Now that Yahoo has announced its acquisition of Tumblr for $1.1 billion in cash — about a quarter of its cash reserves — the top three questions I see are:
How will Yahoo manage to retain, and grow, the Tumblr user base while monetizing it? Today, Tumblr is quite unprofitable, and its lack of advertising is one of the many attributes that have made it popular. Yahoo has a very difficult balancing act ahead: It has to keep Tumblr's current active user base passionately engaged and spending time on the site, while also finding a way to add advertising and other revenue sources. Marissa Mayer, Yahoo’s CEO, stated the ads will be “very light” and “really fit users’ expectations”; however, Ken Goldman, Yahoo’s CFO, added that Tumblr should "materially contribute to revenues" in 2014 and beyond. If users do not stay with the service, they will have bought a ghost town.
Can the Tumblr user base be the next influx of loyal Yahoo users? Yahoo still has a massive user base, with at least 200 million users of Mail alone, and a passionate audience on Flickr. However, it is seeking its next core audience, and Tumblr users could fit the bill. This is a similar challenge to Facebook's motivation for acquiring Instagram, however Facebook has so far held off on adding advertising to the Instagram platform.
How will Tumblr fit into Yahoo’s existing product portfolio? Yahoo has announced it plans to keep Tumblr independent, leaving both its brand and management intact. However, over time, there will be pressure to integrate it more and more tightly with other Yahoo properties. Will existing Yahoo products gain some of Tumblr’s social DNA, or will Tumblr lose some of what makes it unique?