NeoMedia Technologies, Inc (NEOM)

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OT DD MySpace in its own space? Commentary: It's tempting, but not worth it

Last Update: 12:01 AM ET Jul 6, 2006

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B5DDEE133%2DE4D0%2D446D%2D8A16%2D5958F6825F9...


SAN FRANCISCO (MarketWatch) -- A year ago this month, when News Corp. purchased MySpace, the $580 million deal looked questionable, if not foolish.

MySpace seems to be the media company's crown jewel. News Corp. says that MySpace is adding 230,000 new members each day and has more than 90 million members. That's nearly 4 times the 23 million members MySpace had on July 19, 2005, the day News Corp.announced it was buying the social network.

MySpace is the fastest-growing property across the top Web brands, drawing 42 million unique visitors in May, up 329%, according to Nielsen//NetRatings.

Monthly pageviews grew nearly 400% to 19.3 billion. Among the top Web properties, MySpace's pageviews are second to Yahoo's 32 billion pageviews. Google has far less inventory, with 12.8 billion pageviews, followed by eBay at 12 billion, Microsoft's MSN at 11.9 billion, and Time Warner's AOL at 6.7 billion.

Clearly, MySpace -- if it were a standalone company -- would be the hottest kind of stock, one that every sell-side analyst would gladly hawk. After all, with the exception of Google, Internet stocks have fared poorly this year. Institutional and retail investors both would love a growth story.

Investment bankers would also love the business. After last year's flurry of acquisitions, such as eBay's purchase of Skype, and Yahoo's investment in Alibaba, this year is pretty boring as far as Internet merger activity is going. There are also few Internet IPOs out there, besides Vonage , which is giving IPOs a bad name. After debuting on the New York Stock Exchange in May at a price of $17 a share, Vonage is now trading at half the price. Shutterfly, which recently filed to raise $92 million in an IPO under a proposed ticker "SFLY," is about the only Web property that looks promising. Shutterfly generated $17 million in sales in the first quarter. But that's far less than the $50 million a quarter MySpace is estimated to be doing.

Many analysts estimate that MySpace will generate $200 million in sales this year. Bear Stearns estimates that MySpace could grow those sales to $413 million next year and $528 million in 2008. Apply a 30% cash flow margin, which is an assumption based on Yahoo's 40% margin and CNet's 23% margin, MySpace could earn $158 million in 2008.

Google currently trades around 20 times next year's cash flow. Smaller Internet companies that just went public, such as , also trade at 20 or high-teen multiples. So, applying that kind of multiple to MySpace would mean the social-networking company could be worth $3 billion. Now, it's hard for MySpace to get anywhere near that multiple while inside News Corp., which trades at about 7 times cash flow.

Now, all this said, let me just point out that News Corp.has never said anything publicly about spinning out MySpace or Fox Interactive Media, which includes MySpace and Fox's other Internet properties, such as IGN and Scout Media.

But it's very likely the thought has crossed the minds of executives as well as MySpace founders. Prior to the sale to News Corp., MySpace founders had considered an IPO, according to someone close to the company.

It's also my sense that the discussion of MySpace and its value will come up during investment bank Allen & Co.'s annual retreat in Sun Valley, Idaho, later this month. News Corp's Rupert Murdoch is a frequent attendee of this event.

MySpace upside

But the potential billions in upside don't seem to outweigh the downside, which is the time that would have to be expended to sell such an asset. Others agree.

"The opportunity is to leverage it [MySpace]," said Richard Greenfield, an analyst at Pali Research. "The last thing you want to do is separate the company.... let it play out in a few years."

If News Corp. were to sell MySpace, it would not only raise questions about News Corp's Internet vision, it would put a big question mark on synergies between new media and old media and whether media companies can ever really create them. Apparently, many investors don't believe Time Warner and AOL ever made any sense together.

Secondly, if MySpace were to sell, they'd likely be distracted from building their future as they spend more time explaining to Wall Street that they, well, actually have a future.

And, despite what naysayers say, I do believe there is a future.
For one, MySpace is becoming an even bigger traffic contributor to Google, giving the social network far more leverage in negotiating any search contract with the major search engines. I doubt that higher search revenue fees are baked into any figures.

According to Bill Tancer, general manager of global research at Hitwise, for the week ending July 1, Google received 10.34% of their traffic from Myspace.com, Yahoo Search received 2.12% and MSN Search received 2.9%. When I first wrote about MySpace's power to send a significant chunk of traffic to Google, MySpace accounted for 8%.

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