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Does Yahoo’s Tumblr ‘screw up’ augur the end of another digital bubble?

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By Ronan Shields | Digital Editor

July 25, 2016 | 6 min read

The Drum's digital editor Ronan Shields points out how Yahoo's dramatic Tumblr write down is indicative of a major correction in the industry's ad tech sector.

Yahoo

Perhaps the most shocking element of yesterday’s Yahoo revelations was the debilitating effects of its Tumblr write down on its overall financial performance?

Despite annual increases in its search, mobile, and MAVENs revenue during the second quarter (which amounted to $1.3bn) of this year, a downgrade in the valuation of Tumblr (to the tune of $482m) meant its overall losses widened to $440m, compared to just $20m 12 months beforehand.

A promise to ‘not screw it up’ unfulfilled

This is quite damning, especially given the initial promise of Yahoo CEO Marissa Mayer to “not screw it up” when first purchasing the picture blogging service back in 2013, as her rapid acquisition strategy gathered pace in the early days of her four-year (and counting) time at the helm of Yahoo.

Activist investors had been drawing question marks under the purchase of Tumblr as far back as 2014, although Mayer was quick to highlight favorable statistics, claiming that advertisers were lagging behind consumer usage of the picture blogging service.

So why is Tumblr underperforming?

"Because its [Tumblr inventory] is growing so quickly, it’s outpacing demand and it’s causing this monetization shortfall," the chief executive explained on the company’s subsequent quarterly earnings call.

"We’re seeing twice as many Tumblr users engaging with ads compared to last year,” she added.

The fact that Yahoo began selling ads through Facebook’s Audience Network during the quarter in concern here could account to the financial underperformance of Yahoo’s Tumblr unit. However, regardless of which, Yahoo saw a 15 per cent annual decline in its price-per-ad during the quarter – a truly concerning KPI.

Do Yahoo’s other purchases signify the end of a five-year ad tech bubble?

Of course, this is widely expected to be the last quarterly earnings call Yahoo has as a publicly listed company, with several outfits touted as potential suitors, including everyone from U.S. telcos, to private equity funds.

Many had expected that last night’s call would help bring some resolution to this ongoing saga (it did not). However, I’d argue that it does bring into question Yahoo’s other ad tech acquisitions under Mayer’s hegemony (literally dozens surpassing $2bn in value) over a four-year period.

In particular, I’d shine a light on the 2014 $640m purchase of ad tech outfit BrightRoll - the brand that now houses its collective ad tech stack, with one senior level source in the ad tech industry telling me that this was an ‘insane valuation’.

The source went on to claim the BrightRoll exit was an incredibly good one (for the sellers that is), given that its offering is essentially a media business, i.e. the popular theory that most ad tech businesses are essentially ad networks, even though that term fell out of favor long ago.

A quick look at the ad tech exits

The first generation of ad tech outfits, or programmatic players, came about in the 2008/09 era (when funding was hard to come by) and many of this generation of companies have since ‘exited’ (e.g. listed publicly, or been acquired, similarly to BrightRoll). Incidentally, there is also a rumor in ad tech circles that Yahoo was also in the market for one of said companies that later chose to list publicly offering a price tag that was much higher than its eventual valuation on the stock market.

Last week ad tech outfit OpenX published an analysis demonstrating that the average life of an ad tech outfit is six years old. It could be argued that the first generation of such ad tech companies (for the main part) have exited via way of a direct sale, with the minority exiting via way of an initial public offering (IPO), with many of the latter not performing so well, as evidenced in the chart below. Either way, this means the first generation of ad tech outfits are either off the market, or statistically likely to sell.

Stock prices of publicly listed ad tech firms

End of the ‘ad tech gold rush’

One well place ad tech source told me that Yahoo's BrightRoll purchase was indicative of the overvaluations that typified the ‘ad tech gold rush’, and that similar to the downfall of the stock prices of ad tech companies that have IPO’d, a major correction in the market is likely to occur. Those ad tech companies that do achieve earn outs that number in the hundreds of millions, will have to show true differentiation.

Differentiation is key

If we take the analysis of Luma Partners into consideration, i.e. that the number of ad tech companies on the market will shrink from thousands to hundreds within years, then the market dynamics of over-supply, plus lack of differentiated tech will like the drive price of any exit south.

High profile downgrades like Yahoo’s Tumblr faux pas are unlikely to buoy valuations, and surely won’t help Yahoo’s own negotiation position in its ongoing sales meetings.

What’s clear is that as we assign the era of ‘programmatic 1.0’ to history, and move into the next differentiation will be key to survival in the ad tech space, not just success.

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