Exit and Loyalty — Yahoo and Tumbler

By Ben Gomes-Casseres | Originally in HARVARD BUSINESS REVIEW |

As Yahoo goes through with its acquisition of Tumblr, CEO Marissa Mayer may have a user rebellion on her hands. The early reaction from the Tumblr community is not encouraging — blogs lit up with memes of crying babies and apocalyptic rants upon the announcement of the news. The uproar was bolstered by stories critical of Yahoo’s earlier acquisitions, and fueled by rumors that Yahoo may introduce advertising to the popular blogging site.

Amidst this uproar, Mayer can take a page from the book of Albert Hirschman, one of the most original thinkers on political economy of the last century. Against the backdrop of civil strife and war in the late 1960s, Hirschman wrote that when faced with declining institutions, consumers have two choices: Exit and go elsewhere with their support or dollars, or use the power of voice to generate change from within. These two choices are mediated, he explains, by members’ loyalty to the institution. Loyalty makes people more likely to stay and work for change from inside. But loyalty is also a product of how effective a consumer’s voice is likely to be; it does not stem from feeling locked-in or having no possibility of exit.

Hirschman died last year, but I’d like to think that he was aware of the rise of online communities supported by user-generated content and interaction. That is the core of Tumblr. Perhaps more so than other social media communities, Tumblr relies on giving its members a rich medium to voice their views. In return, it enjoys their fierce loyalty. Yahoo now seems to be trying to buy that loyalty. Some see the proposed deal as an effort to “buy cool.” That’s true too, but the cool will quickly turn tepid without the sustained loyalty of the Tumblr community.

Still, after the initial shock subsides, can Yahoo count on Tumblr users staying on? That is probably how the investment bankers framed it — as a question of switching costs, lock-in, network externalities, and the like. Where are these users to go? There is no equivalent forum of this type, richness, and network size (at least not yet). It would seem that the 18-24 year-old demographic that Yahoo is pining for does not have an easy exit choice.

If the new owners indeed think that this community has nowhere to go, they will kill Tumblr, and possibly Yahoo too. As Hirschman explained, in an organization where entry is easy, exit may also be easy. Tumblr grew in part because it was so easy to join, to express oneself, and to be heard. It will be just as easy for its voluntary members to leave, maybe for another forum, but more likely for mobile social media that bypass the web entirely. Try acquiring that, Yahoo.

That deadly bullet might be dodged if more new (Yahoo) customers join Tumblr than leave, or if the loss itself can be stemmed. The result would be a growth in the customer base of Tumblr, which may be good for Yahoo, if it can find a way to make money from the community. This seems to be the outcome that Yahoo is aiming for when it assures Tumblr users that it would leave the unit under independent management and promises “not to screw it up.”

But leaving an acquired Tumblr alone is not enough to make Yahoo cool. It just means that Yahoo would be an investor in a cool property. Yahoo might make money on that, just as it has on its profitable joint venture in China, where it has been almost an arm’s length investor (in part by choice, and in part because the Chinese kept it there). Such an acquisition with independent management would not be the silver bullet that is available to Mayer.

With Tumblr, Mayer should instead see an opportunity that exists to build even greater loyalty by enhancing consumer voice within the platform, instead of just limiting exit. Hirschman urged the embattled governments and companies of the 1960s to listen more closely to their citizens and customers, and then to act to regain lost trust. For Yahoo this would mean to listen more closely to that young demographic, not to seek to own it.

Instead, Yahoo needs Tumblr as a “reverse mentor.” If that is the goal, one would expect Yahoo not just to say it will not mess with Tumblr, but — more importantly — that it welcomes Tumblr’s guidance to change the rest of its operation. Don’t just leave Tumblr founder David Karp alone — invite him to transform Yahoo itself.

This silver-bullet strategy may not involve an acquisition of $1.1 billion, or at least not yet. Other companies have learned to listen better by using partnerships that are short of full acquisition. Disney learned from Pixar in that way. In an earlier era of computing, IBM learned the software and service business by cooperating with multiple partners. Roche learned about biotech through its partnership with Genentech. Often these partnerships did end in acquisition; but that bigger step took place after the acquirer had shown itself willing and ready to reform itself dramatically, from the inside. Without that readiness, these marriages would have failed.

Has Yahoo decided to reform itself and to listen more intently to a new generation of users? Investors hope it has. By itself, the act of buying Tumblr does not demonstrate that Yahoo now has the will to change. But the success of this deal will surely depend on that.