eBay (NASDAQ:EBAY) has confirmed month long rumors by announcing that it was buying Web 2.0, new media company Stumble Upon for $75m. Despite some confusion, the logic of the deal may actually make sense.
Stumble Upon, which was founded in Calgary, Canada in 2001, is something of a computer-automated web surfing tool married to a community of users. Through either their website or browser-integrated buttons users can ask for a new page and then the website will redirect them (a “Stumble”) towards something related. The sites in the system, however, are not purely random. Web Publishers can buy placements from Stumble Upon that insure a certain number of page views from Stumble Upon users per day; just another form of website marketing.
It is that paid search component, along with a feature launched in April called “Stumble Thru”, which is what likely attracted eBay. StumbleThru lets a user move through the pages of a specific site with the same semi-randomness of full internet stumbling. In other words, they can “stumble” through the listings of eBay auctions, or products at eBay property, Half.com
While the pricing of the deal will raise some eyebrows, and the value of Stumble Upon in the eBay product portfolio will puzzle some, the deal is not completely illogical, nor is the price. eBay spends a tremendous amount of resources keeping its site and name well publicized around the web. Stumble Upon will be an asset in those ongoing marketing efforts.
Here's a breakdown in more detail:
With about 2.3m users (discounted in my logic and calculations to 2m for redundant registrations and inactive accounts), eBay is paying approximately $37 per head. As a lead generation fee, that’s not much more than what eBay pays affiliate network sites. If someone, for example, creates an eBay account and than makes one bid on an auction to activate the account, eBay will pay a lead referral fee of around $25-35 plus a revenue share of won auctions.
The Stumble Upon purchase price is attributing, per user, an amount in the ballpark of what eBay pays for converted leads. Using that as the metric for the deal is admittedly suspect though. It’s true not all of the Stumble Upon users will be converted (many are likely already eBay users and a majority won’t sign up) but eBay gains marketing value as well. With five million web recommendations thrown out a day, and now, some large portion of those being sure to go to eBay sites, eBay is effectively gaining a new marketing channel for a fixed upfront fee.
Stumble Upon also generates revenue. It’s probably not a cash cow, but it has managed to survive with almost no outside investment. (It closed on an angel investment round in 2006). Mix that revenue to cover operating expenses and then ask: is the value of converted leads, and web marketing, over the next year or two enough to justify the price? That’s debatable, but consider one more number in the calculation: $41 .
$41 would be the CPM (Cost per thousand impressions or thousand displays of a web advertisement) if the only way to value this deal were in the terms of advertising and the advertising price. Specifically: At 5m impressions per day, over 365 days, assuming no growth or churn, Stumble Upon will serve 1.825b page views in a year. Broken down to CPM, or increments of 1000 displays, that equals a fee of $41 per ad (e.g. $41 CPM). (The math is the purchase price divided by Impressions in units of 1000)
If the combined actual revenue from Stumble Upon plus lead generation revenue (from converted new eBay customer sign ups or increased transactions generated from in–site stumbling) generates $20m, the CPM rate would adjust down to about $30 (same math but with the purchase price lightened by $20m to account for the revenue income). Go one step further and split that cost over two years and the CPM is down to a not so crazy seeming $15? So, in the terms of marketing expenses is the valuation of this deal absurd? Doesn’t seem so. $50m would have bee better, but $75 is not a drug induced hallucination.
eBay is not buying Stumble Upon for revenue; it’s buying them for marketing and it’s buying them as a tool to help its other businesses. That's particularly necessary these days when eBay's retailing businesses are growing more slowly.
Within a marketing framework, there is a clear value proposition. And using marketing/advertising metrics to back out the price, the valuation isn’t crazy. Arguably, even, a company with a strong retailing component like eBay makes an ideal buyer of Stumble Upon (Amazon (NASDAQ:AMZN) could have been another suitor)
The acquisition may not be as striking or logical a fit with eBay’s core businesses as their purchase of StubHub was, but, on the flip side, it’s a lot more natural of a contributor to eBay’s resources than internet telephony company Skype (whose purchase by eBay still puzzles many).
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