Commentary

Murdoch's Vision: Yahoo Could Enhance MySpace

Regardless of whether News Corp. and Yahoo can successfully partner in a defense against Microsoft's unsolicited takeover, their efforts raise an interesting question: Why does News Corp. chairman and CEO Rupert Murdoch, who owns MySpace, need a leading Internet search engine?

There is probably more than one answer. A) MySpace could use Yahoo's search and advertising support, B) News Corp. wants to quickly strengthen its Internet position, C) the cunning Murdoch can't pass up an opportunistic deal, D) All of the above.

That News Corp. may be willing to leverage MySpace for a 20% or better stake in Yahoo may be an admission that it requires more than the top-ranked social network to make a sizeable difference in cyberspace. Since News Corp. acquired MySpace and its Intermix corporate parent for $580 million several years ago, advertising and promotion for Fox-related content have been integrated into the social Web site with mixed results.

Murdoch's instincts were correct in acquiring MySpace. Online social networks have rapidly become a clearinghouse for all things viral: from streaming video and music to user recommendations and aggregating common interests. MySpace is expected to turn profitable this year on more than $1 billion in revenues. Reported talks about News Corp. contributing MySpace and cash for a controlling stake in Yahoo suggest a $10 billion value for the social network. Microsoft's recent 5% stake in privately held Facebook suggests a similar valuation for MySpace's smaller rival.

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Monetizing social networks is proving to be a slippery slope, even for the brightest and best-funded players. Recent declines in MySpace views suggest some users may be rejecting News Corp.'s integration of hyper-targeted ads. Facebook and Google's YouTube also are launching innovative ad initiatives, as evidenced by YouTube's first-ever Videocracy upfront event this past week. Google also began experimenting with visual ads in search results. They're all desperate to translate users into active ad and transaction revenues, although Murdoch has said he is not interested in buying Yahoo or AOL outright.

News Corp. likely considers its ability to tap into and interface with Yahoo's dominant search base as a shortcut in that process. Microsoft also continues pressing for its lucrative unsolicited $45 billion bid for Yahoo. Like News Corp., Microsoft understands that the land grab for online advertising hinges on desktop and wireless mobile device-based Internet search dominated by Google and Yahoo. It is strategically important to the most aggressive of Microsoft's recent efforts, such as its rebranded Mediaroom Internet Protocol Television initiative, Synch operating systems for Ford, and a more universal interactive Xbox interface.

Although Microsoft has more cash resources to throw at Yahoo, News Corp.'s MySpace is a unique gem. News Corp. recently provided $15 million in seed money for Slingshot Labs to create and invest in advanced initiatives to support MySpace and its other Fox Interactive Media assets. They include IGN Entertainment gaming operations, sports-related Scout Media and a dozen Fox and FIM-branded Web sites that could easily interface with Yahoo. It would hasten News Corp.'s ongoing efforts to expand its back-end infrastructure, sales force, functionality, global reach and multi-platform distribution for MySpace and its other Web sites.

The degree that MySpace, FIM and Yahoo initiatives could be cross-pollinated to the benefit of all concerned is the core issue. The involvement of a private equity investor, as has been suggested, would immediately create the need for outside accountability. News Corp. would demand some measure of control. Yahoo would insist on retaining its entrepreneurial autonomy. News Corp. gets search, advertising and distribution. Yahoo gets a social network and access to different streaming video. Together, they become a stronger competitor to Google and are able to achieve together what neither can alone. But the devil is in the details--especially where strategic partnerships are concerned. No one is willing to forget the hard lessons taught by the AOL-Time Warner merger.

A MySpace (FIM)-Yahoo union is not so different in some important ways. News Corp. has a prime collection of Web properties led by MySpace, which has only just begun to explore its potential. That is why MySpace finally opened its network to third-party developers this past week. Access to the right functionality and enhancement can improve the value of FIM's IGN video games unit (think Yahoo Games), regional sports (think Yahoo Sports). This is especially true of FoxNews.com, Fox Business.com and News Corp.'s newly acquired Dow Jones, and its WSJ.com and Marketwatch.com brands, as they relate to top-ranked Yahoo Finance, supported by top-priced CPMs. (In an ironic twist, a union also would give Yahoo the Google connection it seeks, as Google has a guaranteed advertising revenue arrangement with MySpace.)

Many on Wall Street are betting Microsoft will win the battle for Yahoo, just because the 62% premium it is willing to pay is difficult for anyone to match. News Corp. is a wild card, given Murdoch's excellent track record for skillfully going the distance in strategic plays. But this time, he may have unwittingly tipped his hand in conceding that he needs more key pieces to make his ambitious Internet empire work--even if it is driven by one of the fast-growing social networks. And that void will mark all of News Corp.'s future moves.

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