If you haven’t heard, Yahoo just acquired Tumblr for $1.1 billion. Everyone is talking about the deal, and the general consensus seems to be that buying a company with little revenue for such a large sum of money is pretty stupid. Critics say that Yahoo is paying too high of a premium for a company with mediocre financials, but they don’t understand what Yahoo is buying.
You can’t plug the rationale for this deal into a spreadsheet. Yahoo isn’t buying revenue, a team, or even technology. Yahoo is buying Tumblr’s market leading position in the social blogging space.
Tumblr’s usage stats are impressive: 300 million unique visitors a month and 120,000 new blogs created every day. This positions Tumblr at the forefront of how people (especially younger people) are sharing content digitally. If (if!) Yahoo can monetize Tumblr’s users and content and if Tumblr can help drive users to other Yahoo properties, this deal will be Yahoo’s best move in a decade.
Additionally, not only is Yahoo getting a leading position in a fast-growing market—it’s also keeping Tumblr away from the likes of Facebook, Google, and other rivals.
This is a similar strategy to the one used by Google with the purchase of YouTube in 2006. At that time, user-generated content was an emerging market, and Google made a $1.65 billion bet that the market would explode and there would be numerous ways for them to monetize YouTube’s content. They were right.
More than likely, it was the same type of thinking that led Yahoo to buy Tumblr. They are betting that the social blogging market will be massive and that Tumblr will be their YouTube. If they are right, this could actually save Yahoo.
Entrepreneurs can learn a valuable lesson from this. The companies that win big are those seen as leaders in certain categories that matter. That is what investors and acquirers pay big money for—it’s not all about revenue or technology.