Yahoo Board Agrees to Buy Tumblr for $1.1 Billion

Yahoo to purchase Tumblr for $1 billion.
Fred Dufour | AFP | Getty Images
Yahoo to purchase Tumblr for $1 billion.

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, which is expected to be announced as soon as Monday, would be the largest acquisition of a social networking company in years, surpassing Facebook's $1 billion purchase of Instagram last year.

For Yahoo and its chief executive, Marissa Mayer, buying Tumblr would be a bold move as she 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.

Yet even with all those users, a basic question about Tumblr and other social media sites remains open: Can they make money?

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.

(More From CNBC: David Karp - High School Dropout to Tech Titan)

"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."

A Yahoo spokeswoman declined to comment. A representative for Tumblr did not respond to requests for comment.

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.

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.

At the same time, analysts and investors are likely to question whether buying a site that has struggled to generate revenue makes sense.

"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."

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.

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.

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.

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.

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.

Read More in The New York Times:
Sony's Unwanted Genre: Suspense
Confusion and Staff Troubles Rife at I.R.S. Office in Ohio
Coffee Rites, and the Stories They Tell

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.

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.

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.

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.

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.

(Read More: Yahoo Wonder Kid Eyes More Start-Ups After Summly Sale )

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.

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.

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 needs.

(Read More: Yahoo Eyeing Tumblr for $1 Billion?)

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."

Yahoo and have a content-sharing partnership.