Yahoo!, Tumblr and the $1.1bn gamble

Is Yahoo!'s big Tumblr gamble a bold move of genius, a security policy for the future, or an expensive folly? Simon Brew takes a look...

Tumblr, though, isn't an immediately obvious acquisition for the firm, but it may yet prove to be an inspired one. Mayer has already vowed 'not to screw it up' and as part of that, she's confirmed that Tumblr will remain independent, under its current management. Yahoo! is clearly wary of buying something of value, and then diluting it the moment it's brought in house. History is littered with big deals that have struggled as a consequence of such an approach.

Perhaps most tellingly, by taking ownership of a major social sharing platform, Yahoo! keeps itself in the proverbial game. 

So what is Yahoo! actually getting out of the deal?

Licence to print money?

In 2012, the revenues at Tumblr were reportedly $13 million, and Yahoo! has paid over what analysts originally valued the service at. Clearly, given that even conservative watchers are suggesting Yahoo! has paid a hefty premium, this was a service it was desperately keen to get its hands on. Crucially, though, it's not just got the technology here, it's also kept hold the management team. In particular, David Karp, Tumblr's founder, will stay on board as chief executive. Adding his expertise to Yahoo! is likely to have fringe benefits.

One advantage Yahoo! has is that Tumblr is starting from such a low base, though. It's always been reluctant to embrace advertising, only relaxing things slightly last year. But going forward, Yahoo! is sure to be more aggressive, giving its already impressive sales operation a whole new platform to sell onto. Yahoo! has already announced that it's expecting Tumblr to be making a financial contribution by next year. It clearly does not intent on standing still.

There's a clear risk, here. Blogging sites and advertising do tend to be a tough mix, and Tumblr's existing subscriber base of just over 100 million blogs will need to be kept on side. Furthermore, whenever huge companies acquire such services, there's generally an unease over making money out of people's personal content. Yahoo! has been exposed to such issues with Flickr in the past, and looks set to encounter them again here.

That said, those waters are possible to navigate, and there's clearly growth potential in Tumblr. The question, that time will answer, is just how much.

One direction?

There is one further question: does this mark a directional choice for Yahoo!? If the argument runs that the biggest day-to-day asset for Yahoo! is its website, which brings in hundreds of millions of visitors a month, should it be concentrating on producing its own content, and wrapping further offerings around that? Possibly, but the Tumblr purchase suggests that the technology is as much of interest to Yahoo!.

Perhaps most tellingly, by taking ownership of a major social sharing platform, Yahoo! keeps itself in the proverbial game. It guarantees itself relevancy. If future of social networking platforms centres on Facebook, Twitter, Tumblr, Pinterest and Instagram, Yahoo! has bought itself a seat at the table for at least the near to medium-term.

The challenge the firm now faces is to turn Tumblr into a business that's worth paying over a billion dollars for. In social media terms, the price tag - exorbitant thought it may seem - may yet turn out to be something of a snip. But Yahoo! has good form in turning traffic into advertising, and there's little reason to suggest it won't succeed in doing so here. Marissa Mayer has just, effectively, bet her job on it. 

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