News on Digg acquisition? How about MySpace?

"Digg has been in recent acquisition discussions with a number of companies, including News Corp., according to multiple sources close to the negotiations."

News Corp. is undoubtedly always on the lookout to further expand its Fox Interactive Media (FIM) stable of Internet properties via additional acquisitions.

The breadth of FIM’s online content network was presented last month by Ross Levinsohn, President, at the OMMA conference in NYC, as I recount in “Fox Interactive to Yahoo: Watch out, we are on your digital tail!”

FIM is already the “number one content network on the Web” thanks to its portfolio of online properties:

myspace.com: social networking
foxsports.com: sports content
ign.com: gaming community
rottentomatoes: movie destination
askmen.com: lifestyle portal..

The FIM content network has grown from a 5% reach of all 18-34 year olds in the U.S. a year ago to a 50% reach today, Levinsohn said.

FIM is proud of its reach and its corporate parent, News Corp., is proud of its acquisition track record with FIM.

Rupert Murdoch, Chairman and Chief Executive Officer, News Corp., said in his company’s 2006 annual report to shareholders:

Earlier this summer, after the fiscal year-end, we announced a landmark deal with Google to provide search functionality to most of our Internet sites–most importantly MySpace…With at least $900 million committed to us over four years, this agreement more than pays for the MySpace acquisition.

But how does the Google-MySpace announced “landmark deal” signify “this agreement more than pays for the MySpace acquisition”?

Google CEO Eric Schmidt’s Q3 conference call commentary on the status of the “landmark deal” indicates a definitive contract has yet to be executed between the parties. Additionally, as I have often pointed out at this Digital Micro-Markets Blog, the Google $900 million payout schedule to MySpace is contingent and does not represent an irrevocable guaranteed stream of $900 million in revenue share. 

Last week in “To Rupert Murdoch: Is MySpace acquisition really ‘paid for’?” I asked:

Given the contingent nature of the terms of the "landmark deal" and the lack of a definitive contract execution between the parties, can Rupert Murdoch accurately claim that "the agreement more than pays for the MySpace acquisition"?

Have News Corporation shareholders been mislead?

On an even more basic level, why would the Google-MySpace announced deal be a “landmark” one?

MySpace already has a “search functionality deal” with a third party, Yahoo owned Overture search services. MySpace’s multi-year announced, but not formally closed, search outsourcing agreement with Google search services can be viewed as a normal course of business change of vendor decision.

Moreover, in determining what to pay to acquire MySpace, News Corp. had to have taken into consideration the ongoing revenues the Web property was already receiving from its non-landmark search outsourcing deal with Yahoo.

When/if the MySpace search function is actually taken over by Google, the $900 million projected, but not 100% guaranteed, revenue stream will replace the revenue stream already in place, it will not be a wholly new source of income for MySpace.

MySpace may have negotiated a “better” deal with Google than it already had in place with Yahoo, but the revenue stream from outsourced search, in and of itself, ought not be considered new revenues that “pay for” the MySpace acquisition.

A correct assessment would be that ongoing outsourced search income was part of the value attributed to MySpace and considered by News Corp. in advance of agreeing to pay $580 million to acquire the Internet property, regardless of search vendor.

News Corp. continues to assert to its shareholders, however, that a non-operational, substitute vendor agreement offering a revocable payout schedule signifies that its prior year $580 million acquisition of MySpace is “paid for.”

Murdoch’s “Chairman’s Address to the 2006 Annual Stockholders’ Meeting” last Friday:

our new media assets – our latest investments – are moving quickly toward profitability. With the acquisition of MySpace.com and other popular sites, in the space of one year, our company has begun to rival and in some cases surpass the Internet elite…
This summer, after the fiscal year-end, we announced a landmark deal with Google to provide search functionality to all of our Internet sites – most importantly MySpace. With $900 million guaranteed to us over 15 quarters, this agreement more than pays for the MySpace acquisition.

How can News Corp. claim that it is surpassing the “Internet elite,” if its new media assets are not even profitable at present? I recently interviewed Levinsohn and asked him about the FIM-Yahoo “Internet elite” showdown (see "FIM Ross Levinsohn on MySpace in "Real Deal" Exclusive Interview"): 

QUESTION: Rupert Murdoch and yourself look at Yahoo as the number one Internet company to catch. Murdoch recently said, “With continued international expansion, MySpace could well become the biggest global online company as early as this time next year. We are close to Yahoo! in unique visitors in the U.S. already after one year, Let's see how we do around the world." You said at OMMA that FIM is the second biggest Internet company in the U.S. in terms of page views and fast approaching Yahoo. FIM is not fast approaching Yahoo if revenues is the measurement, however. Yahoo is a $6 billion revenue company, while FIM is reporting less than $300 million in revenues. What is the timeframe for catching up with Yahoo’s revenues?

LEVINSOHN:We are not focused on beating Yahoo at anything. Yahoo has been around for ten or eleven years. We are just getting started, 13 months, it’s been a great first year.

Rupert Murdoch and Peter Chernin want us to build the best business possible, we’re not comparing ourselves to the 800 pound gorilla in the room. We are ahead of our strategic plan so far. We are doing terrific for a traditional media company.

Yahoo is a great company, but it is not huge in social networking.

Yahoo CEO Terry Semel is in social media disagreement, as I put forth in “Who needs social media? Junk CPMs, inventory glut, ‘Sexxy Sangria’:

Yahoo has been a pioneer in social media. It is a long-term focus of ours, and we are a far bigger player in this space than many people actually realize…

Together, Yahoo! Answers, del.icio.us, Flickr, and Yahoo! Video have a total of almost 100 million users, which makes us the leading force in social media today. Importantly, and boy have I read about this, within this group is the largest community of the prized 15- to 24-year old youth demographic on the web, which stands at Yahoo! at approximately 30 million. We are incredibly focused on making every part of Yahoo! a more social experience. We are convinced that the social media space will continue to grow and evolve and we plan to be a key player in this business.

The Yahoo-FIM rivalry is a study in contradictions, as I point out: 

It is ironic that the president of FIM, owner of social networking leader MySpace, defines his firm’s online social media properties as a close runner-up to Yahoo in an industry keynote presentation, while the Yahoo CEO laments in a conference call with Wall Street that his company is not getting the social media leadership recognition it rightfully deserves!