Since Marissa Mayer took over as CEO of Yahoo (YHOO) in the middle of the last year, the stock has been on a tear.
This has had nothing to do with Mayer. It was mainly the result of her success in selling half the company's stake in Alibaba, the Chinese e-commerce site. Since it retained 20%, that company's gains also fall onto Yahoo's bottom line, which provided further gains.
In fact, Mayer has so far failed to engineer any organic growth at Yahoo. Revenues for the period ending in March were below those of a year ago, before she took over. So was gross profit. She got a bump in earnings by holding the line on expenses, cutting the cost of revenue by over $50 million, cutting general administration expenses by $20 million, even cutting research by almost $10 million.
But with the purchase of Tumblr, Yahoo is finally ready to run. Here's why.
The Nature of Cloud Development
One thing that has gone unremarked is the changing nature of how software is developed in a cloud world.
In the PC era, software could be structured, parceled out, then integrated in a systematic way. That's how mainframe development works. It's how Microsoft works. There are key executives who act as gatekeepers to the code changes, and you're either a chief or an indian.
In the cloud era, with its quick development cycles and instant scaling, this is no longer the case. You need everyone on board, and feeling they're roughly at the same level. Everyone is an indian, even the chiefs.
This is how Google works. Everyone is empowered to work outside the structure, and seek cool new ideas that might then be turned into something great quickly. That's how Google Maps developed. That's where Mayer comes from.
Mark Zuckerberg wears a hoodie for the same reason Bill Bellichick of the New England Patriots does. It's to tell the troops he's one of them, despite his money and title. Zuckerberg is just a coder, Bellichick is just a coach, and your ideas can make you into them.
This flattened organizational structure did not exist at Yahoo a year ago. Instead, Yahoo was fundamentally organized as a media company, with departments, chains of command, lines of authority. Working from home put people on auto-pilot. They got the jobs done as the jobs were defined, but they weren't empowered to think outside their functions.
This is the kind of environment Mayer is trying to build. Facebook (FB) is the competitor to measure Yahoo against, not Google. The two companies are nearly the same size in terms of revenues, Mayer is building a similar corporate culture, and the two are now directly competitive in the social space.
Tumblr and Mayer's Plans
Two things make Tumblr important to Mayer's development scheme. First, it operates in this cloud environment, with its quick turnarounds, instant scaling and flat organization. Second, it is based in New York, at the top of a nondescript old office building on E 21st Street, near Madison Square.
Mayer has no plans on moving it. In fact, my guess is much of Yahoo's development work is actually moving to Tumblr. By cycling people through a real cloud development environment, a short subway ride from New York's media companies (which are Yahoo Media's competitors), Mayer gets the complete corporate shake-up she was looking for when she gave everyone iPhones and told them to come into the office.
When those things happened, people showed up and asked why. Now she'll show them. Or at least those she intends to keep.
All this will create organic growth for Yahoo. In addition to being next to media, Tumblr is close to Madison Avenue. There are huge benefits here for Yahoo's existing teams, even those outside software.
Mayer is less interested in whether Tumblr might become MySpace than whether Tumblr's process can create more Tumblrs.
Growth to Come
I began speculating on Yahoo stock shortly after Mayer joined the company, and I see no reason to change my call. She is making the right move here, jump-starting the development process based on the right technology and corporate model, and bringing the center of her company out of its Silicon Valley cocoon into the hubbub of Silicon Alley.
I estimate Yahoo can grow revenues 20% per quarter from here, using Tumblr as a base for new applications. If she can do that she can get the company up to $2 billion/quarter by this time next year, which will absolutely thrill the street.
Remember. Because Yahoo is much smaller, on revenues, than Google, it can grow at a much faster rate on less organic growth. Integrating existing Yahoo properties into Tumblr, integrating Yahoo's ad staff into New York, and using a true cloud development model should, taken together, bring Yahoo the kind of growth I'm expecting, and bring investors a hefty return on the stock.