So this is how Tumblr and Yahoo will make money

Screen Shot 2013-05-27 at 6.18.48 PMA week ago the pundits were quick to suggest that Yahoo’s purchase of Tumblr was little more than a Hail Mary. How can a company dependent on a dying model (display advertising) and an aging user base stay relevant in the age of social media?

Buy a company that his millions of users but not an inkling of an idea how to make money.

Put that way it sounds like a sure recipe for an obituary of some kind a year or two out. So was this a mistake? Or does Yahoo know something we don’t know yet?

What Yahoo did acquire was a younger, hipper audience. Tumblr indexes at 237 for 18—24 year olds and only a notch below that for users up to 34.  But despite the appeal of that demographic, Tumblr has failed to sell or deliver effective native advertising. And the other option, blasting users with uninvited display ads has to be ruled out, as it will likely make the site too uncool to hold onto the users Yahoo covets in the first place.

On this week’s The Beancast, host Bob Knorpp, Mitch Joel, Brian Morrissey, Steve Wax, and I discussed a number of topics including the recent Yahoo Tumblr acquisition. We wondered if the real strategy was to leverage Tumblr’s voluminous porn. We hypothesized that Tumblr could become a YouTube of printed and visual content. We hoped that eventually the creative community would figure out how to make native advertising that’s either useful or entertaining.  Just in time to save Yahoo’s investment.

(None of us really knew what we’re talking about or we’d be running Yahoo or creating Tumblrs, but this is social media so we’re all allowed to pontificate. Mitch Joel may have been the closest to right when he reminded everyone that $1.2 billion is cheap if it simply buys Yahoo some relevance with a younger market.)

But here’s how Tumblr and Yahoo will make money. They won’t be saved by ad agencies, or creatives or some form of native advertising. It will be with algorithms and data and search software. Possibly from a company called Swoop.

In a total coincidence, the night after Mr. Knorpp asked me how Yahoo would make money with it’s newest toy, I found myself on a 50-mile road ride with the CEO of Swoop, serial entrepreneur Ron Elwell.

His new startup extends advertisers’ search campaigns by leveraging the content that a search ultimately leads a consumer to. So if you were looking for cake recipes, found a page that offered one, and were skimming through the recipe, Swoop knows that a.) you were searching for that recipe and  b. how to match advertising with the content on that page in a very user-friendly and unobtrusive way.

Swoop relies on what it calls “hints,” essentially asking you if, at that moment, you are interested in an ad or offer about, say, cake mix, or sugar or milk. Only if you say “yes,” do you see an ad. Better yet, that ad gets customized based on what your search terms have been, so its relevance is increased.

Yes this is one of many new programs and platforms attempting to make advertising more timely and contextual. But what makes it interesting and suggests real potential is that it actually respects the user and offers him or her a choice.

What does something like this mean for Yahoo and Tumblr?  First and foremost, suddenly all content becomes more valuable. If you, as an advertiser, know that an interest in certain terms, whether searched or discovered in content that readers care about, leads to traffic and sales, you have more relevant places to offer your “hints.” And, of course, given that Yahoo is now sitting on a ton of new, fresh daily content that it already knows people seek out, it has something useful to offer advertisers.

This won’t happen overnight. Right now Swoop is still in the process of evaluating the content against which its technology works best. And much of the content on Tumblr is, of course, visual. But it is likely that the solution, or part of it, will come from new ways to create contextual advertising that accurately knows what a user or reader wants, not simply assuming that a like or a follow means she wants to be pummeled with so-called native ads in her stream.

Of course, platforms like this, assuming they are successful, will benefit any content creator or popular destination. But at least it gives Yahoo a fighting chance and a way to leverage traffic, popularity, and its young readers without fucking up what does seem to work for Tumblr users.

In fact, Yahoo might even be able to make more money off of its porn.

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