May 20, 2013 at 2:58 PM ET
Plunking down $1.1 billion for blogging platform Tumblr was the easy part. Now Yahoo has to live up to its pledge “not to screw it up,” as CEO Marissa Mayer put it.
It won’t be easy. The history of the Internet is littered with examples of once-promising startups that died on the vine after being acquired — including some bought by Yahoo. Mayer has her work cut out for her.
Investors are asking how the aging Internet giant plans to make money off Tumblr’s feisty, fickle users — who want reassurance that the grown-ups won’t barge into their clubhouse and spoil the fun.
“It’s not the worst idea... but it’s not a clear victory,” said Brian Wieser, senior analyst at Pivotal Research Group. “It definitely gives us traction with a younger audience group, which is good even if they can’t monetize it.”
But with a billion-dollar-plus price tag, there’s going to be pressure for Yahoo to find a way to make money off its new acquisition.
“The biggest single opportunity I think most people see is: Tumblr’s this tremendous property ... how do you go about monetizing that?” said Scott Kessler, an equity analyst at S&P Capital IQ. Native, search-related and newsfeed-embedded ads are possibilities, he said. “The problem with that inherently is [Tumblr’s] disdain for advertising. This platform has existed for over five years and advertising is not part of the model.”
So far, Mayer seems acutely aware of Tumblr users’ suspicion that a Yahoo takeover means an onslaught of ads, emphasizing repeatedly that Tumblr will remain independent, keeping its New York City headquarters and its staff of 175.
But Yahoo doesn’t have a great track record. It bought Geocities in 1999 and shut it down a decade later; its 2005 purchase of Flickr flickered out as that site lost ground to Facebook and Instagram.
Yahoo is far from the only company guilty of paying big bucks for the Next Big Thing and missing the boat, though. Google’s success with its 2006 purchase of YouTube for $1.65 billion is the exception rather than the rule. On News Corp’s disastrous 2005 purchase of MySpace for $580 million, CEO Rupert Murdoch Tweeted last year, “We screwed up in every way possible.” News Corp. unloaded the site in 2011 for a reported $35 million.
Other establishment-social startup relationships aren’t screw-ups so much as May-December romances that fizzle out when the two parties realize they have nothing in common, like when eBay broke up with social content-discovery site StumbleUpon in 2009 after paying $75 million to buy it just two years earlier.
Social-news mashup Reddit.com was bought by Conde Nast in 2006 and spun off five years later, although it remained under the corporate umbrella of Conde Nast parent Advance Publications. Its traffic numbers have grown considerably, but it’s been reluctant to ramp up advertising on the same scale, an issue CEO Yishan Wong touched on in a blog post last fall.
Cultivating a loyal user community and making money off those eyeballs are two different, often conflicting goals. It’s a conundrum tech industry analysts have most recently watched Facebook wrestle with after buying photo app Instagram last year for $1 billion.
In Yahoo’s case, there’s yet another wrinkle: Tumblr has a bit of a porn habit. PrivCo, a company that researches privately held businesses, estimates that one in six Tumblr pages contain adult content.
“What ultimately helped bring down MySpace, TheGlobe, GeoCities and other earlier social networks is that national advertisers were simply unwilling to risk having their brands appearing alongside adult, racist, or other questionable content,” PrivCo founder and CEO Sam Hamadeh said in a research note.
Tumblr users are already threatening to leave if Yahoo restricts content in the manner of Facebook or Instagram. The trick will be keeping users on board and uploading 900 posts every second in a way that won’t scare off mainstream advertisers.
On an analyst conference call, Mayer acknowledged that Tumblr is “not as brand safe" as other Yahoo properties, but added that the site’s trademark edginess “is what’s really exciting about it.”
“We need to have good tools for targeting” to keep advertisers happy, she said.
Kessler predicts Yahoo will keep a hands-off approach and evaluate its options before making any changes that could potentially alienate users. “I don’t expect to see a lot of changes to Tumblr within the next year,” he said.
Mayer doesn’t have the luxury of time on her side, though. What’s cool in social media one minute can be a lame has-been the next. In a research note, Wieser warned, “Unlike Facebook - which has woven itself into the broader fabric of the web - Tumblr's audience is still a niche that could move elsewhere.”