In a desperate drive for youth and content, Yahoo Inc. is spending billions.
The company that ruled Internet search in the early days of the web is on an acquisition frenzy, highlighted by its purchase of blogging site Tumblr last week for $1.1-billion (U.S.). On the heels of that purchase, Yahoo is also reportedly bidding up to $800-million for Hulu, a U.S. video site with a strong user base but an uncertain future.
The deals represent part of a bold attempt by Yahoo CEO Marissa Mayer to radically boost the company’s content and user base, critical given it has long struggled to keep up with rivals such as Facebook Inc. and Google Inc. in the race for eyeballs and advertising revenue.
The Tumblr purchase took many observers by surprise. Tumblr, which allows users to design blog-like pages, is one of the most popular websites in the world, with 300 million unique visitors a month. Its demographic is significantly younger than Yahoo’s, and more than half of Tumblr’s users rely on its mobile app, giving Yahoo much-needed access to the growing world of smartphones and tablets.
“On many levels, Tumblr and Yahoo! couldn’t be more different, but, at the same time, they couldn’t be more complementary,” Ms. Mayer said in announcing the acquisition. “Yahoo is the Internet’s original media network. Tumblr is the Internet’s fastest-growing media frenzy.”
But Tumblr, for all its popularity, still generates little revenue and virtually no profit. The site also has a reputation for hosting myriad pornographic blogs – something Tumblr has tried to counter in recent years.
“Yahoo can take some of Tumblr’s content and monetize it with the Yahoo’s sales force,” said Colin Gillis, technology analyst at BGC Financial. “But there’s always bumps in the road. User-generated content has a long history of monetizing poorly, and there’s lots of content on Tumblr that can’t be monetized.”
In 1999, Yahoo spent $3.57-billion to purchase Geocities, another hugely popular hosting site for user-generated content. The deal turned out to be one of the worst in Yahoo’s history, and after years of declining use, Geocities itself was shut down in 2009.
Many of Yahoo’s smaller acquisitions have also proved unsuccessful. In 2011, Internet entrepreneur Matt Linderman wrote a blog post detailing a host of Yahoo acquisitions that were announced with great fanfare, but fizzled out a year or two later, with the original founders leaving the start-up or the products and services being “sunsetted” – industry jargon for cancelled.
“I respect Marissa Mayer, but there’s some inherent issues of systemic bureaucracy, inertia, size and culture,” Mr. Linderman, who now runs the video site Vooza, said in an interview. “I think it’s about a size issue more than one specific company. A huge organization with thousands of employees is a very different environment than a start-up with just a few people.”
Yahoo’s media relations department did not respond to a request for comment.
RBC Capital Markets analyst Mark Mahaney said Yahoo’s Tumblr acquisition doesn’t have the “game-changing” impact that Google’s purchase of YouTube has had or that Facebook’s purchase of photo-sharing site Instagram is likely to have in the future. However, he added that Facebook success so far in generating ad revenue from Instagram shows that it is possible to make money off major acquisitions in the user-generated content business.
Still, he added, “we’re not going to know for years whether this [acquisition] pays off.”
Some of Yahoo’s forays into the world of user-generated content have gone better than others. In 2005, the company bought photo-sharing site Flickr. For years, as rival Facebook became the largest photo-sharing site in the world, critics complained Yahoo was letting Flickr fade away. However, in recent months the company has increased its efforts to update the service, most recently with an overhaul aimed at luring advertisers and customers back.
At the same time Yahoo looks to enter the user-generated content market with its purchase of Tumblr, the company is also targetting the other end of the spectrum. By reportedly offering between $600-million and $800-million for the video site Hulu, Yahoo hopes to integrate professionally created TV shows into its myriad products and distribution networks. Hulu has been the subject of a protracted bidding war among technology and media companies, as well as private investment firms. But, like Tumblr, the site’s potential as a revenue generator is far from certain, in large part because it is heavily dependent on expensive content it doesn’t own or create.
“The flaw in buying Hulu is that when all the content leaves, you’re left with just a shell,” said Mr. Gillis. “The people who are the owners of that content … what kind of renewal terms are they going to be looking for? Probably pretty aggressive terms.”