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Yahoo Is Planning to Buy Tumblr for $1.1 Billion Yahoo Is Planning to Buy Tumblr for $1.1 Billion
(about 2 hours later)
Yahoo’s board has agreed to buy Tumblr, the popular blogging service, for about $1.1 billion in cash, people with knowledge of the agreement said on Sunday. The board of Yahoo, the faded Web pioneer, agreed on Sunday to buy the popular blogging service Tumblr for about $1.1 billion in cash, people with direct knowledge of the matter said, a signal of how the company plans to reposition itself as the technology industry makes a headlong rush into social media.
The deal, sealed at a meeting of Yahoo’s board, is expected to be announced as soon as Monday, said one of the people, who was not authorized to speak ahead of the announcement. The deal, which is expected to be announced as soon as Monday, would be the biggest acquisition of a social networking company since Facebook paid $1 billion last year for Instagram, the photo-sharing site.
The acquisition is the biggest yet under Yahoo’s chief executive, Marissa Mayer, as she tries to reinvent the once-embattled Web pioneer’s fortunes. Under her, the company is seeking to make up for years of missing out on the growing use of social networks and mobile devices. For Yahoo and its chief executive, Marissa Mayer, buying Tumblr would be a bold move as Ms. Mayer tries to breathe new life into the company. The deal, the seventh since Ms. Mayer defected from Google last summer to take over the company, would be her biggest yet. It is meant to give her company more appeal to young people, and to make up for years of missing out on the revolutions in social networking and mobile devices. Tumblr has over 108 million blogs, with many highly active users.
Buying Tumblr, which was founded in 2007 by David Karp, who is 26, is intended to help address that shortfall. A number of well-known tech founders dropped out of college before making millions from their start-ups, but Mr. Karp didn’t even make it out of high school, dropping out at age 15. Yet even with all those users, a basic question about Tumblr and other social media sites remains open: Can they make money?
The deal marks Yahoo’s seventh acquisition since Ms. Mayer took the helm last year. Starting in July, she began acquiring small start-ups, including OnTheAir, an online video service; Propeld, a maker of location-based apps; and Summly, a newsreading mobile app. In most cases, the acquisitions were made more for the engineering talent than for the products. Founded six years ago, Tumblr has attracted a loyal following and raised millions from big-name investors. Still, it has not proved that it can be profitable, nor that it can succeed on mobile devices, which are becoming the gateway to the Internet. Even Facebook faces continued pressure from investors to show it can increase its profits and adapt to the mobile world.
Ms. Mayer has been simultaneously looking for a big-ticket deal, using the $4.3 billion in cash Yahoo reaped from a sale of half its stake in Alibaba, the Chinese Internet company, last year. “The challenge has always been, how do you monetize eyeballs?” said Charlene Li, the founder of the Altimeter Group, a consulting firm. “Services like Instagram and Facebook always focus on the user experience first. Once that loyalty is there, they figure out how to carefully, ideally, make money on it.”
In the last year, Yahoo has been in talks with a number of larger start-ups, including Foursquare, Quora, Hulu and Dailymotion, the French video service, about a potential acquisition, according to people briefed on those discussion who were not authorized to speak publicly. A Yahoo spokeswoman declined to comment. A representative for Tumblr did not respond to requests for comment.
With Tumblr, Ms. Mayer will finally get the one thing that has long eluded the Internet company: a large social network with a loyal following. Tumblr has more than 100 million blogs on its site, reaching 44 million people in the United States, and 134 million people globally, according to Quantcast, which measures Internet traffic. If the deal is approved, Ms. Mayer will face the challenge of successfully managing the takeover, given Yahoo’s notorious reputation for paying big money for start-ups and then letting the prizes wither. Previous acquisitions by Yahoo, like the purchase of Flickr for $35 million and a $3.6 billion deal for GeoCities, an early pioneer in social networking, have been either shut down or neglected within the company.
But Yahoo does not need the traffic. With 700 million users, Yahoo still draws one of the largest audiences on the Web. More people use Yahoo’s e-mail service than any other service, and Yahoo Finance and Yahoo Sports are some of the most popular destinations in their categories. Because of this, Ms. Mayer will face pressure to keep Tumblr’s staff, led by its founder, the 26-year-old David Karp, who dropped out of high school as a 15-year-old programmer. It is unclear whether all of Tumblr’s 175 employees, based in New York City, will move over to Yahoo.
“You would think they have plenty of page views,” said Colin Gillis, an Internet analyst at BGC Partners. “They’re paying through the nose for it, but Yahoo is after a demographic it has lost.” At the same time, analysts and investors are likely to question whether buying a site that has struggled to generate revenue makes sense.
What Yahoo wants is “stickiness,” products and services that make Yahoo a habitual destination for users and, more important, advertisers. “This is not an inexpensive acquisition, but they’re willing to pay to get back some of what they’ve lost,” said Colin Gillis, an analyst at BGC Partners. “They want to be hip.”
Yahoo, once the biggest seller of display ads in the United States, has been ceding market share to its competitors at Google and Facebook. The company went from a leading 15.5 percent share of all digital ad revenues in the United States in 2009, to an 8.4 percent share last year, even as total digital ad spending grew, according to eMarketer. Google has increased its share to 41 percent during that period. In her short tenure as chief executive, Ms. Mayer has bought a string of tiny start-ups. Most of those were aimed at buying engineering talent that could help freshen Yahoo’s core products, like mail, finance and sports, as well as build out new mobile services.
It is not immediately clear how Yahoo will monetize Tumblr. The blogging site has been trying to create unique advertising opportunities — rather than profiting from clicks on ads — and been trying to entice advertisers to create and promote creative interactive campaigns, with mixed success. Ms. Mayer has had ambitions to hunt bigger game, armed with $4.3 billion in cash from selling half of Yahoo’s stake in the Chinese Internet titan Alibaba.
