Who will profit from the new internet revolution?
By
Editorial staff
Simon Wilson
Nov 17, 2006
Rupert Murdoch’s controversial $580m acquisition of social networking website MySpace last summer now looks like a very canny move indeed, says Simon Wilson
What is MySpace?
It is the world’s market-leading site in the internet phenomenon known as ‘social networking’ – and the single most visited US website. MySpace, and similar sites such as Bebo, are essentially online messaging and web-hosting services. They give members free web pages, which they use to post text and photos, plus music and video clips – and make friends with each other. For its (mostly young) users, who often stay on the site for hours at a time, MySpace is like an online party: it provides the venue, but the guests do most of the work. In the UK, MySpace has seeped into the popular consciousness over the past year as the place where breakthrough music acts Arctic Monkeys and Lily Allen built up a following before they’d released a record.
Can MySpace make money?
It’s already made a lot – for its founders and for Rupert Murdoch. When NewsCorp bought MySpace for $580m in July 2005, critics scoffed that the out-of-touch, desperate Murdoch had vastly overpaid for a flash-in-the-pan dotcom without a proven means of turning a profit (just as this week eyebrows were raised at NewsCorp’s $188m acquisition of a controlling interest in Jamba, the firm best known for Crazy Frog ringtones). Yet fourteen months on, MySpace looks like a bargain. Member numbers more than tripled to 100 million people by August – the same month that MySpace announced a stunning $900m advertising tie-up with Google.
What’s the Google deal?
The search-engine firm has agreed to pay $900m over three years to control the adverts that pop up when MySpace members either search the site or the internet. Assuming certain levels of traffic are met – and both sides say they expect them to be exceeded – the deal guarantees Newscorp a minimum of $900m. That makes a $310m profit on the MySpace acquisition alone and pays off two-thirds of NewsCorp’s entire investment in the internet in one fell swoop. It also boosts the potential market value of similar sites.
Why is the deal so crucial?
Because Google’s involvement gives MySpace new credibility with advertisers. Up to now, advertisers had worried their products would appear next to inappropriate or obscene content, or consumers would be turned off by intrusive advertising. But using Google’s technology, MySpace will be able to match Google search queries with relevant advertising. Before last month’s deal, Credit Suisse analysts wrote that MySpace was beginning to realise its advertising potential and forecast revenues of $150m this year. Now that figure looks conservative.
Why is MySpace so popular?
MySpace became so big, so fast because it takes the best bits of other popular community sites (Craigslist, MP3.com) and puts them together in a technologically simple and accessible way. Plus it succeeds in giving users the sense that they belong to something a bit edgy and cool. For now, that combination is working a treat. As by far the most popular site in the giant US market, MySpace has attracted new users at an astonishing rate thanks to the ‘network effect’ of being the biggest player. If your friends are already all on MySpace, that’s the site you’re going to choose too.
Can that success last?
That’s the $900m dollar question. Sceptics point to the swift rise and fall of earlier social networking sites, such as Geocities and Friendster, and to the current explosive growth of rival sites in other countries – including the UK and Ireland, where Bebo.com is the latest cool site. Certainly, there’s a danger that the young in-crowd who created the networking phenomenon will quickly move on to the next new thing, leaving MySpace as that old-fashioned site your boring big sister used to like. The other big worry is online safety: some critics argue that it would take just one major scandal (say an assault on a minor ‘groomed’ by a criminal using MySpace) to put advertisers off for good and wreck the whole sector.
And a more positive scenario?
Conversely, according to William Drewry of Credit Suisse, “given that this is the first generation to embrace community sites, there may well be the opportunity for continued growth, with the increased scale of the membership base a protection against defection”. MySpace isn’t resting on its laurels. The site will shortly start selling music downloads by unsigned bands, marking the start of a drive to become a major commercial force within the music industry – and (according to MySpace’s founder, Chris DeWolfe) not just in the niche of aspiring new artists, but across the board. NewsCorp have also announced plans to sell film and TV content through MySpace on a ‘download-to-own’ basis in an effort to create a branded foothold in this potentially huge new digital market.
Who are MySpace’s competitors?
In the US, MySpace’s biggest competitor is Facebook, more associated with twenty-somethings and university students than with teenagers. A similar site, San Francisco-based Bebo, founded by Englishman Michael Birch, is running level with MySpace in the UK, and is number-one site in Ireland and New Zealand. Big media conglomerates are interested in both sites. Viacom, which lost out to NewsCorp in the bidding war for MySpace, has made a confirmed approach to Bebo and a rumoured approach to Facebook. YouTube, the video-sharing site, has also seen massive growth and a wave of takeover speculation. Other popular sites in niche markets include Dogster for pet lovers and LinkedIn for business people.
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