Yahoo seeks turnaround with $1.1-billion deal to buy Tumblr

SAN FRANCISCO — Yahoo Inc. Chief Executive Marissa Mayer is attempting a bold — and risky — strategy to turn around the struggling Internet giant with the $1.1-billion acquisition of Tumblr, a trendy social blogging service popular with teens and young adults.

Though Yahoo still has a massive online audience, it’s losing its grip on young people and how they consume the Internet on mobile devices. Tumblr, a 6-year-old company with 100 million users who share links, photos and blog posts, represents the new guard of the Internet.

With Tumblr, the former Google Inc. executive is making her biggest move yet to make Yahoo relevant to a new generation. In doing so, she’s hoping to revive Yahoo’s business, which has been in a prolonged slump.


But analysts say paying such a big price for Tumblr, which in late 2011 was valued by its investors at $800 million, had better be worth it. Yahoo has a history of buying promising young companies only to let them waste away. Acquisitions under previous Yahoo chiefs such as Geocities, an early social networking site, and Flickr, the popular photo sharing website, were long neglected within the company.

“Certainly Yahoo has a track record of taking cool and making it uncool,” said Altimeter Group analyst Brian Solis. “Marissa Mayer is trying to bring Yahoo’s brand appeal to a different type of audience. Yahoo sees this as a path to future relevance.”

The Yahoo board of directors approved the all-cash deal over the weekend, and an announcement could come as early as Monday, according to a person familiar with the deal who spoke on condition of anonymity to preserve a relationship with both companies.

A Yahoo spokeswoman declined to comment. Tumblr could not be reached for comment.

Since she took command of Yahoo in July, Mayer has focused on redesigning Yahoo services to cater to mobile device users, mostly through the acquisitions of tiny startups. In just the first three months of this year, Yahoo bought three startups for a combined $10 million.

With plenty of cash, Mayer has been eyeing bigger deals — using a playbook from her days at Google. Mayer has kicked the tires of several high-profile companies, including online scrapbooking service Pinterest. She attempted a $200-million deal for a controlling interest in the popular video website Dailymotion, owned by France Telecom but abandoned the bid after the French government objected.

So far investors have backed Mayer. Yahoo’s stock price has surged 69% since she took over.

With the Tumblr deal, Yahoo could help it generate more money by selling ads while giving a boost to its own revenue and to its profile.

Tumblr has developed a loyal following as a go-to social network for young people but has struggled to generate revenue.

David Karp, Tumblr’s 26-year-old founder, has focused on the company as a “platform for creativity,” not to make money.

He eschewed conventional online ads, fearful they would spoil the creativity and community on Tumblr. Karp told the Los Angeles Times in 2010 that he was “pretty opposed to advertising. It really turns our stomachs.”

Nonetheless, Tumblr began placing ads on its service last year as its funds began to dry up. Reports say that Tumblr generated $13 million in revenue last year. Some advertisers have steered clear of Tumblr because of a large amount of pornography and otherwise inappropriate content on the service.

Although Karp may not have succeeded in building a big business, he has built a social network that young people identify as their own — making it a valuable prize for other Internet companies such as Google and Microsoft Corp. looking for a youthful injection. Karp has rejected all previous offers for his company, according to media reports.

In March, Tumblr had about 117 million unique users worldwide, up from about 58 million a year earlier, according to research firm ComScore Inc. On smartphones, Tumblr had almost 12 million unique visitors, up from about 4 million a year earlier, ComScore said.

By and large, Tumblr users reacted with dismay at the prospect of Yahoo buying Tumblr. Many users were not born yet when the online portal was formed in 1994, and they fear it will ruin the online service that speaks to their generation. Yahoo is expected to allow Tumblr to operate as an independent business with Karp remaining at the helm.

Said one post: “Go away Yahoo you can’t sit with us.”

The problem isn’t just Yahoo’s advanced age. Tumblr’s users dosn’t even know what Yahoo is.

Yahoo, initially created as a homepage for the Internet, has struggled now that the Internet has no need for a homepage. The only time many people use Yahoo is to check email or the weather on their smartphone.

“It’s very much the generation gap,” said Alexia Tsotsis, co-editor of technology blog TechCrunch and an avid user of Tumblr since 2010.

“Teens are forming their identities, and they just don’t want anything to threaten that identity, especially this Internet portal,” Tsotsis said. “They don’t even know what Internet portal means.”

Tsotsis calls it “acquisition anxiety,” a fear that Yahoo will destroy what’s special about Tumblr, and admits she has it too. She says she may move her blog from Tumblr if Yahoo buys the company.

“And I am not 16 or 25 — I am 31,” she said.

With Yahoo spending about one quarter of its available cash on the deal, Forrester Research analyst Zachary Reiss-Davis said the company will have a tightrope to walk.

“It’s pretty clear that Tumblr is a distinctly unprofitable business. Yahoo is going to have to figure out how to monetize Tumblr users without turning them off from the service and making them want to leave. And it’s going to have to figure out how Tumblr users are going to produce revenue for Yahoo relatively quickly,” Reiss-Davis said.

Internet giants have resorted to buying fresh new technology and talent in blockbuster deals. In 2006, for example, Yahoo tried to buy Facebook Inc. for $1 billion, but Facebook co-founder and Chief Executive Mark Zuckerberg turned down the offer. Facebook last year bought popular mobile photo sharing service Instagram in a stock-and-cash deal originally valued at $1 billion. Facebook was following the example of other Internet giants such as Google, which paid $1.65 billion in stock for video sharing website YouTube seven years ago.

Tumblr, like Instagram and YouTube, is popular because the service makes it easy to create and share photos and updates.

For Yahoo, Tumblr is a big gamble. It took years for YouTube to become a significant source of revenue for Google, with marketers reluctant to put ads alongside some of its user-generated content. Facebook, nervous about alienating users, has yet to put ads on Instagram.

One person with direct knowledge of the Yahoo-Tumblr deal saw potential parallels to News Corp.'s ill-fated purchase of Myspace, one of the original online social networks that quickly lost its luster and its users as it was overshadowed by Facebook, ultimately forcing the publishing giant to cast it off at a huge loss.

“It’s a big purchase for a lot of money. If she’s right, it could help transform Yahoo,” said the person who spoke on condition of anonymity to preserve his relationship with both companies. “But in many ways Tumblr could be compared to Myspace: a lot of unmonetizable inventory and a lot of porn.”