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Yahoo 'won't screw Tumblr'? Then Tumblr will screw its balance sheet

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No future, just people - mining worthless web assets

Yahoo! – like Microsoft - has bought web assets that really had nowhere left to go as independent entities, despite the fact that tech journalists and pundits fully armed with 20/20 hindsight might hail the latent brilliance of their founders. At some point Yahoo! will need a return on its money.

Looking over at Redmond, Microsoft is already fiddling with the web asset it promised to keep at arms length. It's bolted Skype into Outlook.com – formerly Hotmail – and developed a client for Windows Phone 8 and Windows 8.

Where next? Business, that's where, and Microsoft is adding Skype to its Lync communications server. The creeping assimilation of the Skype client is inevitable, because Microsoft must recoup its billions. Over time, product and marketing mission creep means that Skype’s platform and development roadmap will be tied ever tighter into Windows.

This has to happen. Ballmer's gamble wasn't unanimously supported by the Microsoft board, and apparently it was Bill Gates who swung for his friend to rally the board.

Yahoo!’s plan for cashing in on Tumblr is simple: ads. Yahoo! will infuse the blogging service with its personalization and search to serve up ads that are “seamless and enhance the user experience” according to Yahoo!s CEO Marissa Mayer.

Yahoo! certainly needs the business and likely sees Tumblr as quick infusion of a nice captive audience - as Yahoo!’s organic growth of general web searches is stalling. Yahoo! has gone from second to the web’s third search service, behind Bing and Google; based on “powered by” results, it’s nowhere as Yahoo! search is actually Bing.

Yahoo! is making its money from Bing - 88 per cent of the revenue made from Bing search results goes to Sunnyvale instead of Redmond. But Bing alone hasn't been enough to increase Yahoo's search market share.

Tumblr is potentially a way for Yahoo! to make more money from Bing by targeting a youth demographic versus its existing audience when its share of general web searches is falling. That Microsoft-Yahoo! search deal that Mayer recently complained about was recently extended to 2013.

The test for Tumblr’s continued independence will therefore be when it becomes clear that the revenue from flinging highly personalized ads for thick-rimmed specs to hipsters isn’t rolling in. Or, as it was put in the case of Microsoft and aQuantive: when it becomes evident that the acquisition hasn’t accelerated growth “to the degree anticipated".

When that happens, expect the kind of heavy handed service changes that’ll start to make users carp about how Tumblr ain't what it used to be and up their hipster sticks for some other social network.

That could happen sooner than you think. Yahoo! reckons Tumblr will “boost revenue” by 2014. Yahoo! earned $4.9bn last year – so it's paying roughly 20 per cent of what it earned for an asset estimated to have made a mere $13m. At Tumblr’s estimated earnings, it would take about 10 years before Tumblr pays off.

Tumblr’s CEO might have a gift of spotting a budding social networking opportunity, but he’s not been able to turn his skill at attracting short-form bloggers into the ability to make money from them. Yet - we're being lead to believe - Tumblr's CEO will remain in charge and independent of Yahoo!.

The mountain that Tumblr must climb becomes steeper when you subtract from potential revenue the mythical “accretive revenue” that Silicon Valley types talk about when buying another company. Accretive revenue is the idea you add one company’s revenue to another's to produce one-plus-one-equals-two revenue. This doesn't happen, as Microsoft proved on aQuantive, Oracle proved on Sun and Sun proved on StorageTek.

Experience in Silicon Valley tells us that the best you can hope for from M&A is expanded market share. The poster child is Hewlett-Packard’s purchase of Compaq in 2001. That deal produced a painful and confused assimilation process, but eventually by the mid 2000s saw HP leapfrog over Dell to become the world’s biggest PC company.

If users were PC shipments, Yahoo! has achieved a similar goal here: 300 million hipsters flying under the purple-silk flag of Marissa Mayer in one $1.1bn-sized grab.

But users who pay nothing directly are not PC shipments, not even very-low-margin PC shipments. If Yahoo! has truly spent $1.1bn on Tumblr to leave it alone, that would make no sense at all - and Mayer will be fired.

In reality she bought Tumblr to make money, so the clock is ticking. It won’t be long at all before the SEO and business development wizards of the Yahoo! mothership are instructing Tumblr’s entrepreneur CEO, and that will be the first turn of the screw for its happy porn-surfing users. ®

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