Facebook, and AOL pay so much? Why would Yahoo! pay over $1 billion for a blogging platform?
Yahoo! decided to pay so much not because of revenue, or the chance to make huge monetary gains from Tumblr. Yahoo! decided to buy Tumblr due to the power of communities. In the digital arena, communities and the size of a website’s user base is pretty much the only number that matters, and Tumblr has 100 million users. Communities that large, whether digital or not, have a huge amount of influence. Online communities are quickly becoming the most valuable assets on the planet. Yahoo! estimates that the Tumblr acquisition can increase their monthly traffic by up to 50%, significantly increasing the influence of Yahoo’s community.
Companies are becoming increasingly valuable based on intangible assets, specifically digital assets. So how valuable is this data, or is it the simply the community itself? What is the value of a single user? What else can we do with these huge online communities?
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