Inside The Deals: MySpace Music JV Has One Thing In Its FavorAuthority

This story was written by Steve Rosenbush.
When it comes to management, joint ventures such as the MySpace Music initiative unveiled on Thursday pose significant challenges. Getting competing interests to cooperate can be like imposing orders on wet cats in a burlap sack. Remember At Home, the early broadband venture? Or Tele-TV, the telecom industry's first foray into television? They ended in disaster, as did Concert, the telecom joint venture created back in the '90s by AT&T (NYSE: T) and British Telecom. "Joint ventures hardly ever work. Usually, the partners can't manage the personalities or the personalities don't meld," says Susan Kalla, managing partner of KHX Investments, an investment company based in Greenwich, Conn.

The MySpace Music joint venture announced on Thursday has at least one thing in its favor: there's a clear line of authority. The new CEO will report to MySpace co-founder Chris De Wolfe. That puts ultimate authority in the hands of MySpace parent News Corp (NYSE: NWS). The music publishing companies that are joining MySpace MusicUniversal Music Group, Sony (NYSE: SNE) BMG, and Warner Music Groupare lining up behind the MySpace brand and its social networking platform.

Why would the music industry, which has fought so hard to maintain its authority amid the rise of digital media, cede any control? "The music industry doesn't have enough digital doors. Every day you hear about another record store closing," says Chad Stoller, executive director of digital platforms at Organic Inc., the digital agency. Or, in the words of one music industry executive who declined to be identified: "the record companies have no choice but to accept. There's little leverage, little alternative."

Since it's in control, News Corp. won't be able to make any excuses if the venture doesn't live up to expectations. With access to a huge library of music, News Corp. has the opportunity to generate enough additional revenue to bring MySpace up to scale. That won't be easy, though. Its Fox Interactive Media unit, which includes MySpace, generated about $500 million in 2007 and hopes to roughly double that amount this year. That's a big business for a stand-alone company, but it's a small fraction of News Corp.'s fiscal 2007 revenue of $28.6 billion. That's one reason the stock price has fallen to $20.17 from $25 in January. "Investors aren't going to give News Corp. credit for FIM until it accounts for about 10 percent of revenue," says Kalla, of KHX, who doesn't currently own shares of the company.

The music companies are counting on MySpace's expertise in social networking to help develop new revenue streams for the industry. "We will be able to develop many new streams of revenue," De Wolfe said. "MySpace is a global company with 26 offices around the world and over 500 people dedicated to ad sales," he said. The music will provide a foundation for display ads, streaming, music sales, ring tones and other forms of merchandising, and the sharing of playlists across the MySpace community. Members will be able to share playlists, listen to them for free or download them for a charge, De Wolfe said.

At some point, could the partners could bring in additional investors or even sell a stake in MySpace music to the public? "Anything is possible, but it's not something we're really discussing right now," De Wolfe said.

The fact that MySpace is in charge of the venturelending its name and marketing muscle and overseeing managementshows just how much the music industry has changed during the last few years.

Welcome to the fourth edition of Inside The Deals, a weekly column about M&A in the media written by veteran business journalist Steve Rosenbush. Steve is based in New York, and previously was the finance writer for BusinessWeek.com, responsible for coverage of M&A. His interests include the evolving business of media. He can be reached at steveAT paidcontent.org.


By Steve Rosenbush