MySpace Still Short on a Digital Fix and $100M in Revenues

MySpace has yet to deliver the digital fix to Fox Interactive Media that News Corp. expected when it paid $580 million for the social-networking unit three years ago. Instead, MySpace will begin emulating rivals Facebook and Twitter in an effort to offset an anticipated $100 million-plus annual revenue shortfall stemming from waning online traffic and revenues.

Heightened competition -- largely from Facebook -- will also take a toll on FIM's balance sheet at a time when the unit, which could soon be disbanded, should be helping to digitally revitalize all of News' media assets.

According to the latest numbers from Nielsen Media, users spend about one hour more per month on Facebook than nearly anywhere else online, and the site is growing at about 700,000 users daily.

MySpace, meanwhile, is failing to deliver its minimum traffic guarantees under the final 18 months of a Google search deal, diminishing its high-margin revenue flow. In Fox's fiscal third quarter, search revenues came in 80 percent below guaranteed levels, which could result in FIM earning $250 million rather than a forecast $300 million in fiscal 2009 under its unit-wide Google search deal. News reports its fiscal 2009 results August 5.

Even if the lucrative Google search deal is extended beyond June 2010, it may never generate more than about $100 million in guaranteed annual revenues, which have been pivotal in bolstering FIM's overall financials, according to Credit Suisse analyst Spencer Wang.

The short-term response will likely be about twice the headcount reduction already announced at MySpace, for a nearly 60 percent -- or 800 person -- cut intended to generate as much as $100 million in annual cost savings, Wang figures. Even then, he has lowered his FIM estimates to $59 million in earnings on $835 million in revenues in fiscal 2010, and a loss of $75 million on declining revenues of $725 million in fiscal 2011.

By comparison, Facebook has told investors it expects to be profitable in 2009 and says it will generate about $550 million in revenues, about a third from its ad deal with Microsoft and the rest from its own sale of advertising and virtual gifts (brand icons that marketers pay for and that users give to each other). It is furiously innovating with the likes of Facebook Connect (allowing users to link their identity, friends and privacy at other sites) as well as plans for an ad network. It doesn't hurt that employees now have a way to cash in 20 percent of their private shares in the company as an incentive to stay onboard.

The task of redirecting strategy and innovating is job one for recently appointed News digital chief Jon Miller and MySpace chief Owen Van Natta. Among other things, features are being devised to make MySpace a general entertainment destination and network, building on the likes of MyMusic with the help of newly appointed product chief Jason Hirschhorn (formerly of MTV and Sling Media). There also are plans to refortify News' online advertising sales.

Miller needs latitude and resources to focus on exploiting the cost efficiency of digital distribution and finding new sources of revenue. That would more likely occur if News disbands FIM as a digital moniker to focus on integrating more digital strategies and operations throughout the company, as has been speculated.

The recession will continue taking its toll on News as a whole in fiscal year 2010, when the only growth in advertising revenues will be in cable networks, now expected to grow a mere five percent -- although that would double last year's gains. All of the conglomerate's other media operations will sustain lower advertising revenues, which bottomed with a 22 percent decline in fiscal 2009 ad revenues for the Fox owned TV stations and for Dow Jones but are expected to improve to only about a 10 percent drop in ad revenues in the new fiscal year just begun, Wang said.

Wang recently lowered his estimate for News' fiscal 2009 earnings to $3.57 billion, a 34.2 percent decline from the prior year, and expects just a 5.5 percent increase in fiscal 2010 earnings. With about 30 percent of News' earnings tied just to weak TV advertising and another 20 percent from filmed entertainment, which has fawning expectations, MySpace's expected reveue shortfall will make a weak situation worse.