Yahoo Tumblr Acquisition: It's About Young People With Money

Young people with money.

Those four words help explain why Yahoo just handed over more than $1 billion for a social network that has yet to turn a profit.

A third of Tumblr's active users come from households with incomes above $100,000 per year, giving it higher income skew than Facebook or Twitter, according to Comscore, the Web analytics firm.

"Tumblr certainly has the audience to be monetized," said Andrew Lipsman, vice president of Industry Analysis at Comscore.

"The fact that you have the combination of a young skew with a somewhat above average income is a sweet spot for marketers or advertisers," Lipsman added.

Yahoo's purchase of Tumblr has been heralded as a way to make Yahoo cool again: A popular service with a young, passionate and active user base joining a nearly 20-year-old company that has struggled to find its place in a world dominated by newer entrants like Facebook and Google.

In addition to making itself cooler and younger, the Tumblr acquisition -- if Yahoo can hang on to the users -- makes Yahoo bigger. But it also leaves Yahoo staring at the same problem it has been confronting for years: Despite having some of the biggest traffic on the Web -- thanks to its popular news sites and webmail product -- the company struggles with turning those eyeballs into dollars.

In comments on Monday, David Karp, the 26-year-old founder of Tumblr, suggested that the partnership would prompt Yahoo to develop ads that feel like Tumblr content.

"As we designed our advertising products, we were looking for an opportunity to empower the most creative advertisers in the industry," Karp told Ad Age. "That's a vision for Yahoo's future and a vision for advertising that I share with Marissa," he said, referring to Marissa Mayer, Yahoo's CEO.

"The monetization piece is the giant balancing act of the entire deal," said Zachary Reiss-Davis, an analyst at Forrester. "Yahoo has to figure out pretty rapidly how to monetize Tumblr without alienating the core Tumblr users who made it worth spending a $1 billion and a quarter of Yahoo's cash reserves to acquire."

Tumblr, which began in 2007 and only started advertising last year, made $13 million in 2012, according to Forbes. (Valleywag reported on Monday that sources said it actually made significantly less.) The company hopes to bring in $100 million this year.

Nearly half of all Tumblr users are in the highly coveted (for advertisers, at least) ages of 18 to 34, according to Comscore. Thirty-four percent of Yahoo's users fall into that demographic.

In announcing the acquisition on Monday morning, Mayer said that the company is exploring running more ads in Tumblr users' dashboards, which are essentially users' newsfeeds.

But analysts said that Yahoo, which promised "not to screw up" Tumblr, has to be careful not to roll out something that Tumblr's passionate user base will reject.

"The ad unit has to have a social component that fits in with existing content on Tumblr and doesn't stand alone as a separate and isolated banner ad," said Reiss-Davis. "Because that's really not going to fit in with the type of advertising the social network is going to thrive on and its users are going to expect."

"This is certainly an area where Yahoo is going to have to have the assistance with Tumblr engineers creating new products," Reiss-Davis added.

Allen Weiner, vice president of research at Gartner, the technology and research firm, said Yahoo could bring in revenue by using Tumblr as a content marketing product. Companies that do this, like Newscred, make money by licensing content and selling it to companies for use in marketing.

"They are positioned to be a very powerful player in content marketing," Weiner said.

Weiner also noted that another, albeit challenging way, Yahoo could make money through advertising is by curating -- and placing contextual display ads next to -- the very best content from the site's 50 billion blogposts.

But making money from user-generated content has proven difficult, even for the Web's biggest players. Google, the owner of YouTube, has invested hundreds of millions of dollars into creating high-quality original content to sell to advertisers.

"The goal that everybody talks about is becoming hip and relevant again," Weiner said of the Yahoo Tumblr deal. "You … can't go to next quarterly meeting and say our Q ratings are up," he added referring to the television rating system used to measure popularity of a brand. "That's nice to have, but you can't eat it."