Yahoo-Tumblr deal: a bold and risky purchase (+video)

If CEO Marissa Mayer can make her $1.1 billion acquisition of Tumblr work, Yahoo's prospects will brighten. But Yahoo-Tumblr are very different companies with audiences that don't match up well.

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If you’re a Tumblr user or Yahoo investor worried about what the new Yahoo-Tumblr deal will mean for you, it may help to think of the old thought experiment: What happens when an almost immovable object (Yahoo) gets hit by a nearly irresistible force (Tumblr)?

Or in corporate terms: Is there synergy when big and slow meets cool and broke?

The $1.1 billion deal is a bold attempt by Yahoo to jump-start its growth and, eventually, its profits. If chief executive Marissa Mayer can make the deal work, she will have taken a major step toward making Yahoo relevant again as an Internet powerhouse.

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Tumblr’s 117 million users give Yahoo a real social media platform; a link to mobile traffic (12 million unique visitors in March, according to ComScore); and fast growth. Its number of users doubled in a year and its mobile users have tripled.

The risks remain immense for both companies, however, because their audiences are so different. In one fell swoop, Yahoo should see its audience swell by 50 percent. But it’s paying a pretty penny for the privilege. The Sunnyvale, Calif., company is paying $1.1 billion for a six-year-old company, started in the founder’s mother’s New York apartment, whose revenues are estimated to have been $13 million last year. 

The figure isn’t public because Tumblr is a private company. But if the estimate is accurate, it means Yahoo is paying 85 times annual revenues – a premium more reminiscent of the days of the Internet bubble than a sound dollars-and-cents acquisition.

The deal is risky for Tumblr, too, which by some reports appeared to be within months of running out of money. The company already had started to run some ads in the past year, quite a turnaround for its founder and chief executive, David Karp, who famously told the Los Angeles Times in 2010 that he was "pretty opposed to advertising. It really turns our stomachs."

Nevertheless, Tumblr recently started streaming ads on its mobile app and, reportedly, was scheduled to do the same on its website. Yahoo plans to experiment with somewhat more advertising on Tumblr. One area might be the website’s dashboard, a combination homepage and inbox, and on the pages of popular bloggers (who give their permission for ads).

The biggest challenge for the two companies is not financial, however, it’s character. Yahoo is corporate. Tumblr is a community of image-oriented content creators with sometimes off-putting ideas (such as a heavy does of porn and other adult content). And the chasm could prove difficult to bridge.

Will corporate advertisers take to a site that offers images that, in Ms. Mayer’s words, are not “brand safe?” Will Tumblr’s young independent creators take their work elsewhere, making Tumblr fizzle the way Myspace did after it was bought by News Corp.?

Not surprisingly, the initial response from Tumblr users to the deal was not enthusiastic.

“Why dont we create chaos? I mean, isn’t that the only thing we are good at?” wrote a-lterity on hearing the news.

Another blogger, cipsikolakilit, did the Tumblr thing: posting eight clips of people simultaneously looking stunned or angry.

Wall Street wasn’t particularly impressed, sending the stock price up only slightly.

The heads of both Yahoo and Tumblr moved to allay those fears Monday, saying Tumblr would not be rebranded, would not move from its New York headquarters, and would still be run by Mr. Karp. But they did so separately and their methods were telling.

Mayer held a conference call with Wall Street analysts to explain the deal, saying: “We want to let Tumblr be Tumblr, and let Yahoo be Yahoo."

Karp took to his site to write to his users about the advantages of the linkup: “Tumblr gets better faster. The work ahead of us remains the same – and we still have a long way to go! – but with more resources to draw from…. We also share a vision for Tumblr’s business that doesn’t compromise the community and product we love,” he wrote. “As always, everything that Tumblr is, we owe to this unbelievable community. We won’t let you down.”

Then he signed off: “(Expletive) yeah, David.”

Mayer and Karp have a long way to go to make this work.

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