Yahoo’s challenge to be building Tumblr’s advertising business

SAN FRANCISCO — To punctuate his company’s $1.1-billion purchase by Yahoo Inc., Tumblr co-founder and Chief Executive David Karp let loose in a blog post with a celebratory expletive.

It was classic Karp, a 26-year-old high school dropout who built one of the Web’s most popular outlets for personal expression. It was also a clever way to send a message to Tumblr users: It may have been bought out — earning Karp about $275 million — but Tumblr was going to stay irreverent.

The one thing that both companies pledged would change: Tumblr’s resistance to advertising for fear that it would diminish its appeal with teens and young adults.

“Tumblr is now at a point and Dave and the team agree that … it makes sense to monetize it in a way that’s very tasteful and seamless,” Yahoo Chief Executive Marissa Mayer said.

In buying one of the Internet’s hip young companies, Mayer is hoping to bring excitement back to Yahoo, which has languished for years. With Tumblr, Yahoo gets a fast-growing Web service that is strong where Yahoo is not: in social media and on mobile devices. Tumblr is also popular with the 18- to 34-year-old crowd, the demographic that advertisers care the most about.

“What we’ve been seeing and hearing … is that there are a lot of marketers who are very eager to participate on the Tumblr platform,” Mayer said.

Mayer is staking her leadership of Yahoo on the Tumblr acquisition, which is the Sunnyvale, Calif., company’s most expensive since it bought online search engine Overture a decade ago for $1.3 billion in cash and stock.

Yahoo is paying all cash for Tumblr, using some of the $7.6 billion it received last year from selling about half of its stake in Chinese Internet company Alibaba.

Yahoo shares rose 6 cents to $26.58 on Monday, up nearly 70% since Mayer, a former Google Inc. executive, took the reins 10 months ago. But so far there has been little evidence of a turnaround for the struggling Internet pioneer.

In the first quarter, Yahoo’s display advertising revenue, which accounts for about 40% of the company’s sales, fell 11% from a year earlier to $455 million. The number of ads Yahoo sells has declined every quarter since the third quarter of 2011, JMP Securities analyst Ron Josey said.

Madison Avenue has yet to be won over by Mayer, with advertising executives saying their ad spending on Yahoo sites has remained the same or is lower than it was a year ago. Yahoo has been battling stiff competition from Facebook Inc. and Google, both of which have demonstrated that having a huge and growing audience can bring in significant ad revenue.

The challenge for Yahoo will be to build Tumblr’s nascent advertising business. Even with 300 million visitors a month, Tumblr brought in just $13 million in ad revenue last year.

Although Tumblr only started selling ads a year ago, its currency with teens and young adults has already made it a magnet for advertising dollars from brands and movie studios. Brands can pay to promote a Tumblr post or promote their own Tumblr posts. Even before the deal, Tumblr was on track to generate $100 million in ad sales this year.

Mayer said the tie-up with Yahoo would accelerate the growth of advertising on Tumblr. Brands have seen the benefit of Tumblr’s demographics and “the huge volume of users and traffic,” Mayer said.

Yahoo’s chief financial officer, Ken Goldman, said he expected “revenues will start to materialize in a major way in 2014.”

Tumblr also offers Yahoo the ability to collect data on the habits and interests of hundreds of millions of Tumblr users, which will help Yahoo sell advertising across its own sites.

How Yahoo goes about putting more ads on Tumblr will determine whether the Internet giant boosts Tumblr’s fortunes or damages its credibility with young people

Yahoo will pay close attention to Facebook’s acquisition of mobile photo-sharing service Instagram, analysts said. Concerns that Instagram would lose its cool factor with young people after being swallowed up by Facebook did not come to pass. But Facebook has yet to put ads on Instagram.

“We are not going to screw this up,” Mayer said.

She pledged that — at least initially — the advertising on Tumblr would be “light.” She said Yahoo would begin by putting ads in the Tumblr “dashboard,” the equivalent of Facebook’s News Feed, where users track the bloggers they follow. She also said ads could be placed onto the blogs themselves with the permission of the bloggers, suggesting that Tumblr could share revenue with its popular contributors the way that video-sharing website YouTube does.

Yahoo will introduce ads that “really fit the user’s expectation and follow the form and function of the dashboard,” Mayer said.

Tumblr is chock-full of user-generated content such as “Old Love,” or photos of former celebrity couples; “White Men Wearing Google Glass,” photos poking fun at early adopters of Google’s wearable technology; “Reasons My Son Is Crying,” photos of weeping kids; and “The Worst Room,” which collects depressing photos of New York City apartments for rent on Craigslist.

Like other social media services, Tumblr has taken a page from Don Draper in AMC’s “Mad Men” by having marketers tell stories rather than just run banner ads.

That has proved to be a far more effective strategy with Tumblr users, who tend to share Karp’s “anarchist’s aversion to advertising,” said media and marketing expert Tim Hanlon, chief executive of Vertere Group.

Tumblr is going for must-see advertising that is the online equivalent of Super Bowl commercials on television or the fashion ads in glossy editions of Vogue, he said.

“Tumblr didn’t get to hundreds of millions of users by forcing advertising down people’s throats,” Hanlon said. “It’s a publishing platform for marketers to create and distribute messages in a more elegant and substantial way.”

Mayer said she and Karp share “a love of pop culture” and ads that are “great content in and of themselves.”

Karp “says that the state of Internet advertising doesn’t aspire to be as good as the content itself. And we think that should change,” Mayer said.

Yahoo will have to be careful not to push advertising too aggressively and risk alienating Tumblr users, analyst Josey said.

It also will have to exercise caution when it comes to pornographic and other adult content on the site that advertisers will want to avoid. One of the most popular blogs on Tumblr is “Movies, Sex and Videotape,” which shows nude and explicit scenes from movies and comes with an adult content warning.

Mayer said Yahoo would address that concern with “good tools for targeting.”

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