Murdoch Underpaid for MySpace (II)

I’ve said before that Murdoch underpaid for MySpace. Wow, he really underpaid. Roughly a year after he buys it for $580M, he signs a deal worth at least $900M through 2010 just for its search traffic! Plus he’s still signing plenty of other deals involving MySpace. Based just on these deals, Fox is going to get a 40%+ IRR on the deal, and that’s pretty far above its historical 5-10% return on capital. What a great acquisition!

I think this search deal will have a variety of giant implications in the internet world. My quick thoughts:

1. MySpace has shown a business model to all the other social networks and random content sites out there. If you get enough traffic, you can get paid. YouTube and Facebook must be really excited and everyone else is trying to figure out how to grow their traffic and make their users do lots of searches. Of course, this money gives MySpace enough of a war chest to attack all of those sites directly, so they may have a shrinking window to cash in. I would have taken the $750M.

2. Google paid a lot of money for users who were going to Google to search anyway. Google locks up these users, and more importantly, Yahoo and Microsoft are locked out from this traffic (and from AOL’s). That prevents those two from getting a spike in volume that will drive more advertisers. More advertisers means higher keyword prices, so Google can afford to give the largest payouts in absolute dollars while also keeping a large slice of very high margin revenue for themselves. $900M seems like a small price to pay to protect that business, but Microsoft (and Yahoo to a lesser extent) has very deep pockets. If they’re willing to take a loss for several years to get in the game in a big way (like they did with Xbox), I’m not sure this affects their plan of attack very much. Microsoft is still making more per user off most of the MySpace users than Google, after all. It could be a very long, expensive war, and the content holders will be the winners during the battle. See point #1.

3. Yahoo’s miss on their new platform is even more expensive than Stu says. Google has the money to lock up the traffic now. Yahoo doesn’t - Google has 4x as much on its balance sheet, a higher market cap with which to do equity offerings, and more cash flow. The miss makes it harder for Yahoo to buy its way into the war. At this pace, by the time the MySpace contract renews, Yahoo won’t be able to bid. Maybe Merrill Lynch is right and Microsoft and Yahoo should combine.

All in all, Google seems to be most focused on winning the search war in a big way as quickly as possible. Given they are already dominant and getting more so, their aggressive deals should scare the heck out of Yahoo and Microsoft. They need to get in the game. Or at least pretend like they are while keeping their power dry to get some of these deals later – but then it might be too late.

Finally, I’m not sure this is a good deal for MySpace. It is financially now, but the renewal terms could be much worse for two reasons: (1) The longer the search war goes on, the more money content sites will capture. They shouldn’t hasten the ending of the battle, as this 4 year deal might; and (2) The insidious piece of search engine deals is the engines ability to mine the search traffic to develop new products, and Google already has something competitive (sort of). MySpace will be pretty unhappy if this deal allows Google to breathe new life into Orkut.

Related Tags: MySpace, Google, Rupert Murdoch