Digital Thoughts – Part 2 – Music To Their Ears

During eUniverse’s ultimately turbulent fiscal year 2003, they acquired direct marketing focused Response Base, a company run by Chris DeWolfe, who along with the other co-founder of MySpace.com, Tom Anderson, had also worked at XDrive.com. After selling Response Base to eUniverse, Chris and Tom took an undisclosed investment from eUniverse to get MySpace off the ground. eUniverse received 66% of the newly formed company and provided office space and other assistance to the burgeoning unit. The pair bought the myspace.com domain from a defunct online data-storage company with plans to turn it into "a portal around a person’s social life."

In their quest to create a better social networking site, the team at MySpace focused on the obvious deficiencies of then reigning champ, Friendster, and that was speed. Users constantly complained about their ability to access the site, and with some help from well-connected employees along with Intermix’s media muscle, it didn’t take long for frustrated Friendster users to discover and ultimately switch to MySpace. The site really took off when in 2004 they fulfilled one of their initial desires – creating a site that catered to amateur musicians. Bands had already created profiles on the site, but now they had the ability to upload songs and offer streaming music to fans. That, along with constant feature upgrades focused on user expression propelled MySpace to the top ranks of the web. Today, Myspace has more page views than Google; its 22 million-member base currently increases by 75,000 new users per day, all with no cost of acquisition.

As reported in the LA Times, more than 350,000 of their key profile lever, bands and solo artists, from the unknown to the famous, have set up pages to let people sample and share songs, exchange e-mail with the bands and see tour dates. The site has had such success in this arena that it now has more people coming to it for music than MTV Online. And, in a sign of the profound impact that MySpace has had on the music industry, in September of 2004 R.E.M. became the first band from a major record label to stream a whole album on MySpace before its official release. Several bands followed suit, including the Black Eyed Peas, and three other Interscope artists –Queens of the Stone Age, Nine Inch Nails and Audioslave. Weezer and Billy Corrigan from Smashing Pumpkins fame also used the platform to share their work prior to its release. Says Billy Corogan, "Now that MySpace is here, bands don’t necessarily need a label to be heard."

For Rupert Murdoch, founder and head of News Corp. as well as a self-proclaimed “digital immigrant,” MySpace offers exactly what his company needs in order to combat the decline of traditional content delivery. Consumers between the ages of 13 and 34 are increasingly using the web as their medium of choice for all types of information, hitting at the heart of News Corp.’s core businesses. As Rupert Murdoch said in a speech prior to the acquisition, "The threat of losing print advertising dollars to online media is very real. In fact, it’s already happening, particularly in classifieds." Owning one of the biggest communities online should help, and it could even mean a competitor to the now famous Craigslist. Additionally, by acquiring MySpace and promising to keep the platform open for other companies to continue to distribute media, News Corp. now has the ultimate market research tool; they can see what users want and adapt quicker than most to changing tastes. That MySpace has massive reach and already successful distribution for music only helps, and suggests that MySpace could soon find itself changing the way other content, such as movies, gets delivered.

Given that MySpace was the main attraction, many wonder why News Corp. paid $580 million for an asset that on paper was worth closer to $125 million. The answer to that comes by looking at Intermix’s public filings. The company started with a 66% stake in MySpace, but in February of 2005, Intermix and MySpace took in funding from Redpoint Ventures. The investment company paid $11.5 million for 25% of the networking site, their shares coming from both Intermix and MySpace’s existing shareholders. Of the $11.5 million, $4.3 went to Intermix, the original shareholders of MySpace received $3.75 million to take money off the table, with the remaining $5 million being put into the new MySpace, Inc. Post investment, Intermix retained 53% but more importantly, they managed to have written into the agreement a special clause giving them an option to buy out the other stockholders of MySpace based on a valuation of $125.0 million if the Company receives “a bona fide offer by a third party to acquire more than 50% of the stock or assets of Intermix within 12 months of the closing date.” Given that the investment closed in February, we are well within that 12-month period.

Those at Intermix weren’t the only ones who profited from the sale. The deal was particularly kind to the investment community as well. Redpoint Ventures who invested once in eUniverse and in the aforementioned MySpace deal above stands to make $60+ million from an investment of around $15 million. The other significant investor, VantagePoint Partners did almost as well, earning $44 million on a $14 million total investment. Theirs involved a straightforward purchase of $8M in Series C stock and a complex and clever negotiation with the Sony digital investment group, giving VantagePoint at a discounted price, the equity from the $17 million Sony invested in 2001.

Why did MySpace succeed, especially in an area where many have entered, including Internet juggernaut Google? As Business Week suggests, “the answer is, partly, a matter of geography. It emerged from the L.A. music and club scene, drawing on Anderson and DeWolfe’s friends for early support. It wasn’t concocted by Silicon Valley tech types or New York bankers. It was born in a city that’s geared toward media and entertainment, not technology or finance. And like other great exports from Southern California — such as Hollywood and surfboards — MySpace tapped into the country’s psyche.”

Business Week elaborates on MySpace’s success by saying that where other sites tried to be “useful, sensible, and safe,” MySpace focused on being exciting and fun. They attracted lots of models and musicians, people who naturally attract a following in addition to one’s circle of friends. MySpace also leveraged technology to the fullest, implementing features, such as blogs, before many rivals did. Their key to technology development, though, has been to insure that it focuses on the main appeal of the site –allowing users to easily customize their own pages so that they can let their personalities “shine through.” A user of MySpace explains by saying that the site did an exceptional job at creating an environment that the average American youth wants to become a part of. Not only does it encourage individualism, but it also offers the ability to group with similarly minded peers. As a sign of the site’s cultural impact, look no further than one user’s experience of being asked at bars "Can I add you to my friends list on MySpace?" compared to the traditional "Can I get your phone number?"

Few could have predicted the success of MySpace, and even fewer would have imagined it selling for more than About.com did. The acquisition shows that Murdoch, while a digital immigrant, has a company that understands if not the potential for the net, its power and the continued role it will play for the distribution of news and entertainment. It also gives MySpace a fighting chance against Yahoo and MSN, both of whom have taken accelerated steps into the social network space. Finally, this deal shows us that perhaps those who said content is king when it came to valuation, should revise their comments. A platform for user-generated content that can attract and retain users and help an offline media company realize the potential online is king. Many in our space make more than $70 million in annual revenues and $5 million in profit, but even the best hasn’t sold for close to what Intermix/Myspace did. Something for us to think about.