May 21 (Bloomberg) -- Yahoo! Inc. Chief Executive Officer Marissa Mayer is staking the future of the largest U.S. Web portal on a six-year-old blogging startup with little revenue and a freewheeling stance on content created by users.
Yahoo will pay about $1.1 billion in mostly cash for Tumblr Inc., the Sunnyvale, California-based company said yesterday. The blogging network, headquartered in New York, will be operated as an independent business and its 26-year-old founder, David Karp, will remain in charge.
Mayer is wagering that Tumblr’s growing audience and success in emerging areas such as mobile and social networking will help lure users and advertisers back to Yahoo as it chases Google Inc. and Facebook Inc. in the $17.7 billion market for display ads. The strategy could backfire if she fails to convince users to put up with more promotions or sell marketers on a site where one in six pages contains adult content.
“If it works, it validates Mayer’s vision,” Brian Wieser, an analyst at Pivotal Research LLC in New York, said in an interview. “If it doesn’t work, it reinforces the notion that there’s very little that can be done to turn around this display advertising business.”
The deal is also Mayer’s clearest signal to shareholders that she’ll put technology at the center of plans to revive growth. Mayer, an engineer who was Google Inc.’s 20th employee, has embraced her roots as a technologist and is pushing Yahoo to be at the forefront of sleek new apps and services.
That’s a break from the strategy of predecessors, such as Carol Bartz, whose 2009 decision to end development of Web-search results resulted in top engineers departing for Silicon Valley rivals. Former CEO Terry Semel tried to turn Yahoo into a media powerhouse, yet stepped down in 2007 after ceding the lead in the market for Internet search to Google.
In another example of Mayer’s preoccupation with improving products, the CEO also unveiled updates to Yahoo’s Flickr photo-sharing site at an event yesterday in New York. The service, which now features larger, high-resolution images, will also offer one terabyte of space for storing pictures free of charge. That’s enough to accommodate a photo taken every hour for forty years, Yahoo said.
Yahoo’s shares rose 1.6 percent to $27 at the close in New York. The stock has advanced 36 percent this year, compared with a 17 percent gain for the Standard & Poor’s 500 Index.
Founded by Karp in 2007, Tumblr offers a free service for publishing blogs on the Web and mobile devices, and tools for sharing photos, video and other content across social networks.
Tumblr had about $13 million in sales last year, according to PrivCo. It had expected to reach its first annual profit this year after opening to advertising last year.
Adding Tumblr will expand Yahoo’s audience by 50 percent to more than 1 billion monthly visitors, and increase traffic by about 20 percent, according to the statement. The transaction is expected to close in the second half of 2013.
To achieve its targets, Yahoo will need to keep Tumblr’s bloggers from decamping to other platforms and avoid inundating users with ads. Some Tumblr users have already showed resistance to the Yahoo deal in posts on the blogging service.
Karp and Mayer took pains to allay concerns that Tumblr would lose its distinct character. Mayer compared the transaction to her former employer’s $1.65 billion acquisition of YouTube, which catapulted Google to the top of the online video business, and EBay Inc.’s purchase of PayPal, now the e-commerce company’s fastest growing business. Both targets stayed independent under after the deals closed, she said.
“We want Tumblr to see that same kind of success,” Mayer said in an interview. “It’s really important to not have them be distracted by some of the elements that could come about if we were to, say, change a lot or try and integrate a lot.”
Yahoo plans to “allow them to run fast and stay true to their user base and their community,” she said.
Another challenge: luring advertisers to unvarnished user-generated content that’s often replete with not-safe-for-work images. The site’s terms of service permit nudity and other controversial material, and at least one pornographic site ranks among the 20 most-popular Tumblr blogs, according to Quantcast Corp. Karp himself hasn’t always been a fan of placing ads on the site. He told the Los Angeles Times in 2010 that Web advertising “really turns our stomachs.”
“They have to balance keeping those users actively using Tumblr, while at the same time adding advertising and putting monetization around it,” said Zachary Reiss-Davis, an analyst at Forrester Research Inc. “Those are very difficult tasks to balance against each other.”
Mayer will seek to avoid the fate of past Yahoo acquisitions that have failed. The company paid about $3.6 billion for GeoCities, a Web-hosting provider, in 1999 only to shutter the declining business a decade later.
Tumblr had contacted bigger technology companies seeking to be bought, or form a partnership, prior to closing the deal with Yahoo, according to people with knowledge of the matter, who asked not to be identified because the overtures were private.
Mayer has purchased at least 11 companies in her 10 months as CEO, from mobile app makers Stamped Inc. and Jybe Inc. to Summly, the news-reading application created by teenager Nick D’Aloisio. Before Tumblr, most of her deals have been small and focused on talent acquisitions, an approach she advocated during her first conference call with analysts last year.
The deal also reflects the widening influence of Jacqueline Reses, Yahoo’s chief development officer, who has been tasked by Mayer to lead talent management and mergers and acquisitions.
Mayer said in an interview last month that Reses’s “perspective on how to integrate companies well” was critical to her decision to work with the executive.
Tumblr ranks among Yahoo’s largest acquisitions, which include the $5.7 billion purchase of Mark Cuban’s Broadcast.com as well as the GeoCities deal.
Karp and Mayer had been discussing working more closely together, initially considering a partnership, since December, Mayer said.
Mayer had cancelled the first meeting with Karp, which had been scheduled for November, at the last minute.
“I’m really embarrassed,” Mayer said. “I believe this is going to be one of the most productive collaborations of my career, and, ideally, one of my closest friends over time, and I actually missed our first meeting.”
Asked whether Yahoo plans another deal sized similarly to Tumblr, Mayer said, “I’ve learned in my career to never say never, but at the same time, this certainly is an exceptional acquisition.”
The purchase of Tumblr was reminiscent of the company’s early years, when it competed for the best deals and talent, said Dan Rosensweig, a former chief operating officer of Yahoo.
“It’s exciting to see Yahoo! on the offensive,” Rosensweig, now the CEO of online-education startup Chegg Inc., said in an e-mail. “The return on this may take many years, but if executed well, it will be a significant game changer.”
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