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Yahoo (NASDAQ:YHOO) decided to dive head first into the social media world with its recent acquisition of Tumblr. Tumblr is a popular blog and social media network, which is home to unique content from all corners of the world. The agreement was finalized at $1.1 billion and it was announced Tumblr will remain an independently operated business. In this brief article I would like to take a look at some of the benefits and concerns associated with this deal.

Background

Founded in 2006 by David Karp, Tumblr, which has just 175 employees, has over 300 million monthly unique visitors with 120,000 new users every day. On Tumblr, there are over 108 million blogs, which post an average of 90 million times every day. Yahoo's Marissa Mayer publicly stated "We promise not to screw it up" to ensure Tumblr users their beloved platform would remain intact.

Benefits

  1. David Karp, 26, may be the revolutionary mind Yahoo needs for future innovation. Going forward, Yahoo will of course leverage his creative ability across all aspects of the business.
  2. Yahoo is gaining valuable access to the younger generations. Up until this point, Yahoo's social media exposure has been relatively insignificant. The information it can pull from these users should in turn help the broader company's targeting ability.
  3. If Yahoo can monetize its 300 million monthly visitors the revenue will add up quickly.

Concerns

  1. What advertiser is going to want to associate its brand or product with large amounts inappropriate content? Advertisers have up to this point been hesitant to pursue campaigns on Tumblr as the website is home to significant amounts of pornographic, racist, and an array of other inappropriate content. Going forward, the company needs to clean up its website if it wants to draw business from industry leaders. However, if the site clamps down on its content will users push back?
  2. Tumblr has no sustainable competitive advantage as barriers to entry are very low. Currently on the market there are a variety of Tumblr alternatives such as Wordpress and Blogger. Both these platforms were once the sexy platform Tumblr is today. With sufficient startup capital, anyone, including myself, can create a business identical to Tumblr.
  3. Karp since Tumblr's early days has been opposed to advertising on Tumblr as he feels it goes against the site's atmosphere. Karp will remain in charge of the independently operated business but he will of course eventually feel pressure from Yahoo shareholders. It is far too early to tell if Yahoo and Karp can find ways to monetize Tumblr. In a controversial article published in early 2010, Karp stated "We're pretty opposed to advertising" and "It really turns our stomachs."
  4. Yes, Tumblr is drawing over 300 million in monthly users every month but the company will not be able to generate revenue from the vast majority of these users. The majority of these page views belong to the users who are creating the content. To place advertisements on my personal blog through Tumblr, Yahoo must first set up some sort of revenue sharing agreement with its users. It's safe to say a significant portion of Tumblr's users are not in it to make a buck and it is unknown how users will respond to a possible agreement. Personally, I use Blogger as the platform for my own blog, circaalpha.com, where I participate in a revenue sharing program through Google Adsense.

Conclusion

This acquisition does have the potential to give Yahoo exposure to both younger users and the social media scene. However, there are many significant uncertainties and risks associated with this deal.

Source: Tumblr: Weighing Yahoo's Acquisition