Internet: How to make a small fortune in Web 2.0

As dawn breaks over Rupert Murdoch's spidery media empire, the old man will be looking at the company's venture into the social media scene and feeling like he lost a dollar and found a dime.

When News Corp. bought MySpace for USD580 million in 2005, it was the undisputed king of social media. Although Friends Reunited and Friendster were coming up on the rails, MySpace was so far ahead that no one expected it to fall. After all, it was the darling of journalists everywhere from internet via media to style mags.

And it has not fallen: the irony is that MySpace is not a failed business (although it has shown serious signs of failing to thrive). It's just lost its place in an industry where perception matters more than reality. That makes sense in a virtual world . But in the past year, MySpace - which generated revenue largely through click-through advertising - has seen a significant decline in traffic, even as the number of internet users and time spent on line have increased dramatically. Attempts to court buyers were generally unsuccessful as analysts projected current year losses of more than USD150 million. Quite how it can lose that much, given the massive cost-cutting in the past two years is puzzling- except that its re-invention (see below) increased its biggest overhead.

The Wall Street Journal has reported that MySpace has been unloaded to an internet advertising company for a mindboggling USD35 million in cash plus some unspecified number of shares (WSJ speculates it's less than 5%)..

As its social networking functions were taken over by Facebook, twitter and Linked-In, and dozens of clones of each variant, MySpace refocussed itself as an adjunct to the entertainments side of the Murdoch empire. This is, after all, a company which is one of a handful that dominates the global entertainment industry.

But that move - which turned the site into a showcase for artists from many walks of entertainment life - had its price and that price was the same as almost sank YouTube which, ironically, is its largest competitor albeit by accident not design. Users think bandwidth is free: for website owners, it is not. In fact, unless a company is very close to the top if the distribution tree, bandwidth is very costly.Sound and video downloads and streaming are expensive services to provide and that's before taking into account huge data storage needs.

MySpace has failed to move to "the cloud" as have Amazon and Google which has left it with a costly and outdated infrastructure.

As a collection of "fan pages" for millions of unsigned artists (and some who don't get a lot of support out of their record companies) the site has not - bizarrely - managed to capitalise on its link to the whole Fox empire. Instead of the Music, TV and Film businesses building their presence around MySpace and creating reflected glory for all the third party users, each of those businesses has its own set of sites.

A ready-made opportunity for cross-selling within the company's brands was lost due to the divisions operating in cultural, financial and operational silos.

MySpace's primary advertising model is click-through but its revenue has fallen as its numbers have dropped and as its customer base has become more niche. And even Google Ads cannot deliver a sufficient variety of interesting promos based on content that is largely similar from page to page. Indeed, internet users are increasingly grumbling about repetitious ads, particularly from Groupon and wondering if there's a way to kill them. Browser plug-ins already disable ads running Adobe's Flash which have become more prevalent and distracting on screen.

Google's five year exclusive deal for providing search and ad services - which is the saving grace in that it guaranteed (or not, as it turnned out, as it ended up about USD100 million less than expected) revenue of USD900 million, exceeding the MySpace purchase price - expired in August 2010. Revenue from ad sales fell by more than 21% in the year to June 2010 while those of Facebook increased by 39%, said Comscore in the middle of last year. But even as Yahoo, Google and Microsoft were said to be battling for exclusive rights over MySpace advertising, both Google and MySpace agreed to exclusive negotiations which reached a conclusion in December with a "multi-year" deal.

The new owners, a relative minnow called Specific Media, plan to do what Fox failed to do: they have already done a deal with Justin Timberlake who is now as much a media mogul as pop star to bring higher profile stars to the site. But as an advertising company, one wonders where that leaves the recently renewed Google deal.

One thing is for certain: USD35 million and a few shares in a business it has failed to develop is not going to make NewsCorp rich. But it might just stop them becoming poor having entirely failed to understand what they had on hand when they bought the world leader and assumed that it would just continue to grow based on the then buzz alone.