Today: Yahoo (YHOO) confirms $1.1 billion deal for Tumblr, but faces a quandary about content vs. advertising. Also: SolarCity's big gains continue, Apple (AAPL) rebounds ahead of CEO's testimony.

The lead: Yahoo confirms Tumblr acquisition, but marriage has some issues

Yahoo announced Monday that it is buying Tumblr, confirming reports during the weekend that it was performing its largest all-cash deal in a long history of acquisitions in paying $1.1 billion for the blogging platform. While CEO Marissa Mayer praised the deal for increasing Yahoo's users by 50 percent and traffic by 20 percent, Tumblr's reputation as a home for pornographic content could be a major roadblock in Yahoo's attempt to wring enough revenue out of the offering to justify its cost.


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The Sunnyvale Internet company -- in its official news release, which promised not to "screw up" Tumblr -- and the New York startup's founder and CEO David Karp -- in a blog post he ended with a joyful expletive -- strongly said that Tumblr would be operated independently of Yahoo and change very little if at all. While that is an important message to the blogging platform's millions of young, independent-minded users, many of whom cried foul at the acquisition on the platform as well as other social networks and began frantically transitioning their posts to competitor WordPress, it could lead to great difficulties in monetizing the company.

Tumblr reportedly brought in $13 million in 2012 as it first began to offer advertising, and hoped to push that total to $100 million in 2013. Yahoo obviously would like to speed up that transition by employing its large ad-sales division, but the large advertisers Yahoo will be pitching could be concerned about their ads showing up next to pornographic content distributed on Tumblr.

SimilarGroup, which analyzes Web data, reports that 16.6 percent of the traffic on Tumblr is to adult-themed blogs, and more than 1 in 5 referrals to Tumblr blogs is from adult websites, TechCrunch reported Monday. Karp even joked about the "NSFW" content on his site with a GIF offering, showing off the laissez faire attitude he and most of Tumblr's audience have about the amount of pornography offered through the platform, which is the flip side of the same problem.

"Tumblr's free-wheeling environment is partly what has attracted a young audience at a stunningly rapid pace," PrivCo founder and CEO Sam Hamadeh pointed out in an email Monday. "Thus Yahoo's dilemma: If Yahoo keeps Tumblr as wild west of user-posted content including adult content, it will keep away the advertisers needed to justify a $1.1 billion valuation. If Yahoo begins aggressive filtering, Tumblr's young user base may disappear to another new social network just as quickly as they appeared."

Mayer addressed the issue in a conference call Monday: "I think the richness and breadth of content available on Tumblr -- even though it may not be as brand safe as what's on our site -- is what's really exciting and allows us to reach even more users," the young CEO said, later adding, "In terms of how to address advertisers' concerns around brand safety, we need to have good tools for targeting."

Still, Mayer mentioned YouTube as a successful billion-dollar tech acquisition she hoped "Yahooblr" could emulate, during an interview with The New York Times, but her former company, Google (GOOG), has spent much effort to keep adult fare off the world's most prominent video site in order to maintain high rates of advertising. YouTube has done so without pushing the "cool kids" away, but there are doubts Yahoo can do the same with Tumblr.

"They have to balance keeping those users actively using Tumblr, while at the same time adding advertising and putting monetization around it," Forrester analyst Zachary Reiss-Davis told Bloomberg News. "Those are very difficult tasks to balance against each other."

Still, Yahoo used only about a fifth of its available cash on hand to complete the deal, and the traffic boost -- especially in younger users -- is expected to be a boon for the company, while advancing Mayer's efforts to make Yahoo a bigger player in mobile and social arenas, where Tumblr thrives.

"(Yahoo's) fundamentals have been subpar for numerous years, in part because of the company's missing presence in social and mobile. Tumblr may help (Yahoo) develop that presence," RBC Capital Markets analyst Mark Mahaney said in a note, calling the deal a "long-shot/long-term investment."

Investors seemed to be undecided on the deal, with Yahoo stock gaining as much as 53 cents while also dipping as low as 31 cents below Friday's closing price of $26.52, before closing with a 0.2 percent gain at $26.58.

SV150 market report: Apple, SolarCity and SunPower find gains

The large U.S. indexes struggled for gains Monday, all dipping slightly, but a smaller index followed the milestone events enjoyed by its larger siblings earlier this year: The Russell 2000 index, which groups smaller companies, surpassed 1,000 for the first time, showing that this year's record stock market rises have not just been reserved for the big boys.

The SV150 managed a small gain as Silicon Valley got a boost from a big name and a new contributor: Apple and SolarCity. After struggling last week, the Cupertino tech giant bounced back with a 2.2 percent gain to $442.93 as CEO Tim Cook prepared to testify in front of Congress on tax issues. Apple released his planned testimony Monday, while a Senate inquiry found Apple taking advantage of loopholes in the U.S. tax code; for live coverage of the hearing, go to www.siliconvalley.com Tuesday morning.

San Mateo solar installer SolarCity continued an astounding rise that has only increased since the company received a $500 million boost from Goldman Sachs. SolarCity shares surpassed $50 for the first time Monday and ended with a 14.7 percent gain at $51.60; the stock has now jumped more than 500 percent from the price commanded just five months ago in its initial public offering -- which was delayed when the company reportedly had trouble finding investors willing to pay double-digit prices for the shares -- and has moved more than 60 percent higher since the Goldman deal was announced. Fellow Silicon Valley solar company SunPower (SPWRA) also had a good day Monday, hitting a new 52-week high of $23 a share and gaining 7.7 percent to close at $22.70.

Other Silicon Valley stocks dipped to minimize the gains by Apple and the solar sector. VMware dropped 2.8 percent, Facebook and Electronic Arts (ERTS) both declined 1.9 percent, and NetApp decreased 1.7 percent a day ahead of its earnings, with reports that the Sunnyvale data-storage company is exercising layoffs.

Up: SolarCity, SunPower, Splunk, Apple, Advanced Micro Devices, Zynga, Yelp, Netflix (NFLX), Yahoo, Intel

Down: Palo Alto Networks, Ruckus, VMware, EA, Facebook, NetApp, Tesla, Intuit (INTU), eBay (EBAY), Cisco (CSCO), Gilead, Adobe (ADBE), Symantec, Hewlett-Packard (HPQ), Oracle (ORCL), Applied Materials

The SV150 index of Silicon Valley's largest tech companies: Up 1.76, or 0.14 percent, to 1286.32

The tech-heavy Nasdaq composite index: Down 2.54, or 0.07 percent, to 3,496.43

The blue chip Dow Jones industrial average: Down 19.12, or 0.12 percent, to 15,335.28

And the widely watched Standard & Poor's 500 index: Down 1.18, or 0.07 percent, to 1,666.29

Check in weekday afternoons for the 60-Second Business Break, a summary of news from Mercury News staff writers, The Associated Press, Bloomberg News and other wire services. Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/mercbizbreak.