How Much is MySpace's Search Business Worth?

Includes: GOOG, NWS
by: Ashkan Karbasfrooshan

Despite the “liberal media” bias against News Corporation (NASDAQ:NWS) and FOX News, I like the company, I really do. I certainly respect Mr. Rupert Murdoch’s accomplishments - the newspapers, the satellite “stuff,” the cable franchise, let alone their turbocharged race for Web supremacy… But these days, every day, either Mr. Murdoch, COO Peter Chernin of Web Czar Ross Levinsohn make bold statements that leave me scratching my head.

Today, Mr. Chernin’s assertion that they will auction off MySpace’s search business to either Yahoo! (YHOO), MSN (NASDAQ:MSFT) or Google (NASDAQ:GOOG) made me pause and say “why bother?”

All right, call the lawyers

Now, forget the fact that Yahoo! currently powers MySpace’s search engine (at least the paid ads part), and that Yahoo! has said on or off the record that they are not interested in maintaining that relationship at just any cost (click here for that).

With this in mind, I decided to guesstimate what the value of MySpace’s search business actually was. Now, note that I worked in search for a while and have covered the industry for the past 7 years, so while I do not claim to be an expert in anything per se, I know enough about the metrics of the sector to parlay some kind of rational assessment of the value of MySpace’s search business.

The underlying formula is simple:

Annual Revenue = # of search queries x propensity to click on a paid ad x average revenue per click

Here it is, with some assumptions:

Of course, to a site like MySpace, $63M per year in incremental revenues is nothing to sneeze at. Even for News Corp. - who is earmarking revenues of $300M for all of Fox Interactive Media - that number is tempting. Truth is I do believe the revenue is incremental for it should not reduce non-search advertising revenue at all… cause MySpace has so many ad impressions that it can reduce that by shifting traffic elsewhere to the Web.

But, to a company like Google, MSN or Yahoo!, that potential $63M per year comes at a cost and risk. Here’s why.

Indeed, the truth is that tweaking any single one of those variables can jack up or down the value of the business. For example, the average Revenue per Click can obviously be much higher, but if MySpace is all about social networking and music etc., it’s not like people are searching for class-action lawyers or webhosting services, they are searching for music artists and what not. Moreover, considering that MySpace is used for up and coming bands, chances are that the average RPC is less, and not more.

Furthermore, if a search company was really interested, they might have to grant MySpace 75%, 80%, or who knows, maybe even 100% of the revenue, that would obviously make things more interesting to MySpace…

But therein lies the problem: it makes it all that much less interesting to Google, MSN and Yahoo!

Here are three some companies that have played and fiddled with search for almost a decade. They know, immediately upon seeing a site, how lucrative or not it is. And MySpace, as grand as it might be, is not a search-centric platform, and as such, too risky for MSN and Google.

After all, Google makes $6-8 billion in revenues per year. MySpace - with its questionable content and low CTRs - might make it more of a risky proposition that anything else. MSN might be interested in the deal in order to catapult its search business in the big leagues, but it lacks the long list of keyword advertisers that Google has and MSN requires to make it worthwhile, so in all likelihood, Microsoft is really not interested in guaranteeing any revenue numbers to MySpace, something that MySpace probably wants more than promises.

As per Yahoo! - well, Yahoo! currently powers the paid ads on MySpace and the fact that it is not bending over to secure that relationship says a lot about things, doesn’t it?

It says that Mr. Chernin is one hell of a salesman, trying to stoke competition for one of his prized assets that cost them $580 million but that will probably not be generating $63M per year in search business.

Of course, I could be wrong.

[This writer owns shares in Yahoo!, MSN and was an employee of News Corp. for about 6 months… collecting dust and pushing paper, mind you]