• by Diane Mermigas , July 24, 2009

The strategic maneuvers Jonathan Miller must make to get MySpace on the exploding online gaming map cannot be underestimated. The miscalculation by Big Media peers about the consumer draw of video games can be News Corp.'s gain -- for now.

News Corp.'s new digital chief will need to tap all of his resources as a venture capitalist to customize a niche online gaming platform for MySpace that will help it to regain its standing from Facebook and stem a potential $100 million annual revenue shortfall from missing its traffic guarantees to Google.

That makes online gaming a very big bet.

"Games have become the greatest time activity commitment, and can be an adjunct to other businesses," Miller said in an interview. "We are about to see an explosion of better-quality, lower-cost multi-player games on mobile devices with greater bandwidth. They will be a natural extension of other kinds of content: movies, TV programs and even music."

"Social networks like MySpace, with open enough platforms, can allow games creators to leverage millions of hits in a week," Miller said. That arrangement potentially opens the door on paid access by both game developers and players.

However, it will require MySpace to make acquisitions or strategic investments, and engage in even more aggressive rebranding. Unlike music, video games sell at a brisk pace even at high prices. It took a recession to curb overall console game revenues, which have declined 23% from their year-ago highs.

Instead, recession-weary consumers have been flocking to online gaming, which has grown 22% in the past year, attracting 87 million U.S. visitors in May, according to comScore. Yahoo Games tops the list of most-visited gaming sites against AOL, Disney, Nickelodeon, MSN, Electronic Arts and GSN Games Networks.

There's a potential new rival: The fluid communication and search inherent in social networks could contribute to a new wave of online gaming. The younger demographic users of MySpace anchor the broad 7-to-54 consumers who are spending more time playing video games. The social aspects of gaming contributed to the rise in the number of people subscribing to play them through rental services such as GameFly, according to Nielsen.

Still, traditional media conglomerates overwhelmed by the digital convergence have only dabbled in gaming. Disney has one of the healthiest games business, tied mostly to its evergreen character franchises. Viacom Chairman Sumner Redstone recently sold his stake in Midway Games, after which Time Warner acquired the entire company. Part of the reason for Big Media's tepid interest to date could be the general lack of interactivity that is fundamental to gaming.

But the rollout of interactive televisions for the home, beginning this holiday gift season, and more ubiquitous interactivity overall will invite companies to link more of their films, TV programs, music, publishing and Internet to generate new revenue streams. Entertainment and pop culture will continue to be the "core essence" of MySpace, which will be partly paid for by users. "Social networks will become a major distribution point for one-to-one content," Miller said.

While the opportunity is big, the obstacles are even bigger.

MySpace's importance in driving traffic to entertainment and music sites has failed dramatically over the past few years, according to numbers from comScore and Hitwise.

Tying MySpace's gaming fortunes and user numbers to News Corp.'s television, film, publishing and other content is a strategy that failed for Time Warner when Miller was chairman of AOL. He now must secure the necessary funding and latitude from CEO Rupert Murdoch to revive MySpace and integrate and fortify all of News Corp.'s digital resources.

Miller's plan is to more creatively manage the direct pipeline and relationship that MySpace has with its users. The trick with games and other online content is to leverage connections for dollars. It is a concept that content gatekeepers are warming up to -- including Hulu, a News Corp, NBC Universal and Disney partnership, as well as Time Warner and Comcast, whose TV Everywhere initiative is a way for cable subscribers to access the content they pay for on other wireless devices.

Miller is convinced that entertainment and media companies of all sizes will require a mix of advertising and transaction fees as well as consumers paying one-time access fees and subscriptions to financially survive in a fragmented digital market. Last week's annual Comic-con conference highlighted some of the hybrid film storytelling and video gaming content forms in development to which News Corp. can contribute.

The more immediate concern is to pump up MySpace user numbers, which have dropped below minimum traffic guarantees under the final year of a Google search deal. Fox Interactive Media is expected to report about $250 million in earnings, rather than the expected $300 million in earnings for fiscal 2009. Because it takes time and invested money to reverse MySpace fortunes, Credit Suisse analyst Spencer Wang says another round of layoffs matching the last could bring staff reductions to about 60%.

The nearly $100 million in annual cost savings would help to offset lower or no payments from Google. Wang recently lowered his FIM estimates to $59 million in earnings on $835 million in revenues for fiscal 2010, and a loss of $75 million on declining revenues of $725 million in fiscal 2011.

The recession will continue taking its toll on News Corp. in fiscal year 2010, when the only growth in advertising revenues will be in cable networks, now expected to grow a mere 5% -- although that would double last year's gains. All of the conglomerate's other media operations will sustain lower ad revenues, which bottomed with a 22% decline in ad revenues at the Fox-owned TV stations and at Dow Jones in fiscal 2009 just ended. Both units are expected to sustain 10% declines in ad revenues in fiscal 2010, Wang said.