Tumblr’s Success Still Comes Down to Karp

by Jonathan Berr | May 21, 2013 1:27 pm

Tumblr’s Success Still Comes Down to Karp

Yahoo’s (YHOO[1]) splashy, headline-grabbing $1 billion acquisition of Tumblr[2] is as risky as it is bold.

stockoftheweek Tumblr's Success Still Comes Down to Karp[3]Give CEO Marissa Mayer credit for proceeding carefully here. She pledged in the press release announcing the deal that the Sunnyvale, Calif.-based company wouldn’t “screw up” Tumblr. She is keeping Tumblr’s management team — including the 26-year-old founder/CEO David Karp — in place and has vowed “to let Tumblr be Tumblr.”

Unfortunately, Mayer can’t do that for long.

The New York-based Tumblr generated $13 million in revenue last year and isn’t profitable. The company set a goal of $100 million in sales this year and brought in $13 million during the first quarter, indicating that its projections were perhaps too optimistic. Indeed, if there was a clear path to profitability, Karp’s bankers would have no doubt encouraged him to hold out for an IPO, which would have given him (and them) a potentially much bigger payday.

Tumblr has until now kept advertisers at arm’s length; there are no ads on its home page and blogs, and many users like it that way. Under Karp, Tumblr became unique among social networks because it didn’t have follower counts and other ways to measure a user’s popularity. Karp told The New York Times last year that he thought these metrics were “really gross.”

He also has a unique view of advertising.

“Rather than monetizing clicks, he wants advertisers to view Tumblr as a place to promote particularly creative campaigns to an audience whose attention is worth paying for,” the Times noted.

Tumblr has only began selling “sponsorships” about a year ago, so its experience in this area is not deep.

Convincing users who dislike ads to stay with the site when it begins accepting them won’t be easy. Even before the deal was officially announced, some Tumblr users defected to rival WordPress. Of course, people complain about changes on websites no matter how infinitesimal they might be, so Tumblr users might get used to ads eventually.

Whether Tumblr can help Yahoo increase its foothold in mobile remains unclear, though there are some promising signs. Tumblr launched its first mobile-only ads about a month ago, and according to RCR Wireless[4], Disney (DIS[5]) used Tumblr video ads to promote programming on its ABC television network, as did Time Warner’s (TWX[6]) Warner Bros and General Electric (GE[7]).

The other wildcard in this scenario is Karp. Although he is saying nice things about Yahoo now — not surprising considering the company has deposited $250 million into his bank account — the honeymoon might not last. Karp, a high school dropout, probably has never had a real boss before. Now, he not only has to answer to a CEO and board of directors, but shareholders too.

While it’s impressive that Karp has built a site that attracts 300 million users, Wall Street cares more about the future than the past. It’s concerned about “what have you done for me lately?” Karp’s past success will only add to the pressures on him because investors will demand to know why he can’t replicate them when growth begins to falter, which inevitably happens to all companies.

Yahoo also will have to prove that Karp is the right person to lead Tumblr going forward. As Groupon (GRPN[8]) investors learned the hard way with the Andrew Mason, brilliant visionaries aren’t always the best executives[9]. Based on media reports, Karp might have the social skills that Mason lacked. Indeed, he is doing more interviews in the past 24 hours than his hero — Apple (AAPL[10]) founder Steve Jobs — did in two decades.

Karp, like many entrepreneurs, might be easily bored and seek other mountains to climb now that Tumblr has reached this point. That’s what’s happened to more tech company founders than could be counted.

The Internet portal’s history of integrating acquisition does not inspire confidence. Flickr, the photo-sharing site, withered after Yahoo acquired it. GeoCities was a hot company at the height of the dot-com bubble when YHOO swallowed it. A decade later, Yahoo pulled the plug on the site.

Yahoo’s past deals flopped because of a lack of planning. Thus, for the Tumblr deal to work, Mayer & Co. can’t afford to “let Tumblr be Tumblr.” It either needs to inspire Karp to lead the site to greater heights, or it needs to plan for the potential departure of Karp or his top lieutenants.

Otherwise, Tumblr isn’t worth a damn.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter at @jdberr.

Endnotes:
  1. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  2. $1 billion acquisition of Tumblr: http://slant.investorplace.com/2013/05/yahoo-buyout-of-tumblr-a-bonehead-move/
  3. [Image]: http://investorplace.com/hot-topics/stock-of-the-week/
  4. RCR Wireless: http://www.rcrwireless.com/article/20130520/mobile_content/tumblr-mobile-ad-strategy-still-evolving/
  5. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  6. TWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWX
  7. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  8. GRPN: http://studio-5.financialcontent.com/investplace/quote?Symbol=GRPN
  9. brilliant visionaries aren’t always the best executives: http://investorplace.com/ipo-playbook/masons-wild-ride-comes-to-an-abrupt-end/
  10. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL

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