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Yahoo! Faces New Challenges After Tumblr Purchase

Stocks in this article: YHOO FB

NEW YORK ( TheStreet) -- Yahoo!'s (YHOO) decision to buy Tumblr for $1.1 billion signals a turning point for the aging Web pioneer.

Criticisms over the purchase are abundant, but when we consider Yahoo!'s possible motivation for the transaction it starts to become clear the company is looking to reposition itself as a more social media-friendly member of the tech space.

With the purchase, Yahoo! has committed to the biggest buyout of a social networking company in recent memory. As a point of perspective, Facebook's (FB) 2012 buyout of Instagram came in closer to the $1 billion mark.

Yahoo! recently installed Marissa Mayer as CEO and at this stage it looks as though the company is making an attempt to re-invent itself in a number of different ways. Yahoo! has made multiple deals since Meyer has taken the helm but, to date, this marks the biggest of the lot.

The acquisition of Tumblr means the company has turned its focus to social-media in an attempt to make up for its constant misses connecting with younger users.

Tumblr's blogs total 108 million, so its strong presence on the Web is undeniable. A much better question to ask, however, is whether or not Tumblr can turn a profit. With limited success in mobile devices, the six-year-old company has some clear challenges moving forward.

The mobile space is quickly becoming the central consumer gateway to browse the Web, and Yahoo! will need to find ways for Tumblr to maintain a commanding presence amongst smartphone and tablet users.

Monetizing social media applications (mobile or otherwise) is notoriously difficult, with well-documented examples to be found in FaceBook's failures with Instagram.

Generally speaking, these companies look to build product loyalty first and generate revenue later. But in many cases these revenue fail to materialize.

Comments from Yahoo!'s CFO Ken Goldman suggest that Tumblr will start boosting company profits as early as next year. But if we start to see evidence that these projections are unrealistic, Wall Street is unlikely to respond favorably, given Yahoo!'s prior tendency to overpay for startups and then fail to maximize their underlying potential.

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