There were plenty of doubters last July when News Corp. (NWS) closed its $580 million acquisition of social-networking phenomenon MySpace. Critics said the media giant run by billionaire Rupert Murdoch would kill off growth at the site, which had 17 million unique monthly visitors at the time.
But the growth of MySpace, whose mostly younger users communicate through home pages loaded with messages, photos, music, and more, has continued to surge. Researcher comScore Media Metrix says it had a stunning 51.4 million unique users in May, giving it the seventh-largest audience on the Web. Each month, the site gets more visitors than Amazon (AMZN), Apple Computer (AAPL), or The New York Times Digital (NYT).
Yet for an operation of its size, MySpace still generates only a small amount of revenue. Its nearest rivals on the Web are multibillion-dollar companies. News Corp. won't say how much revenue MySpace generates, but one person familiar with the company says it makes about $100 million in banner ads. That's not bad for a startup, especially since industry insiders say it was generating several million dollars a year in profit before News Corp. bought it. However, it's not nearly enough to move the needle at giant News Corp., where money is measured in billions.
RICH IN DATA. Senior News Corp. management is working to bring MySpace's business model up to scale. Chief Operating Officer Peter Chernin announced a big step in that direction during a speech on June 13 in which he outlined the company's new online search strategy. Search is a driver of traffic and advertising revenue for other major Web destinations, but it's a largely untapped source of growth for MySpace and other Fox Interactive Media (FIM) properties such as online gaming site IGN and sports site Scout (see BusinessWeek.com, 5/2/06, "News Corp.'s New Net Bets").
Given MySpace's power, Google (GOOG), Yahoo! (YHOO), and MSN (MSFT) are expected to compete fiercely for the right to be the search engine of choice for MySpace and the rest of Fox Interactive. News Corp. won't say how much money it expects to derive from a deal, but industry experts say it could conceivably boost MySpace's annual revenue several times over. "The deal will probably be worth hundreds of millions of dollars," says Chris Sherman, executive editor of Searchenginewatch.com.
FIM has been reevaluating its search strategy for some time. It currently has a deal with Revenue Science, a company that sells a souped-up version of Yahoo Search. Revenue Science specializes in targeting search ads based on users' behavior. That's a natural for MySpace, which gleans lots of valuable demographic data from its users' profiles. But Sherman suspects MySpace gets very little, if any, revenue from that deal. By dealing directly with a powerful search engine, MySpace could move search from the expense to the revenue column, he speculates.
TRAFFIC ACCELERATION. Last year, FIM considered buying a search-engine company and building its own search capability, just as Yahoo and MSN did. But basic search has become more commoditized, and MySpace has become bigger and more powerful. That gives MySpace leverage to strike a good deal with a big established player.
MySpace already drives a huge amount of traffic to search engines. It generates 100 million searches a month. In fact, 5% of all searches on the Web and 8% of all searches on Google are originated by people who come directly from MySpace. Given its power, MySpace may be able to bargain for 25% to 35% of all the advertising revenue on pages that it generates for a search partner, according to Ali Diab, a former Yahoo search executive.
A good search deal could have several economic benefits for MySpace. It would boost traffic, because users would be less inclined to leave the site to conduct their searches. And that added traffic would raise the value of advertising on MySpace. FIM won't say how much it charges advertisers now, but it's believed to be less than $1 per million impressions. There are parts of Yahoo and MSN that charge many times that rate.
MODEL IN THE MAKING? There are several reasons why MySpace rates are lower. Some advertisers are reluctant to be associated with the freewheeling site, which has concerned some as a potential hunting ground for sexual predators (see Businessweek.com, 5/12/06, "No Space for MySpace?"). And Diab notes that other sites, such as Yahoo, generate searches that are directly related to commerce. That's more lucrative than MySpace searches, which tend to be more about finding individuals or groups of people, he says (see BusinessWeek.com, 5/8/06, "Guide to MySpace").
Search will become an increasingly important tool within MySpace. Sherman says that until now users have navigated by clicking on profiles found on long lists of "friends." But with 51.4 million users last month, "a more efficient way of finding people will become necessary," he says.
One way or another, MySpace and FIM will need a search engine with strong video and audio capability. MySpace is a popular site among musicians and their fans, and videos are popular as well. It isn't out of the question that FIM could still develop a relationship with a cutting-edge search engine such as Blinx, a leader in video search, Sherman says.
WORK IN PROGRESS. For the moment, it appears that MySpace has proven itself to be more than just a passing fad. But it remains to be seen whether a business model which is effective for a startup can have a major impact on the multibillion-dollar bottom line at News Corp.
Creating an effective search strategy could be a crucial element in FIM's emerging business model.