Novice Investing - MySpace Low Value Visitors

Date: Monday 01st 2008f December 2008 04:09:49 PM

MySpace Low Value Visitors - 06/18/2006

By: Novice Investing Staff

Sure, everyone wants to be in MySpace's shoes these days. It has an alexa rank of 5, which means, it has lower traffic only to the search engines. It is a common knowledge that 85% of the internet traffic came from search engines. Therefore, only 15% of traffic goes to the rest of the websites, which include MySpace. It already has higher visitors than Amazon or perhaps even eBay in its short existence. In hindsight, News Corp. (NWS) $ 580 Million acquisition, may seem a low price to pay.

But as with every investments out there, a good investment needs to generate return to its shareholders. How is the profit picture at MySpace despite its burgeoning visitors? Latest businessweek article shows that MySpace was generating around $ 100 Million of revenue before being acquired. It probably has higher revenue figure now since its users has tripled since then. Let's assume that revenue now is around $ 500 M annually. Even then, this is a fairly small number for a website generating this kind of traffic. Surely, there are some better ways for MySpace to monetize its traffics.

Now, rumor has it that MySpace is considering to partner with a major search engine to run search feature on its site. Major search engine such as Google, Microsoft and Yahoo! of course were all over MySpace. Getting MySpace endorsement, will result in higher revenue for both the search engine and MySpace. Here is what is proposed. Major search engine will power the search feature on MySpace and then when search result will be presented a la Google with text advertising on the side. Both MySpace and the search engine will split the revenue that is generated from the ad click.

How much bigger revenue will MySpace get? Probably less than $ 300 Million annually. MySpace users are mostly teenagers and younger aged adult and when they do search, they search for peoples, hobbies and the like, which is harder to target. Who would want to buy a search phrase "Bob Green", unless of course your company is called such a name? Even if your company is called Bob Green, the searchers will most likely not click on your text ad as they are not looking for Bob Green the company, but rather Bob Green the individual.

So, all in all, despite the excitement surrounding MySpace, potential revenue generated is a small one. Amazon, which has less visitors recently, raked in $ 8.49 Billion in revenue and $ 700 Million in operating cash flow. With the expected search engine alliance, MySpace is expected to generate ($ 500 M + $ 300 M ) of revenue, not profit. Was MySpace bought at an overvalued price? Not really. Amazon is worth about $ 14. 66 Billion, or 29 times more expensive than MySpace price. Therefore, it is understandable if MySpace generates only $ 700M /29 = $ 24 M of cash flow.

We can't compare both companies with respect to the amount of visitors it generates. People came to Amazon with something to buy in their mind. Meanwhile, younger audience visit MySpace just for the sake of socializing with other MySpace users. That is why it is called social networking site, not an ecommerce or b2b site. So, get used to it. What matters is profits and purchase price. In this respect, we feel that News Corp. did not buy MySpace at a wildly high valuation.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Amazon.com or any other securities.

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