Why Yahoo Bought Tumblr, and What it Needs to Do

Yahoo! geared up for a major announcement Monday said to be a $1.1 billion deal to take over popular blogging platform Tumblr, a move that could bring a younger, hipper audience to the struggling Internet pioneer.

The deal, first reported by The Wall Street Journal, once official would be the largest for Yahoo! since Marissa Mayer took over as chief executive last year. Neither Yahoo! nor Tumblr commented on the report.

“We don’t comment on rumors or speculation,” a Yahoo! spokesman said in an email. Mayer, however, has scheduled a news conference in New York on Monday at which the company said it will unveil “something special.”

Yahoo! has been looking at a range of possible acquisitions since Mayer took the helm last year and vowed to revive the company, which has faded in the face of competition from Google.

Tumblr could be key to Yahoo!’s strategy because of its popularity with younger Internet users. A survey this year conducted by the online data group Survata found Tumblr more popular than Facebook among those aged 13 to 25.

While Tumblr generates very little cash, bringing it in the Yahoo! family could offer the potential for new advertising and other revenue sources.

John Battelle, an entrepreneur who founded Wired and Federated Media Publishing, said “there are plenty of smart and appropriate takes on why this move makes sense,” because the the Web is moving from a static environment to one of “streams” of data.

“We’re all shifting our attention to mobile devices, and we’ve adopted the ‘stream’ as our preferred method of content discovery and consumption. That stream doesn’t work so well with standard display,” he said in a blog post.

“And Tumblr was built from the ground up as an activity stream.”

Roger Kay at Endpoint Technologies said the deal “brings a social element that Yahoo! is missing and a set of new users.”

But Kay added that “paying $1.1 billion for a company with $13 million in revenue seems a little nuts to me… Those numbers aren’t even earnings, which are surely negative. So, even if Tumblr survives intact, Yahoo is unlikely to get its $1.1 billion back over any interval that falls within a human lifetime.”

Trip Chowdhry at Global Equities Research said the deal could make sense if Yahoo! creates incentives for the Tumblr team.

“They have a very difficult time recruiting smart engineers,” Chowdhry said.

“They need the team committed to stay at least four years. So the deal should be cash and stock. Cash is bad because it creates no incentives for Tumblr employees. An asset means nothing if the talent leaves.”

Founded in 2007 and headquartered in New York, Tumblr says it has more than 108 million blogs, 50 billion postings in 12 languages and 175 employees. The website ranking site Alexa lists Tumblr as number 32 in terms of global popularity.

The Journal said Yahoo’s board unanimously approved the deal in a meeting by telephone on Friday and that it could be announced Monday.

According to the technology website AllThingsD, which is part of the Journal’s parent company, Tumblr founder and chief executive David Karp will get a large cash windfall and also stay at Yahoo! for four years, retaining control over the service.

The website said Yahoo! would take a largely “hands-off” approach to Tumblr without integrating into the Internet giant’s other services. But Yahoo! will help support Tumblr’s efforts in advertising and expand distribution, it said.

Yahoo! recently failed in a bid to take over the online video site Dailymotion after the French government, which owns a stake, quashed the deal. The California firm is now reported to be interested in another video website, Hulu.

Mayer is seeking to help Yahoo! regain its former glory, by emphasizing social media and mobile Internet.

Tumblr has grow into one of the most popular social media sites, but has also been dogged by copyright issues.

It got a round of funding in 2011 worth $85 million that reportedly valued the operation at $800 million.

Source: AFP