When the news that Yahoo! Inc. (NASDAQ:YHOO) may acquire Tumblr started circulating last week, analysts were quick to draw comparisons between it and another recent billion-dollar social media acquisition – Facebook Inc (NASDAQ:FB)-Instagram. But the Tumblr deal doesn’t have much more than a price tag in common with the Instagram deal.
Different motives
Facebook Inc (NASDAQ:FB) saw a threat in Instagram. The photo-sharing network was just 18 months old, yet had gathered a sizable audience that was growing at a menacing pace. It encroached on one of Facebook Inc (NASDAQ:FB)’s core activities – uploading and commenting on photos – and had a much better mobile presence than Facebook.
So, Zuck had no problem laying out $1 billion to turn its competition into an asset. It wasn’t about growing a wider audience or generating more content – I don’t think Facebook Inc (NASDAQ:FB) has a problem with either. It was the easiest and most effective way to squash the competition before it became a real threat.
Yahoo! Inc. (NASDAQ:YHOO), on the other hand, doesn’t go head-to-head with Tumblr. But Tumblr has the right mix of content and mobile presence to make it the perfect takeover target for Marissa Mayer’s vision of the new Yahoo! Inc. (NASDAQ:YHOO).
Mayer believes content is king and the future is in mobile. In the company’s fourth-quarter conference call, she said, “The combination of more personalized content and increased product innovation will be key in getting us back on path for display revenue growth.”
Certainly, Tumblr fits that bill with more than 100 million blogs on the platform and over 50 billion posts.
Different approaches
Because the motives were different – Facebook Inc (NASDAQ:FB) looking to squash competition, Yahoo! Inc. (NASDAQ:YHOO) looking to expand its content – the approaches toward each business will be different.
Like most web startups, Instagram didn’t monetize itself with ads within the first couple years before it was bought out. Instead it was – and still is – focused on growing its user base. Facebook still hasn’t placed any ads on the site or implemented any form of monetization.
And there really isn’t much pressure for it to do so. In fact, Instagram’s growth helps mollify critics’ complaints that Facebook’s growth is slowing.
A similar story with Yahoo! Inc. (NASDAQ:YHOO) and Tumblr is unlikely. Mayer is acquiring content to help boost its struggling display advertising business. While it was once the No. 1 company in the space, Google Inc (NASDAQ:GOOG) overtook it in 2011. Subsequently, other companies in the business zoomed right past Yahoo!, including Facebook.
Since then, the company has seen shrinking returns. Last year, the banner business brought in 3% less revenue than in 2011. In the first quarter of 2013, display ad revenue fell 11% year over year.
Tumblr CEO David Karp is strongly opposed to display ads. And Mayer promised us not to screw it up. She sees the opportunity to work with the Tumblr team to “create advertising opportunities that are seamless and enhance user experience.” That sounds like she’s shying away from explicitly saying display ads.
Last year, Tumblr generated $13 million in revenue from native advertising – the same advertising business that led to Facebook’s fantastic growth in mobile revenue. It generated another $13 billion in the first quarter of 2013, and is just starting to roll out its mobile ad platform. Some analysts expect the company could produce $100 million in revenue this year. Comparatively, Instagram still hasn’t made a penny.
I expect Yahoo! will accelerate the Tumblr platform’s monetization efforts. Whether that’s through more native advertisements, display ads, or some other form of monetization will remain to be seen. But the entire point of expanding its audience and content portfolio is to monetize it. That stands in stark contrast to Facebook’s reasons for acquiring Instagram, which results in contrasting approaches toward when to increase monetization efforts.
The bottom line
These two acquisitions are vastly different. While some are pointing to Facebook’s success with Instagram as a reason to believe Yahoo!’s Tumblr acquisition will be a success, they’re relying on faulty logic. The two businesses had very different motives and very different plans for what to do with their newly acquired businesses.
Zuckerberg spent a billion on a company, and while he was mocked by many, Wall Street isn’t looking for them to make money on it any time soon. The opposite seems to be true with the Tumblr acquisition. It’s hard to imagine Wall Street letting Yahoo! get away without making a few bucks off its latest acquisition.
The article The Difference Between Instagram and Tumblr originally appeared on Fool.com and is written by Adam Levy.
Adam 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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