Why Tumblr Is Worth Every Penny of Its $1.1 Billion Price

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On Sunday night, Yahoo! Inc. (NASDAQ:YHOO) CEO Marissa Mayer and Tumblr CEO David Karp reached a deal that Yahoo would acquire the microblogging platform for $1.1 billion. In cash.

Upon hearing this news Sunday night into Monday morning, many old-timers had two questions. First of all, what is Tumblr? And secondly, is it really worth that much money to Yahoo?

Tumblr is a combination of a microblogging platform and a social networking website, with more accounts than either YouTube or Instagram had at the time of their acquisitions. But how is Yahoo spending more for Tumblr than Facebook paid for Instagram and Google paid for YouTube, when Tumblr’s 2012 revenue was only $13 million, and it took $125 million in investor funding?

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The answer lies in the understanding of how Tumblr ultimately differs from these other social networking sites, and how Yahoo and Tumblr plan on doing business together to maximize their success. If Tumblr is in its infancy, then Yahoo is practically geriatric. Tumblr is only just now ready to monetize posts from its 100 million bloggers. By offering sponsored posts, increasing advertising efforts, and beefing up analytic offerings, the platform has a lot to gain, and Yahoo is ready to help Karp gain it. Just as Google Inc. (NASDAQ:GOOG) has helped grow YouTube’s audience, Yahoo believes it can help expand Tumblr’s.

Additionally, what many people (read: parents) do not understand about Tumblr, and what young people do, is that the site is much more than a blogging platform. Once you’ve shared interests on your dashboard, there is ample opportunity to connect with people who share those same interests. Tumblr facilitates this connection easier than any other social networking site thus far.

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As more people recognize Tumblr as a cyber hangout lounge rather than an exclusive hipster stomping ground, the site will likely reach more users. An increase in users means an increase in dashboard feeds, and it’s the easy monetization of these dashboard feeds that can to help make that $1.1 billion worth it.

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