Could Yahoo's Tumblr acquisition be the next Instagram?

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sramanFrom the time Instagram was acquired last year to the present, Instagram has blossomed from 22 million users to over 100 million. "I'm really proud of how Instagram is doing," said Facebook (NASDAQ:FB) CEO Mark Zuckerberg during the company's earnings conference call. And he should be, given that Instagram helped Facebook secure a foothold in mobile.

Facebook, which famously had a mobile problem, has also since grown to have more visitors on mobile than it does on the Web--all of that in about a year.

This week, Yahoo confirmed it would be acquiring visual micro-blogging platform Tumblr in a deal worth $1.1 billion, one of its largest acquisitions to date. The deal is already drawing comparisons to Facebook's $715 million acquisition of Instagram, and it is easy to see why. Both deals are fairly substantial and involve large companies looking to strengthen their respective mobile portfolios and appeal to a younger audience.

Instagram helped Facebook address these problems, but the company saw its percentage of advertising revenues across Facebook rise to 30 percent, up from 23 percent in the previous quarter. In order for Yahoo to succeed it will need to find out how to monetize Tumblr, as well as its many other mobile apps.

This also comes at a time when CEO Marissa Mayer would like to decrease the number of mobile apps Yahoo operates from 60-75 to a dozen or so. In the past few months, Yahoo has already made a series of acquisitions. Earlier this month, Yahoo acquired to-do app Astrid, and in March the company scooped up mobile software startup Summly. And prior to that, it also acquired Jybe, Alike, Stamped, Snip.it and OnTheAir.

Now the question that remains is if Yahoo will be able to create the same sort of growth with Tumblr that Facebook did with Instagram or if it will more closely remember Flickr, which Yahoo acquired in 2005 for a reported $35 million. Flickr's userbase quickly dropped post-acquisition. However, this week Flickr began offering users 1 terabyte of free storage in an effort to urge users to switch over from other photo sharing services like Instagram. "We hope you'll agree that we have made huge strides to make Flickr awesome again," Mayer said in a blog post.

Yahoo will need to be able to successfully monetize Tumblr's userbase, without losing users, if it wants to succeed. While Facebook has been able to grow Instagram, it is still struggling to find a good monetization strategy to work with Instagram. This is an area where Tumblr already has a leg up. In March, Tumblr began rolling out promoted posts in its apps for Apple's (NASDAQ:AAPL) iOS and Google's (NASDAQ:GOOG) Android with Tumblr Head of Sales Lee Brown telling Bloomberg that an average ad brings in "just under six figures."

Despite this, some analysts are unsure of Yahoo's ability to make a profit from Tumblr. "[The deal is] clearly predicated on the fact that they expect significant growth on their (Tumblr's) userbase. I remain skeptical of their ability to do that," said Jonathan Yarmis technology analyst with Disruptive Technologies at HfS Research. "I've had grave concerns that not only will they not be able to sustain the growth but it also puts the installed base at play," Yarmis added.

Allen Weiner, vice president of research at Gartner, sees the key to monetization a little differently. "A successful integration of Tumblr into Yahoo's forward-looking strategy could end a losing streak of purchases and fizzled launches which includes Maven Networks and Geocities as well as Livestand and Yahoo 360. Mayer's biggest challenge--something Yahoo has not shown to be a strength--is to integrate Tumblr into Yahoo's product set and get the cash register ringing again," said Weiner in a research note.

Essentially, Yahoo needs to consolidate its apps (as Mayer has said she plans to do) into a more streamlined, solid offering. The trick will be making Tumblr fit into the overall Yahoo brand without losing its key audience. Here's where Yahoo should take a page out of Facebook's book. Instagram succeeded and continues to succeed because its team currently works on improving the product and maintaining and growing its userbase. Monetization will come, but if it's pushed too strongly, too early, Yahoo will alienate the young userbase it is essentially paying for. If Yahoo can successfully do that, it may get its skin back in the mobile game.--Sandhya

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