Yahoo! Inc. (NASDAQ:YHOO) recently inked a billion dollar deal to buy Tumblr, which hosts photo-centric blogs. Although the deal hasn’t closed yet, Tumblr is already starting to incorporate advertising into its service. That’s the “holy grail” onto which Yahoo! is looking to latch.
Falling from Grace
Yahoo! was a one-time market darling, helping lead the tech charge that culminated in the 2000 market peak. Since the tech bubble burst, however, Yahoo! Inc. (NASDAQ:YHOO) hasn’t been viewed the same way by the market. Google Inc (NASDAQ:GOOG) is largely to blame.
Google’s dominant Internet search platform and massive advertising reach pushed Yahoo! into the shadows. While ads next to Google search results are an important aspect, the company’s AdSense network is also a key business. AdSense opened the company’s technology up to the masses and quickly became an industry standard.
Although Yahoo’s collection of websites are still important and widely used, its advertising business lacks the scale of Google Inc (NASDAQ:GOOG). Yahoo’s revenues have been weak at best for about four years. New CEO Marissa Mayer, who once worked at Google, has been looking to change things.
Talent
So far, Mayer’s efforts have largely been to acquire smaller companies, their technology, and, most importantly, their people. To this end, Yahoo! Inc. (NASDAQ:YHOO) acquired Snip.it, Alike, and Jybe in the first quarter. That’s part of a solid effort to change the culture at Yahoo!
Mayer wants to instill an entrepreneurial spirit at her new company. However, along the way, she has looked at some transformational purchases, too. The two most notable being video services Dailymotion and Hulu. The Dailymotion deal was scuttled by the French government. Hulu is still being bid around.
Best Fit
Hulu is probably a harder fit than Dailymotion would have been because the service is so tied to the old media world. If it buys Hulu, Yahoo! Inc. (NASDAQ:YHOO) will probably be taking on more problems than it’s worth. Dailymotion would have been a better fit, since it offers a service more like Google Inc (NASDAQ:GOOG)’s YouTube. That said, it would have been a largely new business to learn.
The successful Tumblr bid, meanwhile, is probably the best opportunity. It extends the company’s reach in a known business (photos and customer generated content). Moreover, Yahoo’s Flickr photo service already works closely with Tumblr.
A Big Expansion
Yahoo! expects the deal to increase its “audience by 50 percent to more than a billion monthly visitors, and to grow traffic by approximately 20 percent.” That’s a lot more traffic to monetize. The big concern, however, has been that Yahoo! Inc. (NASDAQ:YHOO) would come in and mess a good thing up.
Mayer promises to let Tumblr continue on in an independent fashion, which is probably the right decision. One good sign for the marriage is that Tumblr is already starting to incorporate advertising in its own way and on its own terms before the deal has been consummated. So Yahoo! will just inherit a preexisting revenue stream when the deal is completed later in the year.
Losing Ground
The sleeper in this deal could be Tumblr’s mobile business. Google is the advertising giant in the online space, but it doesn’t have the same scale in mobile advertising. That’s part of the reason why the company’s margins have been contracting of late. It just doesn’t earn as much in the mobile world as it does online.
This also means that Yahoo! Inc. (NASDAQ:YHOO) can still build a mobile ad business on a competitive basis. Of course Tumblr’s large community will also help Yahoo’s compete online, but it won’t unseat Google Inc (NASDAQ:GOOG) any time soon. That’s OK, though, because there’s plenty to go around in Google’s shadows.
Another Ad Network
For example, IAC/InterActiveCorp (NASDAQ:IACI) is another company that generates money by advertising across its network of sites and services. The company owns second tier search networks like Ask, dating sites like Match.com, and a varied collection of entertainment and information websites.
After a series of corporate actions, IAC/InterActiveCorp (NASDAQ:IACI) has grown its top line in each of the last three years. It also started to pay a dividend in 2011, and has already started increasing it. IAC/InterActiveCorp (NASDAQ:IACI) is well off its all-time highs, but is hardly a cheap investment. That said, for growth and income investors, it’s a nice way to get Internet exposure. It yields around 2%.
Taking on Goliath
Google Inc (NASDAQ:GOOG)’s shares are priced for perfection even though the company’s underlying fundamentals are starting to deteriorate. That could lead to a big fall for the search giant’s shares when investors start to catch on. Google investors might want to consider cashing in some chips.
Meanwhile, investors are just starting to rethink their view of Yahoo! The shares have begun to move higher as they gain confidence in Mayer’s turnaround efforts. IAC/InterActiveCorp (NASDAQ:IACI) is clear evidence that an ad driven business can be grown even with Google around. And, the mobile market is still an open field. If Yahoo! Inc. (NASDAQ:YHOO) can get a better hold there, investors are likely to be well rewarded. The Tumblr deal is a great start.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google Inc (NASDAQ:GOOG).
The article Expanding The Ad Network originally appeared on Fool.com.
Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
