Yahoo! Inc. (YHOO) Changes Direction with Tumblr Purchase

Attempts to regain advertising market share

When we look at the recent earnings performance at Tumblr, some similarities become apparent. Tumblr’s reported revenue for 2012 was $13 million. This figure was matched in the first quarter of 2013, but the company’s goal of reaching $100 million by the end of this year look’s questionable. Tumblr ran through $25 million in cash last year, so it will take innovative alternatives to traditional web advertising to reverse these trends and positively contribute to Yahoo! Inc. (NASDAQ:YHOO)’s profit performance.

Yahoo!’s decision to change its focus and devote more resources to social networking comes directly from its goals to regain some of its lost market share in digital advertising. From 2009 to 2012, Yahoo! lost nearly half of its share of advertising revenue. During that same period, Google Inc (NASDAQ:GOOG)’s advertising presence improved massively, and the company now receives more than 40% of all revenue from Internet advertisements.

The competition between these two companies is fierce, but most of the prevailing arguments suggests that Yahoo! Inc. (NASDAQ:YHOO) is the major laggard.  Both are key names in search, but it is Google Inc (NASDAQ:GOOG) that has amassed clear superiority in this area.  Yahoo! has pulled ahead in the daily news area, but with Google’s continued attempts to move forward in mobile devices, Google remains better-positioned in terms of consumer software trends.

Likely Outcomes

Even with a global community of 134 million and roughly 108 million blog pages, it is unlikely that Tumblr’s networks will pose much of a threat to Google+ or Google’s dominant position in the ad space. This leaves the main question moving forward as whether Yahoo! Inc. (NASDAQ:YHOO) will be able to apply Tumblr’s strengths to its key areas of weakness, avoiding another startup failure reminiscent of Flickr or GeoCities.

Yahoo! is a very late arrival to the social networking game, and its purchase of Tumblr represents what could either be a golden opportunity to reassert itself or a call of attention to its consistent inability to successfully manage its startup enterprises. With a purchase price of over $1 billion, Wall Street will be watching Tumbler’s performance much more closely into the end of the year.

Richard is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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