SUNNYVALE -- Yahoo's (YHOO) $1.1 billion purchase of Tumblr comes with a healthy compensation package for the founder of the social blogging site: $81 million in cash and stock if David Karp stays with the company for the next four years.
Karp's deal, which was revealed Thursday in a filing to the Securities and Exchange Commission, could prove to be a good investment for Yahoo -- if the company can translate all of those young eyeballs on Tumblr into advertising dollars, according to industry analysts.
"On the surface, if you're going to apply a strict financial analysis, you would say it's (Karp's deal) expensive," said Martin Pyykkonen of Wedge Partners. "But going forward it's all about the kind of traffic they can generate. That's the key question."
When she announced the Tumblr deal in May to reach out to a new and younger audience, Yahoo CEO Marissa Mayer promised "not to screw it up" and to leave Tumblr running as an autonomous business unit based in New York.
Even though Tumblr is considered an unproven platform for advertisers, analysts say Yahoo needs fresh material as it continues to stretch its presence on mobile devices and the social Web.
So maintaining Tumblr's management team could be worth the $41 million in Yahoo common stock and $40 million in cash to the 27-year-old Karp for the next four years, said Aaron Kessler of Raymond James.
"It is a lot of money and the compensation's debatable, but Yahoo still wants Tumblr to operate on its own," Kessler said. "They want a strong management team in place to grow to the next level. Who better to manage it then than their founder? We've seen it before where a company acquires another company and then the management leaves and then the business stops doing well."
"There were a lot of skeptics for a while because we didn't know what the traffic was," Pyykkonen said. "Now it's obvious that YouTube was a big win for Google."
It could take another two quarters before it's known whether Yahoo has found a hit with Tumblr, he said.
"Yes, there's this enthusiasm and getting younger people is good," Pyykkonen said. "But at the end of the day, is that traffic going to be monetized? If you want to make money in this business, it's all about advertising. At this point, we just don't know."
Contact Dan Nakaso at 408-271-3648. Follow him at Twitter.com/dannakaso.