The meteoric rise and precipitous fall of Tumblr will become a business school case study displaying how volatile trends in social media digestion left a few beached whales (unicorns?) in the adolescence of the internet age.
Automattic Buys Tumblr For Just $3m?
Automattic, which is the owner of the blog hosting platform WordPress, bought Tumblr on August 13 for just $3M.
In 2017, Nathan Latka caught up with Matt Mullenweg, founder and CEO of Automattic to discuss.
They discussed how it was founded, the subsidiary companies, their rejected acquisition, funding rounds, and future plans.
Matt went from playing Jazz gigs in Houston to creating the most widely used blog hosting platform in the world. WordPress started in 2003 and enables anyone to publish content on the internet in a similar fashion to what would have cost the New York Times thousands of dollars just a few years before.
Automattic owns WordPress, Jetpack, and Woocommerce. Each subsidiary is cohesively integrated together, sold separately or packaged together. WordPress’s hosting platform is pure play SaaS. Jetpack’s blogging tools layer onto WordPress for use if you are using a different hosting site (GoDaddy, Rackspace, etc.). Finally, Woocommerce integrates e-commerce enablement software into WordPress.
Revenues coming from the three products are 99% subscription and at the time of the interview were well into the $100M range.
Similar to Tumblr, in 2008 Automattic received a compelling offer of $200M based on significant engagement but negligible revenue. Matt turned it down believing that being independent gave the company a better chance to grow into its potential. I wonder how David Karp feels about being acquired by Yahoo. Would staying independent like Automattic would have changed the end result?
Before diving in, lets take a look at Tumblr back in 2010.
Before the Yahoo Acquisition
On the other hand, they had little revenue to speak of and were under the impression that a path to monetization would eventually present itself. That, or an acquisition by a deep pocketed media company would satisfy initial investors while creating post acquisition synergies for the buyer.
The latter would occur in 2013. With Marissa Mayer at the helm, Yahoo was at a perplexing point in its history trying to stay relevant in a new age dominated by Google and Facebook. Tumblr was “cool” with a malleable user base of wealthy 18 to 34 year olds and advertisers salivating at the chance to get into their wallets. Still, however, the mechanism to do so was not set in stone.
Would they monetize with content marketing, User Generated Content, or a new set of advertising products entirely? The possibilities were vast, the timeline to figure it out was thin, and the stakes were high.
$1.1 Billion Acquisition by Yahoo
Yahoo went ahead with the acquisition, buying Tumblr for $1.1B in June of 2013. It was a social media darling that connected e-commerce to digital content in an unobtrusive way. Creatives were able to share and edit content without being limited by functionality confines like a Facebook text box.
The acquisition ran into issues almost immediately. David Karp’s (Tumblr Founder) distaste for advertisements and Yahoo’s need to monetize their $1.1B investment led to friction. In 2016 Yahoo wrote down $721M of the Tumblr investment. Next, when Verizon Media bought Yahoo in 2017 the company was likely nothing more than a line item on the balance sheet.
Part of Tumblr’s failure was the company’s lack of ability to generate innovative ad products custom to its platform and user base. But there could be a deeper reason why it failed so egregiously. With all the similar characteristics, why is Instagram one of the most successful companies since the recession while Tumblr’s value vanished like a 2008 collatorized debt obligation?
Why Did Instagram Work and Tumblr Didn’t?
Both have offered unprecedented discovery capabilities for people and places through the use of images. They both also offer a platform for people to publish content with an impressionable audience. However, the users are on each platform for different reasons. The psychology of why they are on the different platforms makes one an advertising goldmine and the other a cautionary tale.
Instagram influencers are on the platform to grow a following and monetize their following. It’s that simple. Each post, each hashtag, and each mention is to drive more engagement so their personal brand is more valuable. The social Instagram user is on the platform to engage with friends online and share their experiences. They make new friends with the purpose of connecting in the physical world as well (DM’s joke not intended).
The human element to Instagram connects the online platform to the physical world which is what makes it so valuable to advertisers. It is why the ROI is so high on Instagram ad’s, it is what has allowed Instagram influencers to make a living, and it is what has enabled some D2C brands to become successful overnight. The psychological connection of “that guy looks cool and hangs out with cool people, I should buy those sunglasses” was tapped into decades ago.
The difference is the technology enables a more authentic connection compared to other traditional advertising mechanisms. That may be obvious, but the reason why users are on Instagram in the first place is essential to making that connection convert to purchases. Tumblr, as mentioned earlier, had at one point 13 billion monthly users. That user base proved out to be less monetizeable even with its ideal demographic of wealthy 18 to 34 year-olds. Why?
Tumblr users post without the expectation that their presence on Tumblr will alter their lives outside of Tumblr. The relationships built on Tumblr usually exist exclusively within the platform. Tumblr users do not post to impress the friends they hangout with. They generally do not care about growing their following, but instead are looking to connect with other microbloggers that share similar interests.
Many of them use pseudonyms and there is no connection between their Tumblr portfolio to their physical identity. That type of user doesn’t convert to paid customers the same way an Instagram user does because of their purpose for scrolling the feed in the first place.
I’d argue that Tumblr’s user base is equally responsible to the company’s downfall as their inability to create effective advertisement products.
WordPress Powers 34% of the World’s Websites
After denying the acquisition offer, Matt then went back to his early investors. Now with an established valuation, he raised the growth capital he needed to scale the company into what it is today. This turned out to be the right decision. Their next round would be at a valuation north of $1B five years later in 2013. Today, 34% of the world’s websites use Automattic’s software.
Staying private and receiving growth oriented investments as opposed to selling to a larger corporation has given Matt the ability to run the company in line with his vision. The company has made 27 buy side investments to date. None, however, caused more attention than their recent acquisition of Tumblr. Not because the size of the transaction, not because of the clear synergies of the combined products, but because of the eerie reminder that as quickly as a billion dollars of value can be created it can also be lost.
Is Automattic the Right Buyer for Tumblr?
The consensus from other articles is that Automattic will use Tumblr as a testing platform for new products. That could be really valuable as Tumblr has more daily active users than WordPress has monthly active users. How is that possible?
It’s amazing how a platform with so much engagement is so inefficiently monetized. To summarize a recent article Matt gave to The Verge, he is looking to power the back end of Tumblr with WordPress tech, find a better way to enable ad’s on the platform, and re-create the old version of blogging on a mobile-centric platform.
What drives WordPress’s value is how many people or companies are publishing content and being hosted on WordPress’s platform. Generally, people only continue to publish content if their blog creates a following. Tumblr is the exception to this rule.
Their users’ posting frequency is much less influenced by followers or outside engagement than any other platform. Is the real reason Matt made this acquisition to find out why? He could then apply his findings to limit retail customer churn on WordPress. Just a thought…