All of these questions are variations on "Why did Yahoo! spend one-third of their cash on hand to buy a company that by all accounts is about to run out of money?" Read this post, and hopefully these questions will not need to be asked again!
Why did Yahoo! make this acquisition?
We know very little about Marissa Mayer's big goals for Yahoo!, but we know one. She wants Yahoo! to own users' daily habits. At an analysts conference recently, she classified these as "searches on the Internet, checking finance, doing your email." Yahoo! is skating to where the puck is going to be when it comes to "daily habits." The Tumblr daily dashboard is a daily habit, and by some accounts, moreso than even Facebook or Twitter among teens.
Why is this so expensive? 1.1 Billion dollars is outrageous!
Yes it is! But per user, it's actually cheaper than, for instance, what AOL paid for the Huffington Post (AOL paid $13/user, Yahoo! is paying $5-$11, depending on what numbers you believe). Tumblr's users are much more engaged than HuffPo users were even at it's peak. Flip this around: if you were given 1.1 billion dollars, would you be able to build a service used by more than ten million people for more than an hour a month? You could not. That's a bigger audience than American Idol, or for that matter anything else (except Facebook or Twitter). Even if you had the perfect product idea and a billion dollars to build it, time is a zero sum game, and it's very hard to get people to unlearn their habits.
Isn't Yahoo! going to ruin Tumblr?
Anecdotally, I have lots of friends who have worked at Yahoo! and have some really terrible stories to tell. Just awful, unbelievable stuff. But you know what? That's true at every tech company of any scale. (BTW - EVEN TUMBLR!) Acquisitions usually don't work out, and I think that Y! probably has an unfair rep as being tough on it's acquisitions. It's not like many of the web 1.0 era of startups were successful on their own, and some (in)famously have flamed out without being acquired by Yahoo! (Dodgeball, Six Apart, etc.). I actually think that some kind of Messenger or Flickr integration with Tumblr would be awesome. Many of my smartest friends say that the fungible identities on Tumblr are part of what's most valuable about it. That's true! I doubt Marissa will mess with that. So breathe easy.
Native advertising hasn't ever been successful at scale on the web, isn't this a risk?
No. Every YouTube video is native advertising. And Yahoo! doesn't have to monetize all those crummy/porny/incoherent blogs, they only have to monetize the dashboard. And I think the basic idea that Tumblr has is the right one, they just didn't have a competent sales organization. Now they do.
How can you measure the value of a social network?
Jason Goldman suggested (perhaps jokingly) that the number of faves was a valuable metric, and unsurprisingly, I agree. Anil notes a bunch of reasons that positivity is important on the Internet, and I agree with all of them, but beyond that, a like, heart or fave (or a reblog or retweet) are the documentation of the essence of blogging. You wrote something, I liked it, and this is my way of letting you know. We're all working for free on these networks, with the exception of the currency of social approval and public appreciation. Whether by accident or design, Tumblr's system of likes and reblogs is one of the most elegant there is, and I think that's a huge part of the network's success.
Why should I care what you say?
I'm one of the few people who have been involved in the business of blogging full-time for over a decade. I have been a blogger since 1999, and tumblr user since 2007, and I actually worked with David Karp and Marco Arment on their first iteration on what would become tumblr. At the time, the engine powered Serious Eats and a handful of David's other consulting clients. These guys were not easy to work with (and, in fact, their presence on other web projects was ultimately short-lived) but they had a laser focus on what they cared about — making blogging simpler and better. I also sold my own blogging company, Apperceptive, to another blogging company, Six Apart, and participated in the sale of Six Apart to SAY media. At Six Apart's peak, our software was powering a billion (or more) pageviews a month. And if you look hard enough at what we're doing over at 29th Street Publishing, you'll see that it's basically blogging with a business model. So this is more or less what I do.
There you go!