Internet Outsider

MySpace: $1B of Revenue in 2007 UPDATED

UPDATE:  Turns out Erika (below) got bad information.  I've rerun MySpace estimates based on Murdoch's recent comments.  Updated estimates are $600 million in calendar 2007 and $1.2 billion in 2008.  More on Silicon Alley Insider...

In a lengthy piece on the trials and tribulations of UGO Networks, Forbes' Erika Brown drops in an interesting nugget: MySpace is expected to do $1 billion in revenue this year.

Now, people have been sticking their fingers in the wind on MySpace revenue since the day Murdoch bought it, but Forbes has better insight than most.  In December, Technology Editor Peter Kafka (now Managing Editor of Silicon Alley Insider) wrote a profile of Murdoch in which he put MySpace revenue at "$30 million a month", or a run-rate $360 million a year.  Forbes's Brown presumably has similarly strong Fox relationships, and she's now pegging the 2007 number at $1 billion.  Assuming solid month-to-month growth off the $30 million December number, the $1 billion isn't even a stretch.

Four conclusions:

1. $1 billion is real money, perhaps even enough to finally silence those who continue to argue (pray) that advertisers will NEVER risk being associated with, gasp, user-generated content.
2. If MySpace can generate $1 billion in revenue, then so can Facebook.  So the $10 billion price tag on the FOR SALE sign Facebook hung around its neck last week actually makes sense.
3. News Corp's $580 million MySpace buy was, indeed, a steal.
4. New York-based Fotolog, which is closing in on the 10 million member mark and closed a big deal with Google last week, could end up being worth real money some day, too.

A place for big bucks.

Photobucket Can Barely Give Itself Away: Implications

Henry Blodget: Every news organization on earth is reporting ValleyWag's scoop that Photobucket is about to sell to News Corp. for about $250 million.  Even if Photobucket has the typical Web 2.0 attributes--small revenue and big losses--this price seems surprisingly low for a site with a reported 41 million users and 2+ billion images. 

Sure, $250 million's an absolute fortune, but it's nothing like what the company would have fetched if, say, Google were at the table.  Alas, Google does not appear to be in the market for a photo-sharing site, so Photobucket will have to settle for the stingier News Corp, which needs to keep $5 billion on ice for its run at the Journal.

The Photobucket price may have implications for the hundreds of other Web 2.0 companies founded with no business model other than "selling to Google."  Photobucket is by almost any measure wildly successful: most companies would kill for 1/10th as many users.  If the sans-Google exit value such a company is in the low-hundred-millions, however, then hundreds of other less-successful start-ups might be advised to lop a zero off their own exit dreams.  Skype and YouTube may remain startling exceptions.

Why Murdoch Wants Dow Jones (and Why CNBC Should Sweat)

Well, yes, there's some diversification for News Corp (geographical and business-line), and, yes, there is perhaps the ability to fire up the financial performance of an ancient family-controlled company, but, more important, there's also the instantaneous injection of credibility and content into FOX's future business-news channel.

Today's financial TV leader, CNBC, has been understandably nervous about FOX's entry into the market (look at what FOX did to the incumbents in an apparently unassailable three-network TV monopoly a decade or two ago).  Until now, however, the assumption was that the FOX business formula would be "beautiful women reading shocking headlines."  This strategy would certainly allow FOX to run away with some of the viewership (beautiful women reading to testosterone- and adrenalin-filled men is not a lousy gameplan), but CNBC would likely position itself as the "prestigious" and "thoughtful" business channel.

If Rupert is successful in his Dow Jones bid, however, CNBC will look comparatively like business-lite.  The sharp, telegenic Wall Street Journal reporters who now provide CNBC with some of its pith will provide it to FOX's business channel instead.  Executives who want to reach the greatest number of influential leaders will speak first to News/Dow Jones/Marketwatch/FOX Business News--and thus cover all their media bases--instead of to CNBC.  And the combination of MySpace/Marketwatch/Wall Street Journal Online would give News Corp a very credible Internet platform on which to repurpose much of the resulting content (a la Bloomberg).  Since CNBC/NBC has no Internet platform, the TV brand would become increasingly isolated and marginalized.

So the folks at CNBC are presumably hoping that the Dow Jones Bancrofts will snicker at $60 a share and tell Rupert to get lost.  Which they have.  For now.  Which gives the folks at GE/NBC/CNBC a chance to think about whether they really can afford to let Dow Jones fall into Murdoch's hands.

