Yahoo’s fuzzy path to making Tumblr work

BENJAMIN PIMENTEL
Last updated 13:41 24/05/2013
Marissa Mayer and David Karp
Reuters

NO CHANGE: Yahoo Chief Executive Marissa Mayer and Tumblr founder and CEO David Karp.

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How can Yahoo make money out of Tumblr? By trial and error - and lots of patience, say analysts who also warn that it won't be a slam dunk.

The US$1.1 billion acquisition is aimed at dramatically expanding Yahoo's user base, particularly among young people, and then translating that growth into more revenue, mainly from online ads.

But as similar moves by two key Yahoo rivals have shown, that process can be a very bumpy ride. Many are seeing comparisons with Facebook's US$1 billion acquisition of Instagram last year and, further back, Google's $1.6 billion buyout of YouTube in 2006.

"In making something like this work, if you're optimistic, it's a 20 percent success rate," analyst Rob Enderle of the Enderle Group told MarketWatch. "If you're more realistic, it's more like 10 percent."

The past deals by Google and Facebook underscore how difficult it is to make money out of big Internet and social media mergers.

Take Facebook's 2012 acquisition of Instagram. One year later, the social networking giant is still trying to figure out how to monetise the photo-based social network, where users have pushed back against plans to introduce ads.

Yahoo can probably gain more positive insight from Google's purchase of YouTube, which was also seen as a bold, risky move at the time, but also one that many believe has begin to pay off, in terms of contributing to the company's massive base of advertising revenues.

Yahoo sees a similar path with Tumblr. Yahoo CEO Marissa Mayer - who worked at Google as head of search products and user experience during the YouTube acquisition - vowed to keep Yahoo and Tumblr "focused on advertising that is as good as the content itself and is seamless with the experience," on call earlier Monday morning.

In their reactions to the deal on Monday, several analysts noted the potential of the Tumblr deal for Yahoo.

"The dilutive nature of this acquisition is, in our view, offset by the slight probability that Tumblr becomes much more than it is today, much as YouTube did for Google," Stifel analyst Jordan Rohan said in a note. "We have to give the management team of Yahoo some leeway to dig itself out of a strategic hole, and Tumblr could be part of that plan."

But analysts stress an important point about the Google-YouTube experience: It took time for the search giant to cash in on the video sharing site.

Google faced two main issues with YouTube - its low-quality content and copyright concerns on that content, Karsten Weide of IDC told MarketWatch.

"What Google did was they very, very patiently worked on those issues," he said. "It took them a lot of time to get it working."

Because of all that work, "YouTube is a more integrated property than it was before," analyst Roger Kay of Endpoint Technologies Associates told MarketWatch. "It's a natural fit."

But analysts worry that Yahoo may face much tougher hurdles with Tumblr.

"YouTube is video and Tumblr is not," Weide said. "The upside of YouTube was obvious. There was a lot of inventory that would support video advertising, which is not necessarily the case for Tumblr."

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Google was also a far stronger company when it bought YouTube, while Yahoo is gobbling up Tumblr at a time when its own core businesses are under siege.

"When they did YouTube, Google was stable," Enderle said. "If YouTube didn't make it, they weren't going under. ... They weren't rushed, so they could do it right because they weren't in revenue trouble."

Yahoo CEO Mayer touted on the call that combined, the two companies will have more than a billion users, creating a formidable base for selling advertising. But Yahoo will need to keep Tumblr users happy enough to stay. That's one important lesson from other Internet deals, especially those involving young users, Enderle said.

"The customer base is very fickle," he said. "They tend to move from product to product. It's not hard to lose your audience."

And that becomes a dilemma, given the pressure to make money from the acquisition, especially with Yahoo executives already promising some revenue boost from Tumblr by next year.

Despite Tumblr Chief Executive David Karp's reputed reluctance to post ads on the site, that clearly will eventually happen. And that's where the tricky part comes in for Yahoo as the company tries to figure out how best to introduce ads without annoying Tumblr users.

"On the one hand, you don't want to alienate the user base," BGC Partners analyst Colin Gillis told MarketWatch. "On the other, you need to generate revenue to justify the price at some point."

"There are clearly question marks and uncertainty around this transaction," he added. "On the positive side, they're playing offense. On the negative side, they could be squandering their cash. You can only do so many big deals."

-MCT

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