Yahoo has had some tough times in recent years. But things have slowly begun turning around since Marissa Mayer (formerly a senior executive at Google) became CEO.

So, the announcement that Yahoo would purchase Tumblr for $1.1 billion is not surprising; however, it is interesting. Once again, a major company has decided to acquire a growing social media firm for a lot of money, even though the social media firm itself does not generate much sales volume or profit.

Consider these observations from CBS News:

“Acquisitions are a way of life in Silicon Valley, a place where two plus two frequently adds up to billions. That is to say, deals are often conducted for reasons other than numbers in a ledger, whether for a promising piece of software or a viable business model. In this case, Tumblr has something that went missing at Yahoo years ago: growth potential. And that is key to Yahoo CEO Marissa Mayer ultimately keeping her job. Yahoo is funding the deal mostly with cash. As with many acquisitions, the question is what the purchase ultimately delivers to the acquirer.”

“How much could Tumblr add to Yahoo’s traffic? According to comScore, Tumblr in March had 29.3 million unique U.S. visitors. Yahoo’s combined sites got 191.4 million visitors, more than another other company except Google, which had 1 million more. There is no way to tell from the outside how much use overlap Yahoo and Tumblr have. If there were none, which seems unlikely, Tumblr would add just over 15 percent. But what would that practically mean for Yahoo? Not significantly more on the bottom line. Profits have been kept up through cost-cutting, including the steady drop in spending on research and development. That is dangerous at a tech company like Yahoo, whose CEO has stressed the importance of innovation.”

“Yahoo’s trouble hasn’t been traffic. Its sites collectively are a major destination on the Internet. But unlike Google, Yahoo has struggled to turn that volume of users into money. Revenue has been flat. Display ad revenue, the type that you might expect to be important at a site like Tumblr, continues to drop. But a 15 percent increase in users won’t fix that picture for Yahoo.”

Click the Yahoo icon to read more and to view a video clip.


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