DECEMBER 4, 2006
Technology
By Steve Rosenbush
What's Next for MySpace
News Corp.'s Rupert Murdoch has had a stellar year with his Internet ventures. His goals for the next year are even shinier
Last summer, media mogul Rupert Murdoch, 75, threw himself headlong into the Internet. The CEO of media empire News Corp. (NWS) made a series of high-profile acquisitions, most notably the $580 million purchase of Internet sensation MySpace (see BusinessWeek.com, 7/19/05, "News Corp.'s Place in MySpace").
But he also authorized the $650 million acquisition of IGN, which brought its flagship gaming site and the Rotten Tomatoes movie review site. There were smaller deals, too, such as the acquisition of sports site Scout.com. Murdoch made his Internet ambitions clear by creating a new division, Fox Interactive Media (FIM) that stood shoulder to shoulder with mighty Fox Entertainment in the corporate hierarchy (see BusinessWeek.com, 5/2/06, "News Corp.'s New Net Bets").
One year later there are signs that Fox Interactive Media is beginning to achieve traction as a business in its own right. The division is expected to generate $500 million in sales for the fiscal year ending in June, 2007.
Second-Largest Site That's not a lot of money by News Corp. standards. The company generated revenues of $26 billion last year. "But it's growing very fast," says Michael Barrett, FIM's chief revenue officer. "Ultimately, we think it could take its place alongside Internet standard-bearers like Yahoo! (YHOO), MSN (MSFT), and AOL (TWX) in its ability to generate revenue."
There's plenty more work to be done. MySpace is the second-largest site on the Web, after Yahoo. But Yahoo is generating more than $5 billion a year in revenue, 10 times the amount at FIM. Yahoo has a big head start on MySpace. It's been around since the '90s. But even so, FIM's revenue engine is just warming up. The next year will be crucial for FIM, as management brings a slew of new products and services to market. One of the most important is just a few weeks away from launch. Before the end of the year, FIM is expected to announce a major deal that will allow millions of additional MySpace users to access their accounts from their cell phones.
"We will announce a significant new mobile partner for MySpace in a week or two," Barrett says. He declined to identify the wireless carrier. But industry executives familiar with the matter told BusinessWeek.com that the partner is Cingular, a joint venture of AT&T (T) and BellSouth (BLS). FIM declined further comment on the talks. Cingular executives were unavailable for comment.
Into the Mainstream MySpace users already can access a mobile version of MySpace by subscribing to wireless upstart Helio, a joint venture of Earthlink (ELNK) and SK Telecom (SKM). But Helio is a tiny fraction of the size of Cingular, the market leader in the U.S. A deal with Cingular could help push wireless social networking into the mainstream, providing an alternative to wireless messaging technologies such as text messaging and wireless e-mail.
While MySpace gets most of the headlines, other Web sites such as IGN are key to FIM's growth. The IGN deal included a piece of technology, known as Direct2Drive, that's playing an important role in News Corp.'s broader online strategy. IGN has used its Direct2Drive Web site as an online store where consumers can purchase gaming titles. FIM has been expanding the site to include movies from its Fox unit and other studios such as Lionsgate and Starz.
FIM is in talks with other entertainment studios interested in using Direct2Drive as an online distribution vehicle for their content. "It's selling really well. It's a logical add-on," says Mickie Rosen, senior vice-president and general manager of entertainment at FIM. He says FIM is in talks with other studios that want to strike deals with Direct2Drive but declines to identify them. Senior industry executives familiar with the talks told BusinessWeek.com the studios include Vivendi's Universal Studios, which is farthest along. Talks also are under way with Sony (SNE) and Warner Brothers.
Exporting Expertise MySpace also is becoming a distribution vehicle for studios that compete with Fox. Sony is using a MySpace page to sell newly released DVDs from the hit TV show Seinfeld, according to analyst Rich Greenfield of Pali Research. He calls it "just another example of how Big Media continues to feed the MySpace growth engine. It also illustrates how high-quality, consumer-desirable content is increasingly becoming a part of MySpace. It's not just YouTube user-created videos."
