Three ways to look at Yahoo’s US$1.1bn acquisition of photo-blogging service Tumblr:
Yahoo CEO Marissa Meyer recently summarised her three-step strategy in an interview on Bloomberg Television:
- bring top engineering talent back to Yahoo to drive product innovation;
- this innovation will boost user engagement;
- this increased engagement will drive more, and more effective, advertising.
In targeting users, Mayer’s key insight is to build upon daily routines, especially those that are
- personalised; and
and in doing so perhaps to side-step Google’s much stronger position in search.
As she explained on Bloomberg Television: “We have all of the content that people want on their phone, we have these daily habits. And I think that whenever you’re dealing with a daily habit and providing a lot of value around it there is an opportunity not only to provide a lot of value to the end user but also to create a great business.”
This is consistent with the half-dozen acquisitions Yahoo has made over the past few months, for example Loki, which brought Yahoo expertise in “community and location-based mobile services.” These six acquisitions averaged US$3.2m each, and seem again to have been consistent with Mayer’s strategy of acquiring talent – only Summly’s technology has been embedded into some of Yahoo’s core products.
And Tumblr fits right in:
- it brings 300m unique monthly users – nearly half Yahoo’s current 700m and more than double ComScore’s estimate of 117m;
- it is social and driven by user-generated content;
- it is embedded in the daily routines of these users, who frequently and regularly post and read other posts;
- it is, in Mayer’s, own words, significantly “ahead of Yahoo in the way that it works on mobile.”
Both Yahoo’s products and users are ageing and in need of rejuvenation.
On the product side, especially in mobile, social and location-driven technologies, Yahoo lags far behind its principal advertising competitors Google and Facebook.
On the user side, Yahoo has been looking for things, according to Ken Goldman (CFO) to “make us cool again” and target a younger audience.
John Borthwick of Betaworks, a Tumblr investor, said that the acquisition will help “make them relevant again” to a new online audience, and Mayer clearly agrees: “With different kinds of people using the two sites… this allows us to really engage both demographics.”
But talk of user numbers often masks a lack of deeper strategy. Mayer explained that Tumblr will “significantly contribute to our growth story, certainly in terms of traffic and users” without explaining how Tumblr’s proud and advertising-averse user base will allow her to monetise it.
In fact, all she really said on monetisation was “We are committed to monetizing Tumblr in a way that is high-quality and enhances the user experience” – which doesn’t really mean anything.
There are obvious and superficial synergy examples – relevant Tumblr content can show up in search results, and apparently Yahoo’s search technology and larger hosting capabilities will improve Tumblr’s existing services – but these hardly count as strategic.
The acquisition therefore gives Yahoo a 40% increase in user numbers, some good people and an established quasi-social platform. But it doesn’t really change Yahoo’s positioning or move it strategically forward.
Betaworks’ Borthwick was quoted as saying that Mayer “is hot on the path to inventing Yahoo as a different kind of company” but this feels more like a deal done because it was a deal, not for any meaningful strategic driver.
It’s all very well for Yahoo CFO Ken Goldman to say buying Tumblr will “make us cool again,” but he and Mayer have just paid US$1.1bn for a company with revenues last year of US$13m, and forecast revenues for 2013 of $100m – which it couldn’t achieve without a major web partner such as Yahoo.
Effectively, Mayer is paying Tumblr’s shareholders for the value Yahoo is bringing to the photo-blogging service.
There are real reasons to think Yahoo will struggle to monetise Tumblr’s content in any meaningful way:
- Tumblr’s bloggers will need to consent to ads being hosted on their blogs, and many of them are vociferously anti-advertising as well as anti-Yahoo;
- much of Tumblr’s content is pornographic, and unlikely to appeal to most advertisers;
- Tumblr’s efforts to generate revenue through “interactive campaigns, rather than standard clickable adds” have not driven very much revenue to date (although in fairness it achieved in Q1 2013 revenues equal to full-year 2012, so it’s clearly growing).
Meanwhile, those 300m young attractive users? Many are already defecting, and Mayer has been reduced to plaintive promises not to re-brand Tumblr, and half-hearted comparisons to Instagram (which didn’t lose many users when Facebook acquired it) rather than Bebo or MySpace (which did – and had been acquired for eerily similar reasons).
And the talent? Not so sure. Last month, Andy Baio, founder of Upcoming which was sold to Yahoo, posted on his blog: “Yahoo seemed like a perfect home for Upcoming – they’d promised resources to grow the community, we’d get to work at a promising tech giant with some of our favourite people… In hindsight, selling Upcoming to Yahoo was a horrible mistake. Selling your company always means sacrificing control and risking its fate, and we now know online communities almost always fail after acquisition.”
What about the competitive landscape? Google, Facebook and Microsoft had all apparently looked at acquiring Tumblr and walked away. It has been reported that talks with Yahoo began on the basis of a commercial partnership and evolved into discussions of an outright acquisition. So there may have been some underlying commercial logic, but it feels more like Mayer feared one of her competitors might acquire Tumblr and so she snapped it up first.
Yahoo has a poor track record of acquisitions – from 2002 to 2012, it did deals worth over US$6bn without meaningfully improving its position or altering user or stock-market perceptions. Despite Mayer’s experience at Google, the headline-grabbing valuation and irate Tumblr users suggest she may be making the same old mistakes Yahoo has always made.