If you can’t build it, buy it.
That has been a long-established rule in Silicon Valley when it comes to growth and innovation – Cisco (NASDAQ: CSCO) did it, Google (NASDAQ: GOOG) has done it and even Facebook (NASDAQ: FB) did it with its $1 billion purchase of Instagram. Now Yahoo’s (NASDAQ: YHOO) new CEO, Marissa Mayer, is relying on the same approach to further her quest to get the one-time Internet pioneer back into the lead.
News of the latest move leaked out in recent days and was confirmed by the companies on Monday: Yahoo’s board has signed off on the $1.1 billion acquisition of Tumblr, the platform favored by hipster bloggers nationwide.
Mayer has lots of cash in her corporate war-chest, so she can pay up to make up for the time that Yahoo has lost under previous CEOs in its bid to remain relevant to younger users – and thus stay important to advertisers.
Yahoo has missed the boat on social networking and squandered its chance to get in early on the mobile trend. That has accelerated the decline in its share of the digital advertising market, which now stands at only about a quarter of that claimed by Google.
Buying Tumblr gives Yahoo access to some of that coveted next-gen audience, but also a conundrum: How to transform their eyeballs into dollars of advertising revenue? Facebook, for example, has pushed ahead with more aggressive changes to its business model. It has encountered a lot of public debate and some controversy but not much “real” revolt (in the form of canceled accounts) signaling that it has done too much too fast.
But Tumblr isn’t Facebook: Despite its rapid growth, it’s less mainstream and its users are the kind of people who are more likely than Facebook’s members to bolt for the latest edgy new platform if they get bombarded by too many ads.
Moreover, the company might need bloggers’ permission before sticking ads on their site, in contrast to the ways that Facebook has sprinkled pages with ads and transformed users’ “likes” into de facto product endorsements without their knowledge.
In announcing the deal to his users, Tumblr’s founder and CEO David Karp – who will stay on to run the site as a separate business – devoted almost as much space trying to allay these concerns as he did toward the deal’s upside. “We’re not turning purple. Our headquarters isn’t moving. Our team isn’t changing,” he said.
Yahoo, which Karp described as “the original Internet company,” shares both “our dream to make the Internet the ultimate creative canvas” and “a vision for Tumblr’s business that doesn’t compromise the community and product we love.” (An extra bonus, Karp points out, tongue in cheek, is that “both our logos end with punctuation!”)
Mayer has promised “not to screw it up,” but punctuation and PR aside, questions about execution are bound to linger. The deal has created a lot of buzz but little in the way of a decisive market response: the stock is up less than 1 percent at $26.70 a share. That’s better than the flat performance of the S&P 500, it’s true, but it’s far from an overwhelming market endorsement of the deal.
Of course, the company’s shares have soared some 70 percent since Mayer’s arrival as CEO last summer. But that largely reflects a big push by the company to buy back stock and to the potential for Chinese online giant Alibaba, in which Yahoo still owns a 24 percent interest. The stock trades at only about 8 times trailing earnings, a clear signal that investors are still guarded about Mayer’s efforts so far to win the attention and loyalty of a younger demographic.
This is the seventh deal that Mayer has struck since arriving at Yahoo, and by far the highest profile. Until now, her focus seems to have been as much on acquiring engineering talent from small companies; this transaction marks a big change in approach and is full of risks for both Yahoo and Mayer herself. It’s hard to see how Tumblr becomes a transformative deal for Yahoo, however.
It isn’t just the rather rich $1.1 billion price tag that the Mayer has to consider, but the cost of keeping Tumblr up and running. Yes, she has acquired a social networking hub with an almost-fiercely loyal coterie of more than 300 million monthly unique visitors.
But it has been burning through cash at a rapid clip – by some reports, $25 million in 2012 alone – and is flagging in its attempts to raise advertising revenue from a newer and still unproven “interactive” model. Nor does Tumblr have a presence in the world of mobile devices – a market that Yahoo still needs to penetrate.
Yahoo has acquired a brand with cachet in the social media world, but it also has acquired a big potential headache. How well will Karp work within the much larger Yahoo and can the two business cultures coexist? (Karp signed his memo to Tumblr users, “Fuck, yeah” – not standard corporate speak.)
How will Tumblr users respond to more ads – especially if those are the display ads that Yahoo loves but Karp has resisted – given that Yahoo is planning on Tumblr becoming a more significant contributor to its revenue next year? Perhaps Yahoo views the acquisition as a toehold into the world of interactive advertising, but will that work or is it going to be a gamble?
For starters, it would take a lot of fresh advertising revenue from Tumblr, which is generating a mere $13 million a quarter right now according to reports, to even move the dial at Yahoo, which reported nearly $5 billion in revenue in 2012.
Targeting the 18- to 34-year old demographic, as Yahoo’s CFO recently described the company’s plan, is one thing. Being able to capture its attention, its “clicks” and its loyalty is something else again – and turning that attention into profits still has to be Yahoo’s ultimate goal.
