eBay’s $75M Purchase of StumbleUpon is “Not a Drug Induced Hallucination”

Two weeks ago I went to StumbleUpon’s summer party at 111 Minna Gallery, San Francisco’s Soma district, conveniently located downstairs from their office and a fortunate 3 blocks from my house. Complimentary beer, wine, and champagne flowed all night long, and San Francisco’s tech crowd was happy.

Photo courtesy of Scott Beale of Laughing Squid

Now, I thought it was kind of odd that eBay, an online auction house and e-commerce site, would buy StumbleUpon, a Web 2.0 website discovery platform for an eyebrow raising price of $75 million. Was eBay simply trying to buy a piece of the Web 2.0 cool, or is there indeed a compelling financial motive?

The StumbleUpon community has grown 150 percent year over year, by word-of-mouth only, delivering approximately five million new recommendations a day to its roughly 2.3 million highly-engaged users. But 2.3 million users is barely a drop in the SNS market.

Source: TechCrunch

For most of us, StumbleUpon a free, easy-to-download toolbar that sits benignly in your browser window and, from time to time, takes you on a fun journey into the far reaches of the Web.

Look below the surface, one will find a hidden ad network with an interesting revenue model and profound implications for paid search.

You see, the sites presented by StumbleUpon’s system, are, in fact, not purely random. Web Publishers can buy placements from StumbleUpon that guarantee a certain number of page views from StumbleUpon users per day. The cost is a minimum of $0.05 per visitor.

Advertisers are thrilled because they reach a highly targeted, attentive audience – provided they show something interesting enough to avoid getting thumbed down. Users are unfazed – since the site is related to their interests, most of the time, they can’t tell the difference.

StumbleThru eBay Shopping

StumbleUpon’s new StumbleThru component, launched 4/20 this year, is thought be the bigger motivation for eBay’s acquisition. With the explosive growth of online destination sites like Flickr , MySpace, and Wikipedia it is near impossible to find meaningful content amidst the millions of pages on domains with exponentially expanding user generated content. eBay included.

StumbleThru allows users to stumble, semi-randomly, through the pages of a specific site just as if they were stumbling the entire Web. Imagine stumbling through the universe of eBay auctions, or listings of products at eBay’s, Half.com. Hmmmm.

According to Seeking Alpha, a provider of stock market opinion and analysis, while the purchase price might be startling, from a marketing perspective, eBay’s purchase price of $75 million is “not a drug induced hallucination.”

With about 2.3m users…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.

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, StumbleUpon 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 been 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.

Sources:

eBay Acquires StumbleUpon: 8 Reasons Why

eBay’s StumbleUpon Acquisition: Confirmed at $75 Million

Why eBay’s StumbleUpon Purchase Actually Makes Sense

StumbleThru : Site Specific StumbleUpon Released

[tags]ebay buys stumbleupon, ebay, stumbleupon, stumblethru, ebay, lorna li[/tags]

Related posts:

1. StumbleUpon New Ways to Drive Traffic To Your Site
2. Social Media Optimization with StumbleUpon
3. 6 Steps for Creating a Social Media Marketing Roadmap & Plan
4. How to Boost Traffic & Turbo Charge Your Blog in 2008
5. Discovery Acquires Treehugger for $10M – the Masses Get Greener

Leave a Reply

Name (required)

Mail (will not be published) (required)

Website

Notify me of followup comments via e-mail

Comment moderation is enabled. Your comment may take some time to appear.