Tumblr has been burning through cash, spending an estimated $25 million last year, while pulling in just $13 million in revenue. Mr. Karp, its founder, has eschewed advertising in favor of a minimalist approach, and only started serving users ads last May. She has had conversations with a number of other big-ticket targets, like Foursquare, a mobile app that lets users find nearby restaurants, stores and bars, and Hulu, the video streaming service, according to people with knowledge of those discussions who were not authorized to speak publicly.
The company also has a fair amount of unsavory content that advertisers may not want to be associated with. Pornography represents a fraction of content on the site, but not a trivial amount for a site with 100 million blogs. Tumblr brings something that Ms. Mayer has sought for some time: a full-fledged social network with a loyal following. The start-up claims more than 100 million blogs on its site, reaching 44 million people in the United States and 134 million around the world, according to Quantcast.
Tumblr also lacks a strong mobile platform, which Yahoo desperately needs. Tumblr’s strong presence on the Web — it is the 24th most-viewed site on the Internet, according to Quantcast — has not yet translated to mobile. But in some ways, Yahoo isn’t pursuing users — it already claims 700 million, one of the biggest user bases on the Web — but products and services that would again make it a central destination. Once the biggest seller of display ads in the United States, Yahoo has lost market share to the likes of Google and Facebook. Its share of all digital ad revenue tumbled to 8.4 percent last year, from 15.5 percent in 2009, even as total advertising spending grew, according to eMarketer. Google now claims about 41 percent.
Yahoo missed the transition from the Web to smartphones as gateways for information and entertainment, and has been struggling to gain a foothold in the mobile advertising arena. Without its own mobile hardware and operating system, the company is far behind competitors at Google and Apple. Ms. Mayer has said she planned to catch up by acquiring mobile companies, which Tumblr is not. The company also missed the shift from the Web to smartphones and tablets. It waited a significantly long time to roll out apps for its most popular services, missing out on chances to harvest users to competitors like Google and Apple.
But Yahoo will get a demographic it has lost. Most of Yahoo’s growth the past several years has come from abroad. Inside the United States, the company has struggled to make its brand stand for something. Until a recent home page improvement, Yahoo’s site had a claustrophobic feel — ads and content jumbled together. And while Yahoo has managed to grow internationally, it has struggled to make its familiar brand relevant again. Until a recent home page renovation, the company’s main page felt claustrophobic, with ads and content jumbled together.
“This is not an inexpensive acquisition, but they’re willing to pay to get back some of what they’ve lost,” said Mr. Gillis, who likened the Tumblr acquisition to AOL’s 2010 acquisition of TechCrunch, a popular technology blog. “They want to be hip.” Tumblr’s trove of users and pages could provide fertile new ground for Yahoo’s ad operations, with what industry experts say is a bounty of unsold ad inventory. Mr. Karp of Tumblr had eschewed advertising, favoring a minimalist policy, starting to serve users ads only last May.
Many Tumblr users, however, were distraught by news of the acquisition. Some took to their blogs to post angry comments. One read: “Dear Yahoo, We bite. Sincerely Every Tumblr user. Ever.” Mr. Karp, the C.E.O., is expected to get nearly $250 million from the deal. Spark Capital, a venture firm in Boston, has been involved in five investment rounds of Tumblr’s financing and is expected to make tens of millions of dollars from the deal.
Analysts hope Yahoo does not make the same mistake it made in 1999 when it acquired GeoCities, then a fast-growing Web community, paying $3.6 billion only to see it shut down. Yet it is not clear how much Tumblr can help Yahoo reach its goals. The blogging site burned through an estimated $25 million in cash last year, and struggled to raise additional money at an acceptable valuation, according to people briefed on the matter who were not authorized to speak publicly about it. That prompted Mr. Karp to begin deal discussions with a number of companies, including Facebook, Microsoft and Google, though nothing came of those talks.
“This could be GeoCities 2.0,” Mr. Gillis said. “That’s a quarter of their cash they just spent. But shareholders are going to have to wait to judge them.” Yahoo and Tumblr have been in serious talks since last week, culminating in the Yahoo board’s vote to approve the deal on Sunday morning.
According to Tumblr’s latest statistics, the company has 175 employees and has raised more than $125 million in venture financing from several big-name firms, including Union Square Ventures, Spark Capital and Betaworks. It is unclear if all of the company’s employees would become Yahoo employees. The blogging site has been trying to create new ad efforts like interactive campaigns, rather than using standard clickable ads, with mixed success. It has set a revenue goal of $100 million for this year; the company reported only $13 million for the first quarter and reported $13 million for 2012.
Yahoo and Tumblr have been in talks since last week trying to complete details of the acquisition. Facebook, Microsoft and Google all showed interest previously in buying Tumblr, an employee of Tumblr said, but those talks never culminated in final offers. Despite its ranking as the 24th most viewed Web site on the Internet, according to Quantcast, Tumblr has yet to translate that into success on mobile devices, something Yahoo strongly wants.
The deal was first reported by the technology news site AllThingsD. Tumblr also bears a fair amount of unsavory content that may unsettle advertisers. Pornography represents a fraction of content on the site, but not a trivial amount for a site with 100 million blogs.
The search for profits isn’t unique to Tumblr, as free apps and services struggle to wring money from their users. Instagram famously generated no money when Facebook bought it.
Mr. Gillis of BGC said, “Either this management team is going to turn Yahoo around or be the ones who squandered its asset base.”

Andrew Ross Sorkin and Jenna Wortham contributed reporting.