Yahoo's Mayer Says Tumblr Could Get Its Own Ad Exchange

David Karp Marissa MayerKarp and Mayer

As the dust around Yahoo’s $1.1 billion acquisition of Tumblr begins to settle, more details are emerging on how the former will enhance the latter’s advertising offerings.

Ads on Tumblr could be served from an ad exchange, Yahoo CEO Marissa Mayer told investors yesterday. Ad Age said, in two different reports:

Yahoo is also considering selling premium ads on Tumblr and to sell ad inventory through exchanges. How premium ads will appear or what exchanges may be used, Ms. Mayer did not say.

Ad exchanges work by offering inventory — in this case space on Tumblr — to bidders in an auction. The highest bidder wins the spot. The inventory is triggered when a user carrying a tracking “cookie” in their web browser calls up a page.

The cookies are the key, as AdExchanger pointed out: Tumblr potentially offers a vast, logged-in audience of 225 million unique users a month. If Tumblr allows its login or cookie to be matched with cookies that users bring from other websites, that would offer a target-rich environment for advertisers.

For example, a user shopping for shoes might look at several shoe websites, and pick up cookies from all of them. Then she might check in to her Tumblr account, at which point the shoe cookies could be matched with the Tumblr login cookies and offered for bid. The user might start to see shoe ads inside Tumblr.

A Tumblr ad exchange might work a lot like Facebook’s own exchange, FBX, which has been a huge success.

It’s an easy way for a large media company like Tumblr to plug in a huge flow of ad dollars.

Tumblr appears to need the money. We previously noted that Tumblr made only $13 million in revenue last year. Now even that number has been called into doubt — it was more like $5 million. That’s a negligible sum from such a large user base.

Tumblr CEO David Karp said yesterday Tumblr was not self-sustaining:

 “There was no path or expectation to sell this company, certainly not this year, and we were well on our way — I should say, are on our way — to making this a self-sustaining business with our advertising products,” Mr. Karp said in an interview Monday with Ad Age. “The conversation with Yahoo started around their ability to help us accelerate that business.”

He was more blunt with Bloomberg:

“We are not cash-flow positive yet, which means we are always running out of money,” he said. “There was no expectation we were selling the company — certainly not this year. This was our providence.”

A source told Valleywag Tumblr made only $5 million last year.

If a Tumblr exchange were launched, one key problem would be how to make sure the ads were sufficiently creative to not screw up Tumblr’s artsy environment.

The nature of an exchange is simply that the highest bidder wins and is allowed to serve whatever ad they want — the process is entirely automated. Mayer said she was keen yesterday to ensure that the ads should be “something people take delight in.”

Mayer hinted they may have a way to solve that dilemma: by only allowing ads on users’ individual pages with their permission:

Ms. Mayer also said ads will eventually appear on individual Tumblr sites, though only “with the blogger’s permission.” She declined to comment on how that would be set up and whether it might entail revenue-sharing agreements.

Put those two notions together — an ad exchange with inventory based only on users who opt-in — and that could be a powerful permission-based ad system. Generally, advertisers far prefer targeting users who have given permission to be targeted than simply serving ads at cookies.

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