Issue of the week: Yahoo’s $1.1 billion Tumblr deal

last updated 8 January 2015

Yahoo’s purchase of Tumblr this week is basically “a billion dollar bailout,” said Sam Biddle in Valleywag.com. David Karp, Tumblr’s young founder and CEO, has long made a show of dismissing profitability as “not a metric that is particularly important.” But it’s a lot harder to sneer at money once you start “running out of it.” The popular microblogging site’s earnings to date come to “an unsustainable pittance,” and rumors circulated that the company was on track to run out of cash within six months. No doubt, Karp—along with Tumblr’s staff, users, and investors—had loftier dreams for the quirky site than to be bought out by Yahoo. But Karp is lucky, because Yahoo’s $1.1 billion purchase has spared him an embarrassing failure. It has also proved that in today’s world, “real winners don’t have to figure out how to make money—they just stall until Yahoo hands it to them.”

The deal makes sense to me, said Felix Salmon in Reuters.com. Sure, $1.1 billion is a lot of money, “but it’s not so much money that it’s going to change the way that investors look at Yahoo’s balance sheet.” Acquiring Tumblr’s 300 million young mobile users will give Yahoo a huge traffic boost and plenty of data to better optimize its products. And it’s a good deal for Tumblr, too. Having “extracted many promises” from Yahoo that it will be left alone, it can now “outsource to Sunnyvale a lot of the gnarly monetization problems” the New York–based team hasn’t been able to solve. But the biggest reason this merger makes sense for Tumblr is that it might have been the only option its venture-capitalist backers were willing to entertain. “Part of the deal you make, when you accept VC funding, is that there will almost certainly be an exit within five to 10 years, and it will almost certainly not be an IPO where the founder retains control.” Getting out with even a hint of its independence intact is probably “the least bad outcome” Tumblr could hope for.

I’m less convinced this was a smart move for Yahoo, said Cyrus Sanati in Fortune. CEO Marissa Mayer seems to think snapping up companies, “instead of innovating,” will somehow make her company “cool” again. The former Google executive has bought 10 other “mobile-centric app companies” since taking over in July in the correct belief that Yahoo needs a bigger mobile presence. But her spending spree has engendered a nasty backlash—and the Tumblr deal “makes Yahoo’s other purchases look like rounding errors.” On the surface, Tumblr is “the perfect Web 2.0 brew,” but it is really a risky acquisition. Aside from its poor revenue, “it is a virtual warehouse for mountains and mountains of porn,” which draws traffic but tends to alienate advertisers. Yahoo’s shareholders have placed a lot of faith in Mayer, believing “she has enough of that Google fairy dust in her pocket to turn the company around.” She had better be careful not to “test their patience.”