YouTube - Big Media Video: Revenue Splits and the Real Stumbling Block

In Sunday's New York Times, Richard Siklos provided some detail on the contemplated revenue splits for BIGMEDIAVIDEO.COM (the NBC/News Corp. theoretical consortium) and YouTube and its content partners.  He also suggested (as the Times has previously) that the real stumbling block in the Big Media-YouTube negotiations is not money but control: The Big Media folks can't live with the idea that someone else (GooTube) will sell advertising against their content.

According to Siklos, the revenue splits between BIGMEDIAVIDEO.COM and its distribution partners will be 90%-to-BIGMEDIAVIDEO and 10% to the distribution partner.  This is interesting, but it leaves out the most important split, at least w/r/t the YouTube-Big Media negotiations: The split between BIGMEDIAVIDEO and the specific Content Owner.  Will each partner in the consortium contribute the same amount of video?  Will they own the same amount of equity?  Will the revenue splits be the same for all BIGMEDIAVIDEO content providers?  If not, the consortium is especially doomed to failure.  If FOX's videos are more popular than NBC's, why will Fox sit by and allow its competitor to benefit at its expense?  (Sorry, but this BIGMEDIAVIDEO thing is DOA).

Siklos also reports that the split between YouTube and its content owners is 30%-to-YouTube and 70%-to-the-content-owner.  This seems reasonable, especially if YouTube is shouldering the costs of selling and serving the advertising (or perhaps the split is after overhead).  If this split were the only hang-up, every major media would probably rush to do a deal with YouTube. 

According to Siklos, however, the larger issue is control: Big Media folks revere their relationships with advertisers, and they don't want someone (Google) getting between them.  In my opinion, if Big Media wants to survive in this new world, this is something they're going to have to get over.

So...YouTube's Toast?

Some traditional content companies finally got their act together and announced a communal video distribution site.  So is YouTube toast? 

No.

How is it not toast?  Let us count the ways.

First, there's the smart point that Fortune's Adam Lashinsky makes in his piece today: Hobbling YouTube would be a tough enough job for an as-yet-to-be-named-built-or-launched site run by ONE big media company.  So imagine how hard it will be when each of SIX big media companies is fiercely looking after its own interests, pointing fingers, spreading blame, demanding changes, etc., before the site even gets up and running. 

Second, big media video content is NOT the only kind of video that Internet users want.  On the contrary, a recent review of Vidmeter, YouTube's most popular channels, and compete.com's analysis of what happened to YouTube's traffic when the 100,000 Viacom videos were deleted (up 14% in two weeks, per the NY Times), suggests that Jon Stewart et al clips comprise a far smaller percentage of total online video content than most people think.

Third, online video will NOT be a winner-take-all game.  Even if BIGMEDIAVIDEO.com actually gets up and running--a real "if," in my opinion--and even if YouTube chooses not to license or otherwise distribute the content, there will be plenty of room for multiple players.  The experience and know-how that YouTube has developed over the past two years, moreover, will continue to give the company a major operating advantage, especially at scale. 

Fourth, unless BIGMEDIAVIDEO.com 1) maintains a chokehold on ALL professionally produced content--something that sounds next to impossible, given that many companies have yet to join the consortium--and 2) builds a powerful consumer brand, YouTube will still be the first stop for many Internet users interested in video clips.  Although Viacom probably assumes otherwise, many Jon Stewart fans probably have no idea what company produces his show (and, therefore, don't think to look on comedycentral.com).  By now, however, most consumers think that youtube=online video, the same way that google=search, so youtube may always be the first stop for many of them.  And once it decides to aggregate links to all online video, there is nothing to stop YouTube from employing--and making a lot of money off of--the same model that has made Google the most powerful media company in the world: sponsored search.

MySpace Financial Performance: No Longer A Joke UPDATED

MySpace still fails to merit so much as a mention in News Corp's quarterly release, but the financial performance of Fox Interactive Media (some of which is MySpace) continues to improve.  Revenue grew to $518 million in the December quarter, up 41% from a year earlier.  This was a slight deceleration from the 45% Y/Y growth in the third quarter, but the division also turned a modest profit after losing $73 million in Q3.

