The Price Of Space

Since News Corp. purchased MySpace for $580 million in July, you can't help but feel pundits are getting a little hysterical about the potential for online 'social networking' sites. Over the summer, there has been no end to the fanfare of publicity from everything hailing Rupert Murdoch as a visionary genius making bold moves in a rapidly changing industry to more 'it all began in a garage' stories.

Investors should be wary of the publicity supposedly educating them all about the potential ad revenue for social networking sites, though. For when you go and blow over half a billion dollars on a company which few think has any substantial assets other than a rote of fairly standard hardware servers (and that's an accurate analysis), you tend to want to tell the world just why you think it's worth so much. Thus has been News Corp.'s mission so far, spewn across a number of supposedly informative articles detailing the enormous advertising power of such sites.

And the current talk of other social networking sites' valuations - like Bebo and Facebook - appears to be a little misleading right now too. The Economist editorialises this week that the acquisition of MySpace "now looks like a masterstroke" and chimes in the speculation that one of the reasons for CEO Tom Freston's sacking from Viacom was because of his reluctance to pay the huge asking price for Bebo, which would have added a much needed online dimension to the owners of MTV's stable of media outlets. But the criticism misses the point, and Sumner Redstone is a very foolish man indeed if this decision was at all responsible for relieving Mr. Freston.

The reason News Corp.'s acquisition of MySpace now looks smart is principally because other social networking sites have been able to up their own valuations based on that one deal, and now it's a rush to see who can sell in this heated climate. There's a good reason Mr. Freston didn't want to pay Bebo's asking price - probably because it was too much. And $580 million was most likely too much for MySpace, too, given that this is a company with no proven long-term business model and no irregular or unusually valuable assets other than a one-year old brand name. And a hundred and twenty million users, of course. But the hedge fund world - where analysis is often ultra-short term - has a saying that goes something like 'if you can make it in a year, you can lose it in a year'. News Corp. - and investors - would do well to keep this in mind right now before picking up any more unproven brands at unproven prices.