MySpace has 15 months left until its partnership with Google ends, and it doesn’t look like Google will re-up for the business and pay MySpace substantial search fees.
To this end, MySpace, which is part of News Corp’s Fox Interactive Media, will have some serious cost-cutting decisions to make, according to Pali Research analyst Richard Greenfield.
“Fox Interactive Media’s problem is that it
significantly ramped its cost structure expecting continued growth,” wrote Greenfield. “In
fiscal Q2 (Dec) 2009, FIM revenues fell only $7 mm, yet profitability dropped
$40 mm or 85%. While there was a unique IGN issue in the quarter, the
need for substantial cost structure reductions is clear.”
It’s not so much that social networks are poor environments to display ads, as much as Google’s search algorithms weren’t as good as they could have been, Greenfield argued. For instance, “Myspace users that search for a
person named Dan, should not see DNA testing as the sponsored link,” he pointed out.
Essentially, Google “simply does not care about
social search,” making it “harder to conceive Google paying anywhere
near their prior commitments to MySpace, especially as the inherent
functionality of social networks (status
updates/news feeds, internal IM, internal e-mail) is diminishing the
importance
of search.”
More from his note:
In fiscal 2009 and fiscal 2010 (see Exhibit A), we estimate Myspace will
generate $300 million of revenues from its Google search deal in each year,
representing about 35% of FIM’s total revenues in each year (with Myspace
still by far the largest component of FIM). While Yahoo, AOL and MSN
could all be bidders for a new Myspace deal beginning in July 2010, we suspect
all have learned from GOOG’s overpayment. In turn, we are
estimating a 50% drop in search fees.
In July 2005, News Corp. formed
Fox Interactive Media (FIM), with its acquisition of Myspace. FIM (helped
by acquisitions of IGN and Photobucket) along with Fox Sports.com grew to $856
mm of revenues in fiscal (June) 2008. Yet, after a strong fiscal Q1
(Sept) 2009, FIM experienced its first-ever down revenue quarter in fiscal Q2
(Dec) 2009.
While Myspace’s strategy to
capture portal advertising dollars through its homepage redesign and its recent
music relaunch have proved successful, FIM’s problem is that it
significantly ramped its cost structure expecting continued growth. In
fiscal Q2 (Dec) 2009, FIM revenues fell only $7 mm, yet profitability dropped
$40 mm or 85%. While there was a unique IGN issue in the quarter, the
need for substantial cost structure reductions is clear.
Assuming a new search deal in FY
‘11 at 50% of the current rate, FIM would need to organically grow
revenues by 27%-plus in fiscal (June) 2011 to compensate for the reduced search
revenues. We are assuming organic revenues are up double digits and they can
take some cost out of the business over the coming year, but not enough to
fully-compensate. In turn, we now expect FIM profitability to drop
notably in fiscal 2011.
(Image source:static.guim.co.uk)
