Wednesday, June 29, 2011

MySpace - A Cautionary Tale

The date is July 18, 2005.  And News Corp (NWS) announces the purchase of Intermix Media, parent company of MySpace.com for $580 million.  It is said to be Murdoch's greatest coup.  And people wondered why the MySpace people would sell so cheaply.  Crazy kids!

After all, according the the press release, MySpace was the "World’s Fastest-Growing Social Networking Portal". 

Logical then to conclude that this was a billion-dollar asset, not mere millions.  The sellers were stupid.  Murdoch smart (again).  And anyone who missed out would pay... having missed out on the ground floor entrance to "new" media.  No mention of profits.  Just that this was growing, new, and cool!  Everybody's doin' it!

Others in the media world, most notably Sumner Redstone of Viacom (VIA), were doing a lot of soul searching.  We shoulda, coulda, woulda bought MySpace.  We really wanted to buy MySpace.  But we were outmaneuvered by that crafty Murdoch.  Oh dear, oh my.  What shall we do?

In true media company fashion, they reacted (after the fact).  Heads would roll.  In fact, one of the reasons cited for Viacom's CEO Tom Freston being fired subsequently was the failure to buy MySpace.  I particularly like this article from the New York Magazine praising Sumner Redstone for firing Freston.  Obviously this guy was a serial bumbler, who didn't GET it.  The title - Bright Summer: Why Ousting Viacom CEO Tom Freston Was a Good Idea.  You'll never guess who the author is.
 
Now fast forward 6 short years.  Is Sumner smart or did he just get lucky?  Was Freston an idiot?  Did News Corp conquer the world with MySpace? 

Honestly, until today, I would have been hard-pressed to know if MySpace still exists. How times change.

Reports are that News Corp is desperate to get MySpace sold by the end of its fiscal year.  The ultimate window-dressing.  News Corp wants to sell it quick so they don't have to dirty next year's financials.  To that end, the Wall Street Journal is reporting that a deal is done or near done.  And the price?  Wait for it... wait for it... $30 to $40 million.  Yes, I said MILLION.  No, need for a "B".

The dirty little secret is that this "fastest growing" whatchamacallit thingy didn't make any money.  How many times do we have to learn that Revenue Growth is ethereal?  Or that it certainly does not presuppose profits?

The dirty little not-so secret is that MySpace was never much of a business.  Just because lots of people use something online doesn't mean there are profits to be had.  Hello, Pandora (P)!

But few things are as powerful as the fear of being left behind.  And this includes media executives.  I remember those bygone days when you did not exist if you were not ON MySpace.  Sound familiar?

Yes, I'm going to mention the F-word... Facebook.

Ironically, while MySpace is in the news as the emperor who wears no clothes, reports of Facebook's "value" are everywhere.  Over the last couple of years, the market value of the company has steadily risen.  $1 billion, $5 billion, up and up we go.  Interestingly, the one thing we "KNOW" about Facebook is that it is becoming more valuable by the day.

Once it was listed on Second Market, the numbers really took off.  $50 billion sound reasonable?  No, that lasted about a week.  $60 billion?  Nope, that number came and went.  Now Facebook's market value is supposedly closer to $70 billion (and rising of course). And if media sources are to be believed, an IPO is coming.  The financial press has termed it the "HOTTEST IPO EVER" with an anticipated market value of $100 Billion.

Why?  For the same reason cited by News Corp in 2005.