FIM's expertise on the Web is being exported to other parts of News Corp., too. FIM has helped launch a network of Web sites for Fox Entertainment's 25 local TV stations. BusinessWeek.com has learned that next it will help launch Web sites for hundreds of other stations that are affiliated with the Fox TV network.
"These aren't online versions of the TV stations. These Web sites are local Internet portals," says Ron Berryman, senior vice-president and general manager of the TV stations group at FIM. Each local Web site has a small staff that includes an editorial specialist and a salesperson.
Dicey Proposition Berryman said that Fox's Internet strategy is different from those of other broadcasters, which have been national in scope. Fox is focused on the local advertising market, where local newspaper publishers and major Internet players such as Google (GOOG) are dominant. FIM built the Web platform and the content management systems for the sites, which have names like MyFoxDallas and MyFoxNewYork.
News Corp.'s foray into the Internet seemed like a dicey proposition last year, and many people were happy to predict its failure. How could News Corp., of all companies, run by a 75-year-old media mogul, possibly know what to do with an Internet community like MySpace? Critics thought the $580 million price tag was way too high. They predicted that Murdoch, known for his conservative politics and commercial impulses, would turn off the freewheeling MySpace community. They said MySpace's young members were fickle and likely to abandon it for the next hot destination.
Now, 14 months after the close of the deal, those dire predictions haven't come true. MySpace had 14 million regular users when the News Corp. deal was announced. It has 50 million today. Growth in the U.S. remains steady, and it's expanding aggressively into new international markets such as China (see BusinessWeek.com, 9/21/06, "Murdoch's Mission to China," and 8/9/06, "Fox to Make MySpace More Spacious").
"Eighty of the top 100 brands advertise on MySpace. It's a who's who of marketing," Barrett says. Brands with a presence on the site include music companies and consumer products companies from Jeep (DCX) to Procter & Gamble (PG).
Executive Exodus? News Corp. won't disclose any financial information about FIM beyond its forecast that the unit will generate $500 million in revenue in 2007. But Barrett says that margins at FIM are on the rise. The value of online advertising is rising industrywide, which helps FIM.
But acquisitions such as MySpace have benefited financially by being part of a much larger corporate enterprise. Before the acquisition, MySpace ads were sold by third-party advertising networks. Now the majority are sold by in-house staff that has access to top-tier marketers long accustomed to doing business with Fox Entertainment and other News Corp. businesses. "It's a higher-margin way of selling ads," Barrett says.
The biggest challenge over the long run could be retaining top management. FIM already has lost its founding president, Ross Levinsohn, who left last month saying he wanted to pursue other ventures. FIM is now run by his cousin, Fox Entertainment veteran Peter Levinsohn (see BusinessWeek.com, 11/17/06, "Why Ross Levinsohn Is Leaving News Corp.").
MySpace founders Tom Anderson and Chris DeWolfe (see BusinessWeek.com, 6/13/05, "Hey, Come to This Site Often?") are expected to stick around another year so they can qualify for their full bonuses. But whether Anderson and DeWolfe remain beyond that time is unclear and may depend in large measure on how the coming year goes. Both men were key to MySpace's quick success and remain engaged in its current management.
Much More Commercial The other major challenge is related to the huge FIM user community. FIM has been able to boost marketing and offer new products without alienating its users, at least so far. But that process is in the early stages. For example, MySpace allows users to sell their own music over the site. But the site could become much more commercial, through the use of music reviews and the sale of T-shirts and other consumer goods.
So far, FIM has proven to be a savvy move for Murdoch. He told investors last month that he believes he could sell MySpace alone for $6 billion. While that figure may be high, analysts expect it would fetch at least $2 billion. Not bad for a year's work.
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