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May 20, 2013

Tumblr Deal Could Be Risky - but Rewarding - for Yahoo

By Ed Silverstein, TMCnet Contributor

If Yahoo is successful with its reported planned acquisition of Tumblr, it will mark a major turning point for CEO Marissa Mayer and the social media company she’s been leading for less than a year.

Yahoo is willing to pay $1.1 billion for the six-year-old social blogging site. In exchange, Yahoo would get a youthful audience and all that it represents.

Tumblr has among its current users many teenagers and young adults – who will now grow older in the social media market with a connection to Yahoo – if the deal comes through. Currently, Yahoo doesn’t have a strong connection with younger audiences. It’s considered a bit stodgy among the younger crowd, and has about 700 million unique visitors a month.

Also, if Yahoo owned Tumblr, the larger social media company would be able to sell more ads and see increased revenue. Yahoo has been competing with such rivals as Google (News - Alert) and Facebook for market share.

However, it’s noteworthy that Tumblr only recently started accepting ads on the site, and is not well-known for its financial success. It’s better known for its potential.

Tumblr has about 117 million users compared to 58 million in 2012, TMCnet reported, citing March data from ComScore. In addition, Tumblr has more than 108 million blogs, news reports said.

Tumblr was recently valued at $800 million, a distant amount from the $1.1 billion reported by the media as the selling price for the Yahoo deal. There is another troubling trend at Yahoo when it comes to acquisitions.

“Yahoo has a history of buying promising young companies only to let them waste away,” according to a Los Angeles Times report carried by TMCnet. “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.”

Yahoo acquired Flickr for $35 million and acquired GeoCities for $3.6 billion.

"Certainly Yahoo has a track record of taking cool and making it uncool," Altimeter Group analyst Brian Solis told the L.A. Times. "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."

Some of the other deals made since Mayer has come in as CEO in July expand connections to the growing mobile device sector. For instance, Yahoo paid $10 million for three startups during early 2013. A recent deal to acquire Dailymotion was scrapped after the French government weighed in against the move, which would have ranged between $200 million and $300 million, TMCnet reported.

Before Mayer came to Yahoo, the company had a reputation of “missing out on the revolutions in social networking and mobile devices,” The New York Times added.

There is some other risk with the new deal, too. The younger users of Tumblr do not appear to be thrilled with a Yahoo connection to Tumblr – and Yahoo is banking on them not leaving for other sites – in the fast-changing social media sector. Also, profit is an obvious concern.

"It's pretty clear that Tumblr is a distinctly unprofitable business,” Forrester (News - Alert) Research analyst Zachary Reiss-Davis told the L.A. Times. “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.”

Also, Tumblr has a reputation of having many adult-themed photos on the site – even though it has many younger users. That could be a concern for would-be advertisers wanting to avoid controversy.

The Yahoo board approved the Tumblr deal over the weekend and a formal announcement on the deal could be made on Monday.

If the Yahoo-Tumblr deal comes to pass, it would reach beyond the recent Facebook (News - Alert) deal for Instagram for about a billion dollars in cash and stock. That deal closed last September.

Also, Facebook has pretty much let Instagram run independently, according to All Things D, and that’s what’s envisioned for Tumblr with the Yahoo deal. Similarly, Google has let YouTube (News - Alert) run pretty much independently since acquiring it for $1.65 billion in stock.

There is already pressure on Yahoo to keep all of Tumblr's employees and leadership in place, news reports said.

Yahoo may be interested in other social media properties, too. Yahoo has billions of dollars available for acquisitions after selling half of its share in Alibaba, The N.Y. Times said.

Edited by Alisen Downey
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