How to value a failing social network
WHEN Rupert Murdoch bought MySpace for $580m back in 2005, he appeared to have got himself a bargain. In 2007, analysts at RBC Capital Markets said the site was worth $5bn, which would have meant a staggering return on News Corp’s original investment. Alas, what began so well looks set to end with a whimper, after News Corp execs confirmed they are considering a sale of the social network.
So how much is MySpace actually worth? RBC’s 2007 valuation was based on the fact that Murdoch had cut a shrewd three-year advertising deal with Google, which guaranteed the social network $300m of revenues a year. Google never recouped its $900m outlay and, when the deal was renewed last year, MySpace got far less favourable terms. The pair are now sharing revenues, which is bad news for the social network.
The new arrangement is already taking its toll. Last year, revenues at MySpace fell sharply to $347m, says eMarketer, from $470m a year earlier. Compare that to Facebook, which made $1.2bn in revenues in the first nine months of 2010, and likely finished the year around the $2bn mark. Facebook received a nominal valuation of around $50bn after its latest fundraising; applying the same metric of 25 times revenues, that would value MySpace at $8.7bn, although such a price tag is ridiculous: Facebook is in the ascendant while MySpace’s star is burning out.
Analysts at Treffis reckon MySpace constitutes about two per cent of News Corp’s stock value, which puts its equity value at around $1bn. We think that is still far too high, but it’s very hard to put a price on a sinking ship.