Tumblr Buyout: 10 Reasons Why Yahoo Must Make It a Big Success

By Don Reisinger  |  Posted 2013-05-20

Tumblr Buyout: 10 Reasons Why Yahoo Must Make It a Big Success

Yahoo and Tumblr were all the news on May 20, when the longtime Web giant announced that it plans to acquire the micro-blogging service for $1.1 billion.

What is perhaps most surprising is that the deal is nearly entirely in cash, meaning Tumblr investors won’t need to worry about Yahoo’s stock price fluctuating, reducing their net payoff. Even better for Tumblr, many of the company’s employees who were attracted to the company with stock options will be millionaires when the deal is finalized in the second half of this year.

For those on the outside looking in, including Web users, analysts and shareholders, there might be several questions worth asking. Does the Tumblr acquisition make sense for Yahoo? What happens if Tumblr changes too dramatically? Can Yahoo retain Tumblr employee and user loyalty? And what possible reasons did Yahoo have for making the move?

Here are some observations that might answer these and other questions regarding what this deal is all about.

1. It’s a very big deal

So, why is this deal so important? Simple: it’s a very, very big deal. Tumblr, which has hardly any revenue stream to speak of, is being bought out for $1.1 billion in cash. That means Yahoo CEO Marissa Mayer and its Board of Directors is convinced that it can turn Tumblr into a major money maker in a relatively brief period of time–certainly no more than the next three to five years. It will be interesting to see if Yahoo can recoup that huge investment.

2. This almost happened years ago

Here’s an interesting tidbit from the Yahoo-Tumblr saga: Several years ago, when Tumblr was in its infancy, Yahoo reportedly held discussions to acquire the micro-blogging service for $50 million. Tumblr at that time said no. Smart move.

3. They’ll be separate companies

Yahoo made very clear in its press release about the acquisition that Tumblr will remain a completely separate entity and will not in any way be impacted by Yahoo’s management staff. That said, Tumblr’s executives will still need to report to Mayer on the company’s performance. So, while they might be separate companies, look for Mayer to set the strategic directions.

4. Mayer says it’s about advertising

In a conference call with investors and analysts on May 20, Mayer said the key reason she endorsed the deal was the prospect of more advertising revenue. She believes that Tumblr, which has more than 300 million active users, is a huge revenue opportunity for Yahoo, and one that she wants to capitalize on with her company’s existing ad services.

Tumblr Buyout: 10 Reasons Why Yahoo Must Make It a Big Success

5. Think of it like Google and YouTube

During that same discussion, Mayer said that she would attempt to operate Tumblr as Google has done with YouTube. What she essentially means is that Tumblr will be considered a separate entity capable of entering into its own deals with other companies and won’t be integrated into any Yahoo services. Tumblr posts, however, might come to the Yahoo homepage, similar to the way YouTube videos are readily available in Google Search.

6. The same Tumblr business plan

On the call, Mayer said that Tumblr will maintain the same business plan—save for revenue-generation—as it came into the deal with. That’s important. The last thing Tumblr users want is for Yahoo to mess up something that’s extremely important to them. Under the terms of the deal, the roadmap Tumblr had in place will not change.

7. It puts pressure on Google

This deal puts a bit of competitive pressure on Google so look for the search giant to make some kind of business move in response. After all, with Tumblr’s help, Yahoo now has well over 1 billion people globally that it can advertise to. Better yet, the company has a huge content engine that should only increase the viability of its advertising services. Google needs to head off any negative effects this deal might have on its ad business.

8. Mayer promises Yahoo won’t be, well, Yahoo

Mayer said something very interesting during her call with investors and analysts: Yahoo won’t act like it typically has when it’s made a major corporate acquisition. In the past, Yahoo made extremely poor decisions that ended up killing or greatly devaluing the services it has acquired. The company has a poor record of retaining key employees that made their acquisitions worth buying in the first place. Mayer has promised that won’t happen this time around. We shall see.

9. Does it excite Microsoft?

Let’s not forget that for the time being, Yahoo and Microsoft have an important partnership involving the Bing search engine that could greatly benefit the software giant. After all, Mayer herself said that the Tumblr acquisition should enhance her company’s search offering. That’s music to Microsoft’s ears, and something that can’t be overlooked as one evaluates this entire deal.

10. Twitter might come into the crosshairs

This might have also been good news for Twitter. Although it’s somewhat different from Tumblr, Twitter’s offering provides a simple way for people to share their quick thoughts with others online. If a company like Google is worried enough about Yahoo’s Tumblr buy, it might not be long before it tries to hold talks with Twitter and acquire the social network. Keep an eye on Twitter—it might just move for the right price.

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