Yahoo! Inc. (YHOO)’s Risky But Smart Decision

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Yahoo! Inc. (YHOO)Now that Yahoo! Inc. (NASDAQ:YHOO) has finally announced the acquisition of Tumblr, the media is all over this deal, mostly with a pessimistic tone. There are some solid reasons to be skeptic about this acquisition, and Yahoo! Inc. (NASDAQ:YHOO) still needs to go a long way in order to prove it can remain a relevant player in its industry. However, the deal makes a lot of sense considering the circumstances.

The glass half empty

Yahoo! Inc. (NASDAQ:YHOO) is under pressure. Some may say it´s even desperate to revitalize its image and attract more traffic in order to regain some of the traction it lost over the last years. The company has been lagging competitors for a long time, and something needs to be done in order to turn things around.

Google Inc (NASDAQ:GOOG) has become the unquestionable leader in search and the company owns assets like Gmail and YouTube, which are enormously valuable when it comes to generating traffic and selling online ads.

In addition to that, Facebook Inc (NASDAQ:FB), with its more than one billion users, has changed the competitive landscape in the industry by benefiting from the popularity of social networks and seducing advertisers with the enormous amounts of information it collects from that user base.

Big deals in the tech industry don´t have the best track record of success, especially when they are done by companies looking for ways to solve their problems as opposed to capitalizing an opportunity for growth. And Yahoo! doesn´t have an auspicious acquisition history either. Deals like Delicious and Flickr turned out disappointing users of these services after they were incorporated into Yahoo! Inc. (NASDAQ:YHOO) and modified by the company.

The price tag of $1.1 billion looks expensive considering that Tumblr produced $13 million in revenue during 2012 and is expected to generate $100 million in 2013. If that weren´t enough, there are some important issues that Yahoo! will need solve, like the fact that Tumblr has plenty of pornographic content that could be a problem when it comes to monetizing the platform via advertising.

These kinds of deals can be complex to manage, and Yahoo! Inc. (NASDAQ:YHOO) needs to be careful not to scare Tumblr users away. This is far from a sure bet by Marissa Mayer and her team, so we are miles away from being able to tell if the Tumblr deal will effectively solve Yahoo!´s problems, or even justify its price tag over time.

The glass half full

It is risky and complicated, but that doesn´t necessarily mean it´s a bad decision. To begin with, Yahoo! is gaining access to a big and growing audience; Tumblr has 55 million bloggers, and 300 million visitors per month. More importantly, the quality of those users is perhaps even more relevant than the number itself.

Tumblr may inject a lot of life and energy to the content in which Yahoo! currently relies. Tumblr caters to a younger demographic that spends massive amounts of time sharing photos, videos and animated GIFs on the site, this is something that Yahoo! doesn´t have, and a much welcome addition to the company.

Tumblr has also been stealing traffic away from Facebook Inc (NASDAQ:FB) and outgrowing Google Inc (NASDAQ:GOOG)´s blogging platform. Keep in mind that Yahoo! has been losing a lot of ground to these competitors over the last several years. Buying a ‘cool’ company that is doing better that the competition in its area is certainly a start in the right direction, and it could be a big morale booster for the company.

One big area in which Yahoo! Inc. (NASDAQ:YHOO) has been lagging the competition is mobile, where most of the industry growth is coming from. Google Inc (NASDAQ:GOOG) has Android, the dominant mobile operating system with a global market share of more than 75%, and the company also owns many of the most popular cross platform applications and services like Search, Gmail, Maps and YouTube among many others.

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