It’s a problem every hot tech company has to face when it’s acquired by a bigger player – how to keep an established user base loyal to a product they love while convincing investors that revenues can and will grow? This is the situation facing Tumblr founder David Karp following his company’s acquisition by Yahoo.
Highlighting how important it is to maintain the Tumblr experience, Yahoo made an outright pledge “not to screw it up” in the press release announcing the $1.1 billion acquisition. Further, the 26-year-old Karp – who will be $275 million richer once the deal closes – will stay put as CEO, and Tumblr will function as a separate business unit.
While Karp and Yahoo CEO Marissa Mayer are adamant that Tumblr will continue on its own roadmap, they also say that its ad business will be spurred along with the help of Yahoo’s sales organization – which is 2,500 people strong, compared to Tumblr’s existing 25, per Mayer – and that Yahoo will introduce new native ad units to the platform.
Tumblr, which is now six years old and has raised $125 million in funding, pulled in just $13 million in ad revenue last year after announcing its first foray into advertising in April.
“There was no path or expectation to sell this company, certainly not this year, and we were well on our way – I should say, are on our way – to making this a self-sustaining business with our advertising products,” Karp said Monday. “The conversation with Yahoo started around their ability to help us accelerate that business.”
The emphasis on advertising would seem to represent an about-face by Karp, who told the Los Angeles Times in 2010 that his company was “pretty opposed to advertising” and that it “really turns our stomachs.” Now he’s joined forces with a company that will account for 7.7% of the U.S. display market this year, according to eMarketer, though it’s been steadily losing ground to Google and Facebook over the past few years.
Looking back on those statements, Karp said that he had really been alluding to search ads.
“As we designed our advertising products, we were looking for an opportunity to empower the most creative advertisers in the industry,” he said. “That’s a vision for Yahoo’s future and a vision for advertising that I share with Marissa and our team shares… Ads on a whole lot of the internet today look like little blue links trying to get you to buy the thing from you guys rather than those guys. That wasn’t the kind of advertising we were excited to see on Tumblr.”
Mayer said that there’s “a great opportunity to really have Yahoo provide turnkey monetization for Tumblr and they can decide where it belongs, how it should enhance the user experience.” She added that Yahoo has “amazing personalization and targeting techniques that we use for both content and advertising that they can tap into.”
“We want the ads overall to be something people take delight in,” she said. “With those tools and with those resources we think that we can effectively monetize Tumblr while staying really true to what the community wants and David’s vision for where it goes in the future.”
Tumblr’s current ad offerings include recently introduced mobile ads that appear in users’ streams. It had previously pitched even more restrained offerings to marketers and agencies, most notably the “radar” unit, which rotated promoted blogs and ones curated by staff on users’ dashboards.
On a conference call discussing the deal this morning, Mayer alluded to the possibility of Tumblr inventory being sold through ad exchanges. How Tumblr’s user base of 93.1 million unique monthly visitors, per recent ComScore data, will respond remains to be seen.
Mayer also said ads will eventually appear on individual Tumblr sites, though only “with the blogger’s permission.” She declined to comment on how that would be set up and whether it might entail revenue-sharing agreements.
Karp indicated that Tumblr might consider YouTube’s model, in which ad revenue is shared with partner channels.
Tumblr was valued at $800 million after its capital raise of $85 million in 2011. Observers have interpreted Yahoo’s readiness to pay a nearly 40% premium on top of that as evidence of Yahoo’s desire to reach the coveted audience of 18-to-24 year olds, for whom it’s not relevant. But Mayer characterized the deal as a way to broaden the appeal of Yahoo’s content.
“Tumblr is strong in vertical areas where Yahoo has been less strong. We’re very strong in finance, sports and hard news. Tumblr is great in art and architecture, food and travel, not to mention fashion,” she said. “So we think by pulling in additional strength in these vertical topic areas, it’s something we can do to really strengthen our core verticals.”
This story originally appeared in Advertising Age.
