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From NPR News, it's ALL THINGS CONSIDERED. I'm Melissa Block.
ROBERT SIEGEL, HOST:
I'm Robert Siegel. Some big numbers are being thrown around in Silicon Valley today. This morning, Yahoo CEO Marissa Mayer announced that Yahoo is buying Tumblr, a social media and blogging startup. The price, $1.1 billion and that for a site which last year earned a tiny fraction of that amount in revenue.
So, either Mayer is making big gamble or this is simply business as usual in the tech world today. NPR's Steve Henn explains that what makes a startup worth more than $1 billion.
STEVE HENN, BYLINE: Yahoo's purchase of Tumblr is just the latest in a string of billion-dollar-plus acquisitions of hot social media startups over the last couple of years. Facebook recently bought Instagram for more than a billion. At the time, Instagram had no revenue at all and just a dozen employees. Then, Microsoft bought a company called Yammer for 1.2 billion and now, Tumblr.
What these companies all have in common is that they all have big fast-growing user bases and their core services were good fits for the technology giants that gobbled them up. But figuring out how much to pay for a firm with little or no revenue is still a crapshoot. This morning, when Wall Street analysts asked Yahoo's CFO Ken Goldman how the company arrived at its billion-dollar-plus purchase price for Tumblr, they were told this.
KEN GOLDMAN: We looked at forward EBITDAs multiples out a few years. We looked at a edifying value in terms of monthly active users and unique users.
HENN: If you're not an accountant, that probably just sounds like gibberish. And even if you are, what it boils down to is that Yahoo executives really just took a guess. They looked at the size of Tumblr's audience, which is large, more than 100 million people. And then they looked at how fast the service is growing and then they estimated what kind of advertising revenue Tumblr could generate in the future if it really got serious about selling ads.
Then, they came up with a figure.
UNIDENTIFIED MAN: A billion dollars.
HENN: Actually, 1.1 billion. But if this still sounds kind of nuts, consider this. Clark Fredrickson, at emarketer, says Tumblr's audience is already many, many times bigger than, say, a site like the New York Times.
CLARK FREDERICKSON: Sure. I mean, Tumblr is far, far bigger than many, many news media websites. It has very strong engagement.
HENN: And Tumblr users have blogs. They invest their time and soul on the site. They're not likely to just give them up or not come back next month. Plus, Tumblr's users, their demographics, are attractive.
FREDERICKSON: Younger users, you know, frankly, a group of people that Yahoo has had a tough time attracting in the last three to five years.
HENN: Still, when Marissa Mayer got on that conference call this morning to explain the deal, Wall Street analysts understandably had lots of questions about how Tumblr would ever pay for itself.
FREDERICKSON: Someone asked her about when they would, you know, really roll out the ad products. And her response was a quote from "The Social Network," the film.
(SOUNDBITE FROM FILM, "THE SOCIAL NETWORK")
JUSTIN TIMBERLAKE: (As Sean Parker) You don't even know what the thing is yet, how big it can get, how far it can go.
HENN: And in tech hubs from Silicon Valley to New York, life is imitating art. For years now, entrepreneurs have focused on building services that attract huge audiences. Only after they've done that and people are engaged with these services every day, the entrepreneurs begin to focus on how to make money from these sites, how to sell ads. First, they build the site, then they figure out what it really is, then they make money.
Today, Marissa Mayer said Tumblr was ready for that final step.
MARISSA MAYER: As we promised this morning, we are not going to screw this up.
HENN: By buying Tumblr, Mayer says she expects to increase traffic to Yahoo's websites by 50 percent a year.
MAYER: More than 300 million monthly users. When you add that to the more than 700 million monthly users already on Yahoo, we have a global audience that exceeds a billion monthly users.
HENN: If those numbers prove out and Yahoo can add advertising to Tumblr without alienating its users, this deal could be profitable for everyone, even at this price. Steve Henn, NPR News, Silicon Valley. Transcript provided by NPR, Copyright NPR.