Spending $1.1 billion to save Yahoo

Yahoo Inc. is going to spend $1.1 billion in cash to purchase blogging site Tumblr, which has yet to make money. It’s a bold move, especially for the closely watched CEO Marissa Mayer.

Here are a few of the details and rational for the deal from the Wall Street Journal story:

Tumblr, founded in 2007, fast built a following by making it easy for people to post blogs and photos, follow other people on Tumblr and receive updates via a feed. The website’s simple design has lowered the bar for online publishing and effectively merged blogging with social media.

By acquiring Tumblr, Yahoo would instantly gain a social-media site that has become a hub of communication and blogging for millions of people, but one that generates little revenue.

Tumblr Chief Executive David Karp has focused on building the company’s user base for its minimalist blogging platform while leaving for later the question of earning money. It is a pattern typical for young Internet companies.

Tumblr began placing ads on its service last year. Mr. Karp, who once told the Los Angeles Times that he was “pretty opposed to advertising,” said in recent media reports that Tumblr generated $13 million in revenue last year.

People familiar with the matter said Yahoo believes it could help Tumblr bring in more money by selling ads, boosting its own revenue in the process.

The New York Times points out the significance of the deal for Mayer and how integrating it will also be a challenge:

The acquisition is the biggest yet under Yahoo’s chief executive, Marissa Mayer, as she attempts to reinvent the once-embattled Web pioneer’s fortunes. Under her, the company is seeking to make up for years of missing out on the growing use of social networks and mobile devices.

Buying Tumblr is intended to help address that shortfall. The six-year-old company is one of the most popular blogging services, with over 108 million blogs. Buying the company could provide a wealth of user-generated content.

The acquisition will be a test for Ms. Mayer, who will have to ensure that Tumblr does not get lost inside Yahoo. In the past, acquisitions made by Yahoo’s former chiefs, including Geocities, an early social site, and Flickr, the popular photo-sharing Web site, have either been shuttered years later or neglected within the company.

The Guardian also notes that this is a big deal for Yahoo, pointing out they plan to live stream the announcement:

With a high-profile press conference scheduled for Monday afternoon at a location in a lounge in New York’s Times Square, just a couple of miles from Tumblr’s headquarters, nobody expects Mayer will turn up empty-handed. According to the Wall Street Journal on Sunday evening, the Yahoo board have agreed to pay $1.1bn for Tumblr and will let it continue to operate as an independent business.

Yahoo declined to comment ahead of the announcement, but pointed out that it will be streamed live. That’s something the company previously only did (in audio) for its quarterly financial results. Which points to Mayer being aware of its significance, and wanting the world’s media to realise it too.

For Yahoo, capturing the white-hot blogging site which is so easy to use that it repeatedly and effortlessly captures the zeitgeist (such as “White Men Wearing Google Glass“) could catapult it back into the top flight of contenders, in a web world that has become hugely more complicated since it was set up in March 1995 – before Google and nearly a decade before Facebook.

And it could be that Tumblr needs Yahoo just as much as Yahoo needs Tumblr, the Guardian reports:

But for Tumblr, Yahoo could bring the skills at pulling in advertising sales it has been sorely missing. It also looks like something of a shotgun marriage. Tumblr only has a few months’ worth of cash left, according to industry gossip, and has been shopping itself around the industry for a little while. It pulled in $13m of advertising in 2012, but is spending far more than that.

It hoped to hit a $100m revenue target for 2013 but that seems unlikely now, making its purchase a potential lifesaver for both companies, and for investors.

Unlike Facebook, Tumblr has been slow to pull in advertisers. Speaking to the Guardian in January 2012, Karp expressed disdain for how other sites use ads. Of Google-owned YouTube, he said: “They take your creative works – your film that you poured hours and hours of energy into – and they put ads on top of it. They make it as gross an experience to watch your film as possible. I’m sure it will contribute to Google’s bottom line; I’m not sure it will inspire any creators.”

No matter what, it’s a big price to pay for a site that’s not generating any money and could be out of cash. Yahoo is banking on selling ads across platforms and creating another reason for users to visit its site and use its search.

Translating users of one site to another can be difficult at times and history is full of deals like this one that haven’t panned out.