According to a WSJ post - What we know about the Facebook IPO:
People close to Facebook believe the company is growing fast enough to justify a valuation of $100 billion or more when the company goes public, our Journal colleagues Geoffrey Fowler and Anupreeta Das reported six weeks ago.
CNBC also reported the $100 billion plus valuation today. Only a couple dozen U.S. companies, including lions of corporate America such as Exxon Mobil, General Electric and J.P. Morgan Chase, have stock-market values above $100 billion.
As for revenue and profits?
Facebook is on track to exceed $2 billion in earnings before interest, taxes, depreciation and amortization for 2011, Fowler and Das reported six weeks ago. That’s even higher than the expected 2011 profit circulated in the early part of the year when Goldman Sachs and Russian investment house Digital Sky Technologies invested in Facebook at a $50 billion valuation. If Facebook ends the year with $2 billion in Ebitda, would IPO investors stomach a 50 times trailing multiple valuation? Seems bubble-like.
No kidding.  And notice the "before interest, taxes" etc.  This is also earnings before stock options dilution.  And then there is that small question of SUSTAINABILITY.  Perhaps the MySpace folks should send a memo to the Z-Man.

For those infatuated with Facebook and the possibilities of social media as a business, let me share a recent James Grant quote:  
I [have] learned never to stand in line to buy an asset. You always want to go where nobody else is in line.
For the record, he was talking about GOLD, but it could easily be speaking about Facebook and the legion of internet focused firms that have come out of the woodwork of late.  LinkedIn (LNKD), anyone?

With valuations where they are, how likely is it that anyone will be surprised?  And surprised to the upside?

Facebook is a phenomenon.  Even I have a page (although I rarely, if ever, log on).  But the "market" has obviously decided that the ever growing number of users will eventually constitute a business.  And not just any business, but one that will be worth billions.  And not just several billion, but $100 billion or more.

Yes, I remember the eyeball metrics and the click metrics.  And the "Little Billy Spends 28 hours a day on that website" valuations too.  But that is the kind of thinking that got News Corp to belly up to the bar with MySpace.  And that worked out quite well.  News Corp had a fun night partying.  All his friends were jealous... until they saw him the next morning!

News Corp will recover from the fling with MySpace. MySpace's cost to the company is a rounding error when compared to the size, scope, and value of this media giant.  The cash flow out of Fox News alone will probably offset the whole affair in a matter of months.  While the percentage loss on this investment is eye-catching, it is not in the grand scheme all that much money.  And the damage is contained within News Corp.

Those who ascribe a $100 billion to Facebook may face a far more substantial hit.  Perhaps the pain will finally drive home the lessons we should have learned years ago.  Either way, it is likely to have a profound effect on the markets.  Is another Internet Bubble about to burst?

For all you Facebook fans out there, don't bother with the emails.  I know what you're going to say.

Wait, don't tell me.... This time it's different!


Disclosure: No positions.

6 comments:

  1. Excellent, as always. Q: Do you ever short these suckers? Obviously not right away but after they've gone parabolic... Have you done it? Would you consider doing it for this new bubble?

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  2. Great article. very enjoyable.

    i wonder if it really is this easy to spot market hype or whether i would have been caught up in the dot-com bubble 10 years ago... haha

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  3. I have shorted a number of similarly valued companies. If I can short FB at a mkt value of $100 billion, it will be a gift.

    Having lived and invested thru the 1990's it was hard to work in an environment where most people "got it" and I didn't. Actually had an older client tell me that he didn't understand how a young guy like me didn't understand the value of these new companies. He wanted all-tech. Everything else was worthless.

    I was real popular. Tried to get my firm to sell Cisco for 4 straight years. At $600 billion, I officially was the village idiot.

    He who laughs last...

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  4. great article! It's hard to stay sane in an insane world. Businessweek did an article on why Myspace failed a couple issues ago. On top of the fact that there was no real business, these "creative" types had short attention span. What's next is their motto.

    But again, this Facebook kid could be different....

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  5. Great article - The valuation of FB seems to be based on the value of Z-man himself. If I was investing I would want him at the helm for a while. Like Apple and Jobs, FB without the Z-Man is simply not FB. Short the stock a few months after the IPO, it's no different this time around.

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  6. Have not seen a blog from you for a long time now. Are you too busy at work or not finding any good value ideas in this market?

    I do not short but I carefully read and research you long articles.

    You are an excellent and very knowledgeable thinker. Your blogs are pleasure to read.

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