The time has come for big changes at MySpace, according to Pali Research analyst Richard Greenfield.
In a research note Tuesday morning, Greenfield asserts that, with just over a year to go on the News Corp. (NASDAQ:NWS) unit’s search advertising deal with Google (NASDAQ:GOOG), “it appears as though Google simply does not care about social search.” He contends it is difficult to imagine Google paying anywhere near what they were previously shelling out to MySpace, “especially as the inherent functionality of social networks is diminishing the importance of search.” The current deal expires in June 2010.
Greenfield estimates that MySpace will get about $300 million in revenue from Google in both the June 2009 fiscal year and in FY 2010, or about 35% of revenues in each year. He says there could be some competition for a new deal from Yahoo (NASDAQ:YHOO), AOL (NYSE:TWX) and MSN (NASDAQ:MSFT), but he nonetheless sees a 50% drop in search fees. He also notes that Fox Interactive Media, the NWS unit that includes MySpace, is seeing costs increase even as revenues shrink. Greenfield notes that in the December quarter, revenue fell $7 million form a year ago, while profits fell $40 million. “The need for substantial cost structure reductions is clear,” he writes.
If you assume a new search deal at 50% of the current rate, Greenfield notes, the company would need 27%-plus organic growth in the June 2011 fiscal year to compensate for the lower search revenue.
Greenfield thinks there could be management changes ahead at MySpace. For starters, he says there is no obvious reason why the other elements of Fox Interactive - IGN and Photobucket - are separate entities from MySpace. He also says that it is unclear if MySpace founders Chris DeWolfe and Tom Anderson will stay with the company after their contracts expire later this year.
Meanwhile, Greenfield thinks the company has “little choice” to make significant headcount reductions.
NWS Tuesday is down 15 cents, or 2.2%, to $6.95.
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