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.
According to eMarketer, Yahoo!'s market share in digital advertising dropped to 8.4% in 2012 (nearly half of what it was in 2009). Tumblr's large number of blog pages means increased ad space for Yahoo!, and new efforts by Tumblr to create interactive ad campaigns can help build on the traditional "point and click" model that is typically seen on Yahoo!'s pages. But with Tumblr's actual performance falling well below its revenue goals, it is unclear how much of an asset Tumblr can actually be for its new parent company. Tumblr reported $13 million in revenue for the first quarter, after posting $13 million for all of 2012. After spending an estimated $25 million in cash last year, Tumblr's true value to Yahoo! remains questionable at best. This means Yahoo! will face heightened scrutiny this year as investors look to assess the compatibility of these companies and their ability to improve on weaknesses seen in the past. At the time of publication the author had no position in any of the stocks mentioned. This article was written by an independent contributor, separate from TheStreet's regular news coverage.