In the wake of the Google/Myspace $900 million deal where Google would be paying FIM $900 million over 40 months, and Merrill Lynch coming out saying that the deal would get Google $225M back, I was asked by a few readers to rejig the original value of MySpace’s search business analysis.
Note that the $900 price tag is for all of FIM, at least the areas that matter, including sites like IGN, whereas this analysis is for MySpace only.
I decided to update the figures with MySpace’s most recent number and even include the contextual ad revenue, that is ads that are plastered on sites, they get much, much lower CTRs and average CPCs are much less, but on a garganthuan site like MySpace, it can add up. The thing is that over time, if the results are not up to par, advertisers opt out and that portion will reduce.
I could be wrong, but my guess is that despite News Corp.’s bravado, Yahoo! did the numbers and realized that over time, MySpace’s traffic is simply not all that profitable. People do not go there to search, so the “propensity to search” is low, and, the contextual ads are simply not clicked on.
Of course, I still give kudos to News Corp.’s team for getting Google to commit to such a staggeringly high number, even though per month, it’s only $22.5 month, a joke for a company with Google’s deep pockets and need to defend their position as search king.
[Disclosure: I own shares in Yahoo!]
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WatchMojo NewsletterOf course the answer to that is no.
Rupert Murdoch went all out and bought both assets for $1.3 billion… it’s made him the envy of many media moguls to own such jewels, but can you imagine the coup de theatre if he did?
Yesterday, Forbes asks if it helps or hurts IGN to be part of FIM.
And there are rumors of an eventual MySpace IPO, read more here.
While FIM is on pace to generate $300M in revenues this year, it will carry a loss. Next year, the revenue is $500M for the online unit, that includes MySpace, IGN, Scout and all of Fox’s flagship online properties.
The $900 million Google is paying FIM over three years is a great coup because I doubt FIM would generate that much in income through a stand alone search strategy, but, the fact remains that $300M per year is chump change to a behemoth like News Corp. who generates $20B per year in sales.
So, should Murdoch spin off MySpace and IGN? The former because it has risen in value quite a bit (at least if value is a function of traffic); the ladder because it might be restricted within FIM?
MySpace and IGN could generate quite a bit more than the $1.3 billion they cost Murdoch. Of course, if it were up to me, I am not sure I would have sold to News Corp. in the first place.
MySpace has grown into a social phenomenon; IGN could be a CNET (what is lacks in some areas it has in others), worth $1.2 Billion on the stock market.
But of course, no one ever asks me anything!
[Disclosure: News Corp.’s FIM is involved in ongoing litigation against WatchMojo.com]
Merrill Lynch analyst Justin Post estimates that the alliance will generate at least [added later: in net] $225 million in revenue over three years for Google, or an average of $75M per year.
HipMojo’s own analysis a few months ago pegged the potential value of the deal, looking only at search revenue and assuming many things and a 50-50% revenue share, at $63M per year. Tack on a modest growth rate, and we’re not far off from Merrill Lynch’s numbers.
The bottom line is that Google is paying $900 million over three years to recoup $225 million, so, to defend itself against its competitors, it’s considering losing $675 million. That might seem foolish, but Google not only defended against FIM from becoming a competitor as well.
I misread and misunderstood Merrill Lynch’s report, which claims Google will make a net $225 million, in other words, Merrill’s analysts estimate Google’s revenue at $900 million + $225 million = $1.125 billion.
All right, maybe someone can pass me the koolaid, but there is no way Google can generate over $1 billion in revenue from Myspace. Yes, Google did get 10% of its traffic from MySpace, but Google generates (at least it did when I read the SEC prospectus a couple of years ago) the bulk - we’re talking percentages in the high 90s folks - of its revenues off and on www.google.com and not through its network. In search, not all traffic is created equally.
The key metric is that MySpace (and all social network, I’m not picking on FIM’s MySpace alone here) users have a low propensity to search. People go there for anything but search.
But, of course, is Google can generate +$1 billion off that deal - great!
Bottom line: This is not a revenue deal for Google, it’s a loss leader and it is a smart move. It ensures that MSN and Yahoo do not increase market share; it also dangles a large enough carrot in front of News Corp. to ensure it does not enter search and compete with Google, who has done a masterful job of positioning itself as a technology company and not a media company. If it were a media company, surely Viacom and News Corp. would think twice about sleeping with the enemy. Yahoo, who boasts about being a media company, naturally will have some naysayers in old media companies anytime negotiations come up.
All to say, I cannot understand how Google can make money on this deal - given today’s traffic numbers and factors - when you know that Google had to give up a lot of revenue share. I would estimate that News Corp. probably played up Yahoo and MSFT’s interest to get anywhere from 70-100% revenue share.
Score one for Google in terms of positioning here. Who knows, maybe all of those IR lessons are starting to teach the folks at Mountain View a thing or two.
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