Could Tumblr Be The Next Instagram?

May.21.13 | About: Yahoo! Inc. (YHOO)

When Facebook (NASDAQ:FB) bought Instagram for $1B last year, it was a startup less than 2 years old. Its photo app attracted over 30m users and sported an eye-popping user growth curve. Since then, entrepreneurs, VCs and pundits have actively wondered who would be next. I think we know now. And, ironically, it isn't a natively mobile service.

On Sunday, it was reported that Yahoo's (NASDAQ:YHOO) board approved the acquisition of Tumblr for $1.1B. And after the broad media coverage and discussion about Facebook's 1 year IPO anniversary, I think it is interesting to note that the Tumblr acquisition could be for Yahoo in many ways what the Instagram acquisition was for Facebook.

Here are five simple ways that Tumblr could be Yahoo's Instagram:

  1. It fills a gaping hole in the product offering (mobile for Facebook, social for Yahoo) and addresses a nagging question from Wall Street about how a new public CEO will lead and manage growth.

  2. It provides a large user base but almost no corresponding monetization (30m users, $0 revs for Instagram; 117m users, $13m revs for Tumblr). More importantly, monetization questions are non-trivial in both cases, based on user experience and relationship with the members.

  3. It offers an opportunity to gain more "cool points" with a largely younger audience, and in both cases there were concerns from users of the target service that threatened a revolt or at least significant defection. Ironically, my view is that Facebook's risk is not to become the next MySpace (as Rupert suggests). which means it would be everywhere today and nowhere tomorrow because of a precipitous overnight decline; but rather the next Yahoo, where the company remains large but loses brand relevance among the younger and more tech savvy circles…

  4. Price tag is ~$1B and takes place after a recent venture round ($500m valuation for Instagram weeks prior vs. $800m valuation for Tumblr months prior), which is a large departure from largely acqui-hire oriented strategies at both Facebook and Yahoo.

  5. It is yet another miss for Twitter who was actually rumored to be looking at both Instagram and Tumblr and probably could have leveraged both in unique ways to bolster its position in the social ecosystem. Of course, the lack of public currency or over a billion dollars in cash on the balance sheet probably made these deals difficult to close for Twitter. Lack of profitability probably complicated matters further.

While Marissa Mayer and Yahoo's board would love for Tumblr to be its Instagram, in many ways they probably want it to be much more. Despite the aforementioned similarities, there are some clear differences worth mentioning as well. Here are five ways the Tumblr acquisition is unique to Yahoo:

  1. Yahoo is a turnaround and wants a transformative deal to bring new talent, new product offerings and new brand affinity. In contrast, Facebook is a growth play and wanted to bolster its mobile story for the IPO while also protecting its flank from what could be perceived as potential competition for the hearts and minds of its core youth demographic. Ironically, Facebook CFO David Ebersman believes Instagram still is formidable competition.

  2. Tumblr has already started the process of building monetization into the service even if it is small now. There was nothing when Facebook bought Instagram. Both Yahoo and Facebook will have to manage the balance between ads and user interface.

  3. Yahoo is quietly establishing a significant presence in Silicon Alley. Not only has it added serious deal capacity in NYC with the addition of TR Newcomb, but it also now haves a beachhead in the city with the Tumblr acquisition.

  4. Yahoo is actively big game hunting. The company needs to inject new life into the business at some significant scale, so it will probably be taking some big swings. Let's see what it does in video. Yahoo is rumored to have been trying to acquire DailyMotion before French regulators shot down that idea and is currently rumored to also be looking hard at Hulu.

  5. Tumblr usage in 2013 has been declining slightly in contrast to Instagram, which was on fire when Facebook purchased it and still seems to be gaining solid traction. It leads to the inevitable question: Can Tumblr be Yahoo's MySpace? My view: yes it can. I don't think MySpace was all about being a fad. I think there was management culpability as well. This is a fragile audience. If Yahoo tries to impose too much of its will and culture, the community will run for the hills.

Instagram was a brilliant defensive move for Facebook and had the side benefit of providing expansion into mobile, which at that time was an underdeveloped area. Yahoo, on the other hand, needs to rebuild its product suite, organization and brand. It has already started with its acqui-hire strategy and new Flickr and Weather apps, but this acquisition raises the bar significantly. As we watch this acquisition carefully, the keys will be user growth, key employee retention, and signs of integration into the mothership, especially in terms of product and sales.

Plenty of people will debate the valuation for Tumblr because that is what people do. (That is for another post.) I believe that the Tumblr acquisition is a necessary move for Yahoo, even more so than Instagram was for Facebook. If Tumblr could be an Instagram for Yahoo in terms of providing a significant number of young users and answering basic questions about the strategy and path from Wall Street, fantastic! The key is that Yahoo needs it to lead a full transformation and repositioning. The challenge is that Yahoo can neither move too quickly or too forcefully, or else it could actually drive the audience away.