Yahoo! (NASDAQ:YHOO) continues to focus on mobile phones with its product redesigns as it announced a new iPhone application for its photo sharing service, Flickr, in an attempt to directly compete with Facebook’s (NASDAQ:FB) subsidiary, Instagram. Overall, we think this is a key release by Yahoo! because the photo sharing feature of Flickr can (1) attract users to Yahoo!, (2) help retain existing users, and (3) increase the amount of data that Yahoo! has on its users, thereby increasing its display ad quality.
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(1) Flickr Mobile Can Attract New Users
As we’ve stated previously, Yahoo’s mobile focus will be key in helping it drive new user growth, especially in emerging markets. On average, new emerging market users are likely to access the Internet via their mobile phones before they access it via a PC. Since social photo-sharing is also becoming a big phenomenon among users, improving its Flickr application is a smart way for Yahoo! to capture this growth. Overall, if new smartphone users use Flickr for their photo sharing needs, they could stick to Yahoo! for other things such as email, news, chat, etc.
Additionally, Flickr’s improved integration with Facebook and Twitter will help it attract users who are yet to use photo sharing software on their smartphones. Photo sharing is a key part of the social experience, and Flickr had about 2.1% market share on Twitter in June 2011 in a market of 2.2 million tweets per day made using third party photo services.  We think this large market is far from saturation and that Flickr, because of its redesign, can gain a substantial chunk of the market.
(2) Mobile App Will Help Retain Existing Users
Flickr released its first iOS app in 2008, but the release was more or less a failure. The company did not put too many resources into the app’s development, which became a big disappointment for users who waited over a year for the app. 
Due to the absence of a good mobile application, the entry of Instagram severely dented Flickr’s user base. For example, according to research firm Quantcast, Flickr’s unique visitor numbers in the United States declined from 15 million in January 2012 to 12 million in December, a decline of over 20%.  However, we think that the new look of Flickr for iOS combined with the recent user backlash at Instagram due to privacy concerns will not only keep users from switching to Instagram but also attract Instagram users who have decided to leave the service. Flickr’s integration with Facebook and the reviews that users have given it on the app store (4 stars) strengthen our view.
(3) Flickr Can Help Yahoo! Increase Ad Quality
Flickr is likely to be the key social platform that Marissa Mayer will leverage during her time at Yahoo!. Even if a user uses the application to upload photos to Facebook, Flickr will store the pictures on its servers and this data can be used to improve Yahoo!’s ad quality on its own properties. The influx in data will be massive given that Facebook users uploaded 72 billion photos in 2011 while Flickr had a total of only 6 billion photos. If Flickr’s mobile app can capture even 1% of the photos uploaded to Facebook, it will increase the total number of photos on its database by over 10%. 
This data will be useful for Yahoo! because when users take and share photos, they are providing data on their whereabouts and interests, all of which can be used by Yahoo! in its ad algorithms. If Yahoo! engineers are able to use the Flickr data to improve ad quality, we will see revenue per page view for Yahoo!’s ads increase since advertisers are likely to pay more for better ad targeting. Over the long term, we could see revenue per impression increase faster than our forecasts, creating upside to our price estimate.
We currently have a $20 price estimate for Yahoo!, which is approximately the same as the current market price.Notes: