Written August 2011 by Cliff Feldwick
There’s an axiom in investing that says “Don’t try to catch a falling knife”. Simply stated, it means that trying to “get in on” a stock whose value is headed down, down is rarely a good idea. Makes sense.
In the Internet world, the latest falling knife – no, make that a Samurai sword, strapped onto a cannon with a falling piano right behind – is MySpace. It could serve as a poster child for really, really (really, really, really) bad investing.
How bad? Well, in 2005, NewsCorp bought it from its original founders for $580 million. As I write this, last ditch negotiations are in progress to get it off the books at $30 to $35 million, with the value decreasing every day.
And yes, it is that NewsCorp, the Rupert Murdoch group that
is itself heading headfirst into a large open sewer over the phone hacking,
police payoff and other assorted scandals in
The most-mentioned buyers are Specific Media, although another venture capital group specializing in turnarounds is possibly in the game, and maybe one of the founders looking to buy it back. Specific Media is an online ads group who is looking for a place to put all their ads. They should be cursed as the people who came up with “pop under” ads – the ones that hide under the webpage you were browsing and then show up as you’re trying to exit.
Who would want it?
Let’s take a look at the exact sharp edges of this falling stiletto. First off, how long has it been since you, or anyone you know, mentioned logging onto MySpace? Seen any ads lately that say “follow us on MySpace”? Any graffiti? Anything? Anything?
When MySpace peaked in December of 2008, which really wasn’t that long ago, it had almost 76 million unique visitors a month. That doesn’t count multiple logons from the same people checking over and over. Since then it has lost a million visits a month. I’m frankly surprised that it still gets about 30 million hits, but maybe that’s because a lot of undiscovered bands (many for good reasons) still post things.
When your revenue is completely from ads, that kind of drop in visitors means a precipitous drop in what you can charge, equals failure. Although NewsCorp does not break MySpace out in its financials individually, the Digital Media Arm group that includes it lost $156 million last quarter. Yes, last quarter. So maybe that’s really a falling elephant.
What happened?
There are a bunch of reasons why this fell apart so spectacularly, including Rupert Murdoch’s attention turning to buying the Wall Street Journal and losing interest in this toy. A truly fascinating article can be found on Bloomberg Businessweek at http://www.businessweek.com/print/magazine/content/11_27/b4235053917570.htm. Highly recommended.
Lessons
As a high school history teacher of mine used to ask as we rushed from his room: “Did anybody learn anything here today?”
Well, first off: those that live by media frenzy and “being cool”, die just as quickly. Remember Friendster? Didn’t think so. But the MySpace founders created theirs because they were looking for a neater version of Friendster. And it worked. For a while.
But most importantly: Take the money and run! The two guys who created MySpace got the American dream, with a cherry on top. Selling at a peak turns out to be a very good business principle.
This should serve as a lesson for Groupon, for instance. Last December they rebuffed an offer from Google to sell out for $6 billion. Yep, billion. Looking at Groupon’s numbers, including statistics on how many people sign up but never actually buy a coupon, I suggest they reread the paragraph above several times. And they may have come up with the same conclusion: they are reportedly in negotiations again with, yep, Google for, yep, $6 billion. Perhaps they realize that Google could create the same type of site in a couple of months and completely blow them out of the water. Take! Money! Run!
Facebook is apparently going a different route, with an Initial Public Offering that will make its founders billionaires. Again: Take! Money! Run! Because if anything should be obvious from all this, it is that fame will fade and glory will tarnish, but a really, really (really, really, really) big pile of money can make that a lot easier to live with.