What Yahoo! Inc. (YHOO) Needs to Do With Tumblr

Yahoo! Inc. (YHOO)Every time Yahoo! Inc. (NASDAQ:YHOO) ties itself up in a deal, investors can easily wonder whether the company will finally piece together its Web technology and Web content, two areas of business that Yahoo! seems to have operated somewhat discretely. In all likelihood, Yahoo! wants to remain in the business of its own Web-content creation, and Web-content assemblage based on third-party materials.

But, its content business will have a better chance of making a bigger splash in the overflows of Web information only if Yahoo! Inc. (NASDAQ:YHOO) really strives to leverage its Web-technology capability by applying uniquely Yahoo!-coding techniques and developing supporting Web tools to help enrich its users’ content-consuming experience.

Tumblr purchase

Has all that come to fruition this time with Yahoo! Inc. (NASDAQ:YHOO) adding another Web property, Tumblr — a collection of user-generated blogs–to its already-sprawling Web-content presence? Little to Yahoo! shareholders’ surprise, none of what has been desirable is forthcoming just yet.

The Tumblr purchase reportedly models Google Inc (NASDAQ:GOOG)‘s YouTube acquisition, which allowed YouTube to remain as a stand-alone company with a separate corporate and tax reporting identity under YouTube, LLC. Yahoo! intends to keep Tumblr independent, and even more so on management and operations for the blogging-platform operator. To grant Tumblr’s current team continued development discretion is “not to screw it up,” according to Yahoo! Inc. (NASDAQ:YHOO) CEO Marissa Mayer.

But clearly, spending over $1 billion of shareholders’ money is not just for the right of listing in Yahoo!’s balance sheet an investment in an asset called Tumblr, Inc. Yahoo! has an obligation to integrate Tumblr’s blog publishing service into its own business settings. To be sure, Google Inc (NASDAQ:GOOG) never left YouTube just hanging on its balance sheet.

Behind YouTube video ads, it’s all Google’s ad placing and serving technologies, plus advertisement analytic tools to provide marketers with necessary business intelligence and help them better understand their target audience. Given that Yahoo! Inc. (NASDAQ:YHOO) is no front runner in managing display ads, there will be much ground that the company has to cover when trying to capitalize on Tumblr’s 13 billion monthly pageviews.

Advertising model

As much as the advertising model is at its core a bit counter-intuitive in a traditional business sense, it is still the one practical monetizing solution for Web companies to make money. Everywhere else in the business world, if a company provides a product or service, it expects whoever uses it to pay. Not an all-certain business exchange on the predominantly free Web. Here, companies don’t really sell their Web services and application tools to users.

Instead, many Web companies monetize their user presence and usage to collect ad dollars from other businesses offering traditional products or services. This makes a strange business practice for Web companies. Web companies must find ways to please advertisers that actually pay the expenses and contribute to profits, but they do this potentially to the detriment of their underlying business and real customers.

This can be especially difficult for Yahoo! when trying to turn Tumblr, currently an ad-free platform, into an add-laden marketplace. Facebook Inc (NASDAQ:FB) went through the same path after its early resistance to an ad-supported business model. It’s just easier to ask for ad dollars from marketers eager to get in front of any large audiences than persuading users, individual or organizational, to pay to use the Facebook platform.

While Facebook Inc (NASDAQ:FB) users have really no legitimate reasons to complain about seeing ads embedded in their news feed and displayed elsewhere throughout their Facebook Inc (NASDAQ:FB) pages, Tumblr users, the more hippy, creative bunch, may just feel entitled to their pristine blogging environment and resent to having ads popped up within their elegantly crafted blogs.

Yahoo! strategy

One has to admire Yahoo! Inc. (NASDAQ:YHOO)’s bravery to be willing to face such a delicate issue. But considering that Yahoo! earns its revenue almost entirely from ad services, it’s just too alluring not to try to monetize Tumblr’s user popularity, hoping that at some point it can recoup the $1.1 billion handed out in the snap of a finger. But what advertising strategies does Yahoo! have?

It seems that the least Yahoo! must do is to marry particular representations of specific marketers to the unique images of individual blogs. It’s not an easy targeting advertising task and will call on Yahoo!’s coding techniques. How about taking a page from Google Inc (NASDAQ:GOOG)’s ad book and sharing ad revenue with Tumblr content creators, the bloggers? An AdSense-like reward program may provide a financial incentive to quiet down the outcry from some Tumblr users.

In an ideal business setting, Web companies should be able to sell their tech services and tools to their Web users. A charge of just $1 per month for Tumblr’s 108 million blogs means an annual revenue of nearly $1.3 billion, whereas Yahoo! Inc. (NASDAQ:YHOO) only pulled in a total of ad dollars below $5 billion in 2012 from all the sites it operates. Sometimes, it’s easy to forget that behind the ease of Web usage, there are the physical, supporting servers, data storage, and network equipment that require real costs to deploy.

At the minimum, Web users can see how different application tools may bring varying user experiences and results. If Yahoo! could substantially contribute to a better use of the Tumblr platform through its coding and app-developing capability, and somehow figure out a selectively fee-based blog-publishing service mechanism, it would certainly help alleviate the pressure of relying solely on advertising.

In any case, Yahoo! Inc. (NASDAQ:YHOO) will have to do something meaningful about Tumblr, either on the ads or the apps. A mere collecting another Web outlet without a well-conceived integration won’t help Yahoo!’s turnaround. Only time will tell, and hopefully at some point, Yahoo! could finally change this overwhelming image as mostly an owner of sprawling Web properties, and the techie side of it would also shine through. Besides, it may not be a guarantee that business models for Web companies won’t shift over time from the ad-supported system to a user-paying scheme.

The article What Yahoo! Needs to Do With Tumblr originally appeared on Fool.com.

Jay 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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