Precise estimates of MySpace's revenue vary.  In a comment below, Keith Eysmun estimates the Q4 revenue was about $150 million, or a $600 milllion run-rate.  In a recent Forbes' piece, Peter Kafka cites a monthly revenue figure of $28 million, or a $350 million run-rate.  Judging from the Y/Y divisional comparisons, something in the division is still growing extremely fast, and I suspect it's MySpace, but the site's overall revenue may still be relatively small.  My original Microsoft comparison, therefore, was premature.  Using Keith's revenue estimate, a $15 billion valuation for MySpace would also be approximately 22X run-rate revenue, not the 10x-15x I originally estimated below.

So where does this performance put Fox in the overall scheme of things?  Believe it or not, the division itself is catching up with Microsoft (which generated $624 million in the quarter, up a meager 5% year over year).  Microsoft, moreover, lost a boatload of money--$155 million--which means FIM may in aggregate be a stronger business.  Perhaps this impressive performance will garner Fox's Internet division a bit morerespect. 

Wasn't it just a few months ago that analyst Jordan Rohan was roundly ridiculed for suggesting that MySpace could one day be worth, gasp, $15 billion?  Based on MySpace's current run-rate, that sounds like a less than outrageous 20x-30x (depends how much of FIM's revenue MySpace generates).  Now if only Fox would start taking the Interactive division seriously enough as to bother mentioning it in its quarterly press releases.

Those Irresponsible Publicity Seeking Analysts

Well, there was a bit of a traffic/linking explosion after yesterday's post about Jordan Rohan's MySpace-might-be-worth-$15 billion musings.  Jordan mostly took it on the chin, as did I for not dismissing his comments as idiotic and irresponsible. 

And maybe the howlers are right.  Maybe Jordan's a braindead moron who just wanted to see his name in print.  Maybe MySpace is such a pile of junk that it will never be worth anything more than Newscorp paid for it (This seems to be the general line of reasoning: Newscorp paid $600 million a year ago, so the property can't possibly be worth much more than that).  Maybe.

But here's the thing: Yesterday, amid the screams, Jordan's comments triggered some intelligent debate.  Could MySpace be worth $15 billion someday?  (The equivalent of about 1/3 of a Yahoo! and 1/10th of a Google)?  If not, why not?  If so, why?  I haven't read Jordan's note, so I don't know what his reasoning was, but I'd be interested in hearing it.  And so, I imagine, would many thoughtful observers, whether they ultimately concluded that Jordan is a far-sighted thinker or a reckless idiot.

Back when Google went public, at $85, the consensus was that this price was absurd: A six-year old search engine worth $30 billion, almost as much as Yahoo! or eBay--how ridiculous was that!?  And, so, dutifully, carefully, terrified of being ridiculed, most analysts painstakingly constructed 10-year DCF models, with perfectly calculated WACCs and terminal multiples, and ventured--to howls of ridicule--that Google might someday, if all went well, be worth as much as...$150!  And then, when Google blasted through $150, the analysts scrambled back to their DCFs, adjusted their assumptions, and carefully, dutifully ventured that Google might someday be worth...$180!  More howls.  Then Google broke $200.  And analysts raised their targets to $220.  And there was pandemonium--those cheerleading idiots were just taking a time-machine back to 1999!  And so on.

Bottom line: Back in September 2004, I, for one, would have appreciated an analyst with the balls to explain why Google could be worth not $150, $180, or $220 after a few years, but $500 in one year.  Even if I decided that the analyst was an imbecile, I'd have been grateful to him or her for helping me think through the extremes. I would have the same admiration for an analyst who made a compelling argument that, say, GE, Microsoft, the DOW, or some other sacred cow was about to drop 90%.

So, here's a toast to Jordan Rohan, prophet or moron.  And here's a toast to any analyst with the guts to say something interesting.

Could MySpace Be Worth $15 Billion? Easy

The most surprising thing about RBC analyst Jordan Rohan's comment that MySpace could be worth $10-$20 billion in a few years is that he deemed this assessment "audacious"--and the press seemed to agree.  Why is this audacious?  In little more than two years, MySpace has come out of nowhere to become the 7th biggest site in the U.S.  Per NetRatings, it now has 50 million monthly users--closing in on half of Yahoo!'s domestic user base--and it is still growing at a fantastic rate (a reported 250,000 sign-ups a day).  MySpace recently signed a $900 million multi-year search deal with Google, showing that the revenue is starting to follow.  Etc.  Given all this, the theory that, in a few years, MySpace could be worth less than half of what Yahoo is worth with its now-battered valuation seems eminently reasonable.  On its current trajectory, in fact, MySpace could end up being worth a lot more.

