Murdoch gamble pays off as MySpace takes over

When Rupert Murdoch bought the MySpace social networking website in July last year, critics scoffed that the $580m price tag was too rich for a loss-making dot.com, a desperate and expensive deal by a media mogul worried he had missed the explosive growth of the internet.

Little more than one year on, and Wall Street thinks the business might already be worth as much as 10 times what Mr Murdoch paid for it.

For this has been the week when MySpace, the internet's biggest teen hang-out, came of age. Mr Murdoch, addressing Wall Street analysts on Tuesday, was able to boast that the site had signed up its 100 millionth member that morning.

But a bigger, more important number had been released the previous evening: 900 million. That is the number of dollars that Google has promised to pay over the next three years in return for controlling the adverts that pop up when MySpace members search the site and the internet.

MySpace has been folded into the Fox Interactive Media division of Mr Murdoch's News Corp empire, which also includes other lifestyle websites and internet spin-offs from the company's television stations. Nothing else, though, has the following of MySpace.

It has 100 million member profiles, and more than 70 million individuals around the globe have used the site in the past month. Mainly teenagers or twentysomethings, they use the site to chat with friends, find new people with similar interests, and to swap photos, music and messages.

It has more than tripled in size under News Corp's ownership, without the company having to do any marketing. The members do that for it. The more people online, the more their friends are attracted to join. And, with MySpace the undeniable leader in the giant US market at least, a web-surfer looking to meet new friends is likely to be attracted to the biggest community. This "network effect" shows no sign of slowing.

For most of the first year, though, MySpace brought in almost no money. While News Corp has been able to sell some banner adverts on some of the main pages of the site, advertisers have been unexcited - even nervous - about placing ads on members' profile pages. News Corp tried to show how it could be done, placing ads for the Fox film X-Men III on every page; Disney preferred only to buy a front page spot for its Pirates of the Caribbean promos.

Frankly, you just don't know what sort of content your ad might appear next to. Some campaigners are already calling MySpace and other teen sites a paedophile's playground. It is not just for reasons of conscience that News Corp has been removing suspicious or inappropriate profiles from the site; advertisers will not flock to it unless the site is seen to be safe.

Wall Street has been cautious, therefore, about ascribing a high value to MySpace, but the Google deal has given confidence. If those bright sparks on the west coast are willing to pay $900m, then clearly MySpace's 100 million membership can be - in the jargon - "monetised". Google's search-based advertising software means only the most relevant ads will appear. News Corp and Google will each take a cut of the fee charged to an advertiser when a member clicks on the ad. The "guaranteed" $900m is conditional on MySpace being used by agreed numbers of people but both sides say they expect those conditions to be significantly surpassed.

Using the same valuations ascribed to other internet businesses, analysts at Credit Suisse think the Google deal underpins a valuation for MySpace of $3bn-$4bn, and possibly above $5bn.

News Corp, meanwhile, is busy assembling additional content to put on the MySpace site. By splitting it into "channels" - grouping the profiles of aspiring musicians or comedians - it can add other entertainment content within these channels. For example, it is putting comedy club footage on the comedy channel, and selling advertising alongside the clips. In a few years, the member-generated profiles may be only one part of a much wider MySpace media website.

Glen Drury, managing director for Yahoo! in northern Europe, says specialist social networking sites will need to evolve from their current narrow focus. "The user-generated world of content is only just starting to be scratched. Where it goes in future is integration. People do not want to have to register on eight different sites which do different things and set up their profile on each," he said.

The main question is whether MySpace's young membership will stick around or whether they will move on quickly to the "next big thing". The explosive growth of rival networking sites in some countries, and other user-generated content sites like YouTube, suggests this is a risk.

William Drewry, an analyst at Credit Suisse, said: "There is clearly a risk that the young demographic that has supported MySpace's meteoric rise moves on to the next thing. Equally, however, given that this is the first generation to embrace community sites, there may well be the opportunity for continued growth, with the increased scale of the membership base a protection against defection."

Wall Street, which has already chased News Corp shares higher this year, may wait to see the proof of the pudding before fully warming to the Google deal, but optimism is growing that wily old Mr Murdoch has found a way to make real money out of his internet gamble 13 months ago.

Social networking leader that launched last year

In the UK, MySpace faces some serious competition from Bebo, set up by the Briton Michael Birch. Bebo is the second most popular UK social networking site - as well as the sector leader in Ireland.

Figures for June, from Nielsen/NetRatings, show that Bebo had 2.7 million UK users, versus 3.2 million for the longer-established MySpace.

Mr Birch, from the UK, describes the rivalry with the News Corp-owned MySpace as a "bit of a David and Goliath" battle, though he believes that he understands the UK market better as it is his home ground.

Bebo launched as a social networking site only in July last year, in four markets: the US, Australia, UK and Ireland. It just so happens that it is the UK and Ireland where it has really taken off. In fact it is so popular in Ireland that its success there has apparently led to a drop in the number of mobile phone text messages that are being sent.

The Nielsen/NetRatings data shows that Bebo's users are much younger than MySpace's - 41 per cent of MySpace users in the UK are over 35, compared with 28 per cent of Bebo's.

Bebo has a reputation as a website for school children and teenagers, although Mr Birch says this is unfair. He says Bebo's users are only younger because the site itself is younger. And he points out that the majority of users are over 16.

"Teenagers tend to be early adopters. The more members you get, the more it skews to an older demographic over time," Mr Birch said.

The UK's third most popular site is Friends Reunited, which has been around for much longer. It is a slightly different kind of site, designed to put you in touch with former school friends rather than making new ones. ITV, which bought Friends Reunited for £120m, said earlier this week that its revenues had doubled to £8m in the first half of this year.

Saeed Shah