It is not surprising that Yahoo’s purchase has unnerved many Tumblr users. After all, the internet giant has a record of buying promising young tech firms such as Delicious, an online-bookmarking service, and GeoCities, which hosts websites, and then neglecting them. The rich price paid for Tumblr, which reportedly made just $13m of revenue last year, is also fuelling doubts about the deal. According to an estimate by John Saroff, a former Google executive, Tumblr would need to generate at least $108m of revenue a year to return more than the opportunity cost of the capital that Yahoo is tying up in it.
Why is Yahoo willing to take such a risk? Part of the answer is that, like an ageing rocker, it hopes being associated with younger stars will make it look cool again. It is also hoping to emulate Google, which snapped up YouTube, a video site, in 2006, and Facebook, which swallowed Instagram, a photo-sharing service, last year. The firms were criticised for paying too much for targets with scant revenues. But both deals now look like winners. Instagram, for instance, has seen its monthly users soar to over 100m, up from around 30m when Facebook bought it.