That said, of course, it is also conceivable that MySpace might not continue on its current trajectory, might not be able to meaningfully monetize the site, might get so clogged with sex-predator and teen-porn lawsuits that advertisers stay miles away, might fail to lock in a fickle user base given to pronouncing formerly cool trends as "so last year," might, in any number of ways, prove a major disappointment.  It might even end up being worth less than Newscorp paid for it (circa $600 milllion).  Right now, however, it is certainly headed in the right direction.

Jordan's careful packaging of a not-so-audacious hypothesis is probably in part the result of a research environment in which analysts are terrified of saying anything bold for fear of getting sued.  For those who have watched the Internet for a while, however, the idea is far from outrageous.  MySpace could easily be worth $15 billion in a few years, or more...or $1 billion, or somewhere in between. 

The key now, for those trying to make a more refined assessment of the property's potential value, is to follow the money--on both sides of the ledger (revenue and costs).  One big search deal--and an obsession with music-related content--will not a $15 billion company make. 

Apologies for the Long Silence...

...and thanks for the many kind notes wondering where the heck I've gone.  I've been quasi-offline for much of the month, finishing up the draft of a book, and posting will be exceedingly light (probably non-existent) until after Labor Day.  After that, I'll try to get back to it with alacrity.

Much interesting news of late, especially the Google-MySpace deal.  Certainly didn't take MySpace too long to show us the money (after the post a month or two ago wondering if it would ever do same).

Best for the rest of August.  Keep the comments coming...

MySpace: Time To Show Us The Money

MySpace has taken the world by storm.  With more than 70 million registered users, huge pageview and traffic growth, and ubiquitous and usually gushing PR, the company is now tipped as the vanguard in a new Internet portal revolution.  The company's success has also restored Rupert's status as a brilliant visionary, one who saw its promise early and picked it up for a song.

And, yes, the company's growth is amazing.  But so, it seems worth observing, was the early growth of user-driven companies like Geocities and Tripod, neither of which proved to be particularly good businesses.  So with the MySpace hype-cup overflowing, it seems worth taking a peek at where MySpace stands as a business (as opposed to a cultural phenomenon), and where it might eventually go.

On the first score, based on Newscorp's recent 10Q, we can first note that MySpace is so irrelevant to the financial performance of the larger entity that it doesn't even merit describing.  In the MD&A, the company describes in detail the performance of each of its other businesses, including its small book business, but it doesn't so much as mention MySpace. 

Judging from the year over year comparisons in the "Other" category, in which MySpace and the rest of Fox Interactive Media have been unceremoniously dumped, we can assume that the company might have contributed somewhere up to $100 million in revenue in the last quarter ($400 million run-rate), while losing up to about $50 million.  Although these revenue numbers are not tiny, they pale in comparison to those of Yahoo, Google, and other Internet leaders.  Unlike the revenue at the other Internet leaders, moreover, they appear to come with significant losses, suggesting that the MySpace business model is nowhere near as leverageable as those of its larger brethren.  Geocities and Tripod, if memory serves, had a similar problem.

These estimates are imprecise, and MySpace's staggering traffic growth has obviously far outpaced its ability to monetize itself.  The company has been a part of News for more than six months now, however, so it the profitable-monetization engine is ever going to really kick in, it ought to kick in soon.  If it doesn't, and if News Corp. doesn't provide more insight into the company's business model, it will probably be prudent to conclude that, in MySpace's case, as with some of the first-generation user-generated sites, traffic should not necessarily be viewed as a good proxy for business value.  The MySpace revolution, in other words, may not, in fact, revolutionize News Corp.'s bottom line. 

UPDATE:

An excellent story from Julia Angwin at the WSJ on MySpace's push to create "safe" areas that mainstream advertisers can embrace without appearing to subsidize teen pornsters.  Although this sounds like a promising move, Julia points out at the end of the piece that users have yet to really embrace the new areas, preferring to remain in the user-generated jungle that scares the bejesus out of Disney, et al.  The site's tremendous audience no doubt creates numerous monetization opportunities that don't include traditional advertising (data-gathering, for one).  Again, however, it remains to be seen how large and profitable these will be.