Billion-dollar Tumblr gamble demonstrates Mayer’s ambition

Many people’s first reaction was “how much?”, especially given that Tumbr was valued at “just” $800m last year, and had revenues of only $13m. That means that Yahoo! paid almost 85 times revenue! Even in the often-lofty world of internet buyouts, that’s at the very edge of M&A heaven! Add in the fact that Tumblr has always struggled to make money, and that its user community has always resisted advertising, it’s easy to see why this deal has got many observers scratching their heads in bafflement.

But I think it could just work. First off, while still profitable - Yahoo! is still market leader in online advertising, and visited hundreds of millions of times monthly - it has ceded the leads it had in social media (via Flickr) to Facebook and search to Google.

Back in the 1990s, Yahoo! was a true internet pioneer and innovator, but has for many years been seen by hipsters as a dull corporate behemoth. It’s had a rough few years – turning down a $44bn approach from Microsoft, getting attacked by Chinese hackers and being unable to hold onto its CEOs for any length of time.

However, since the arrival of Marissa Mayer from Google last year, things have settled down nicely and stability seems to have returned. Services have been tweaked and improved – only this week, Flickr was revamped – and the company has dropped underperforming products. Interestingly, shares in Yahoo! have risen 70 per cent since Mayer arrived.

But it’s not enough for companies to remain stable (or for Wall Street to be happy) – they have to grow. And this is where Mayer may have played a blinder. Despite her widely-mocked ban on Yahoo! employees working from home (examined by my colleague Barry Dudley on The Drum on 22 March), she is an extremely smart operator, and a hugely ambitious one at that.

I can’t imagine that she’d be content for her company to chug along reasonably profitably – she wants to transform Yahoo!. At heart, the company is still what it was in 1995, a hierarchical directory and web portal that sells marketing services, with a few extra bits bolted on and up to now it has, it’s fair to say, been laggardly in the mobile and social space.

However, things are changing. At the beginning of the year Mayer bought Snip.it, the San Francisco-based startup that created a web application for clipping news articles and arranging them in a visually compelling Pinterest-like format, for $10m (she promptly shut Snip.it down, suggesting she wanted to acquire talent and technology, not an app). She has been very active recently in acquiring various smallish tech businesses including Summly, Stamped, On the Air and Astrid and – even as I go to press – the cross-platform game developer PlayerScale.

Last week Yahoo! announced a partnership with Twitter to incorporate relevant tweets in its homepage, and, just hours after announcing the Tumblr deal, it unveiled a complete revamp of Flickr, offering users a terabyte of free storage. Although the redesign hasn’t proved universally popular with Flickr power users (however one of my Green Square colleagues, a keen amateur photographer and long-time Flickr user, loves it), it does represent a sea change in what the site is for, and an intriguing indication of the Mayer-led Yahoo’s ambition.

It's clear that Yahoo! sees an opportunity to position Flickr not just as a photo-sharing site for pros and serious amateurs, but also as a more privacy-friendly alternative to Facebook, (which is, as anyone with teenage kids will know, massively popular for photo-sharing, but has regularly been accused of making its privacy settings, in the words of blogger Stuart Dredge, “less user-friendly than they should be”). It also now goes up against Google +. Unhappy established users may abandon Flickr for 500px and the like, but Yahoo! is obviously gambling that these will be far outnumbered by new users. And of course Flickr can now be protected from the threat of the Facebook-owned Instagram.

I think I can see what Mayer and co are trying to do, which brings us nicely on to the Tumblr acquisition. A billion dollars is a lot of money for a company that makes just thirteen million in revenue. But Yahoo! isn’t buying a company, it’s buying a community. And a big community at that - Tumblr has more than 300 million monthly unique visitors and 120,000 signups every day, 900 posts a second and 24 billion minutes spent on the site every month. On mobile, more than half of its visitors are using the Tumblr mobile app, for an average of seven sessions a day.

Clearly, as part of Yahoo!, it should be a lot easier to drive Tumblr’s vast community towards its other offerings and this new addition to the family will, according to Mayer, “grow Yahoo's audience by 50 per cent to more than a billion people and increase its total traffic by 20 per cent.” That means Yahoo! has a scale to match Google or Facebook, plus a better presence in mobile than it’s ever had.

Since Yahoo! is in the business of making money from advertising, a bigger audience means bigger revenues. And a large part of that new audience will be young – the kind of eyeballs advertisers love to attract.

All of a sudden, a billion bucks doesn’t seem that much, especially when the acquirer is also getting some serious talent, including Tumblr founder and internet wunderkind David Karp, who’s tied in for at least four years thanks to an earn-out.

Of course, Yahoo! needs to manage and nurture its new baby very carefully. When it bought Flickr in 2005, it made a lot of mistakes (chief among them forced integration into Yahoo!). Facebook alienated hundreds of thousands of Instagram users last year. The company’s finance chief Ken Goldman told the media that there would be “no screw-ups”. Yahoo! has already vowed to keep Tumblr a completely separate entity, and will offer users no clues as it its identity, which may make it difficult to drive eyeballs quite as directly towards other Yahoo! services in the short term. It will, however, offer Tumblr its engineering expertise, which should hopefully make Tumblr even better than it is.

But the biggest challenge for Yahoo! is to make sure that it plays the long game. It must not fall into short-term revenue lures, or be panicked into killing its newly-acquired golden egg layer, but instead must focus on strategic, scalable monetisation opportunities. Everything up to now suggests that Mayer is up to the job so I think this one might just come off.

A billion dollar gamble, maybe, and it may well be that my next pie is a humble one. But when Google and Facebook are growing at your expense, you need to take risks and play for high stakes.

Tony Walford is a partner at Green Square, corporate finance advisors to the media and marketing sector.