Is MySpace vulnerable to takeover?

That we should even be discussing whether social networking phenomenon MySpace is likely to change hands over the coming months is one big, meaty signal as to how fast the Web 2.0 phenomenon is evolving.

What makes it all the more surprising, of course, is that MySpace was sold for big money in 2005, when Rupert Murdoch's News Corporation handed over $580 million (£290 million), in a deal that's increasingly looking like an absolute bargain.

For a media organisation, a social networking service such as MySpace is the latest must-have. It brings together the golden younger demographic audience for potential owners, and brings them in their tens of millions. That's one of the key reasons why rival service Facebook, should it ultimately change owners, is unlikely to attract a price tag below a billion or two.

There is another reason for that price premium, and that's the scarcity of really successful social networking sites. Sure, the sheer number of users and their potential spending power is enough to send PowerPoint presentations and Excel spreadsheets into overdrive, but it's also the simple law of economics at work here. Where really successful social networking sites are concerned, there is a hell of a lot of demand, but very little in terms of supply. Quid pro quo, up goes the price.

In spite of the undeniably speedy growth of rival services Facebook and Bebo, MySpace still rules the roost. Over 60 million unique users visited the site in July 2007, while Facebook stood at 19.5 million. The gap is certainly closing between the two, yet Murdoch's investment has been more than covered, with MySpace rumoured to be generating $800 million of review for the Fox Interactive Media division, in addition to a nine-figure profit. In the light of that number, for just twelve months of business, that $580 million initial outlay is one of the sector's savviest acquisitions of recent times.

While rumours that MySpace may be found a new home have hardly been thunderous, they've nonetheless been there. And there are a handful of reasons why a deal may appear on the table.

Why is it such a good deal?

First and foremost, MySpace is surely one of the most bankable cheques that Rupert Murdoch could write. So desperate are so many media and internet companies to get hold of something on the scale of MySpace, that it may be a bargaining chip that snares News Corporation an even bigger target. While Murdoch's bank account is, undoubtedly, robust enough to support its owners' ambitions - as demonstrated by the recent $5 billion (£2.5 billion) acquisition of Wall Street Journal owner Dow Jones - if ever he needed to tip a deal, then MySpace is certainly a tool capable of doing so.

The second reason for a potential sale? The fact that MySpace is an increasing magnet for bad publicity. Granted, given the scale of the News Corporation empire this isn't something that's likely to be particularly sensitive to the organisation, not least given the stranglehold of sorts that it has over global media. But still, it's worth noting that recent reports such as those relating to registered sex offenders using the service are not without impact, not least given the age demographic of the bulk of MySpace's audience. Other negative stories have seen phishers attack MySpace users, and criminals use the service to aid in identity theft. As with most successes, it's become a target, and a very sizeable one.

Perhaps the most compelling reason for a sale though is the argument that MySpace may be nearing the peak of its value, and the summit of its popularity. Granted, even were it to do so, generating nearly a billion dollars of revenue is enough to keep it on pretty much any company's asset register, yet there's a growing feeling that MySpace may have had its day.

One of the strongest arguments in favour is the growing strength of the competition. While MySpace's lead is sizeable, and one that'll take some time to close down, the fact remains that it's now decreasing as leaner services grow in popularity.

And there's the next point: that MySpace itself is being bettered by some of its opponents. Online forums and newsgroups aren't short of negative comments at the best of times, but they're nonetheless festering with legitimate complaints over the MySpace service itself. These range from it being overrun by spammers, by musicians desperately selling their latest wares, and by a growing amount of superfluous clutter.

In comparison, Facebook - which itself, it could be argued, is falling victim to a similar problem, albeit at a slower rate (although that could change, given the explosion in unwelcome plug-in applications for it) - is unofficially earning itself a name for being the place where you go to meet your real friends, rather than earn yourself a number of supposed acquaintances you're never likely to meet in your life. It's also worth noting that the point where MySpace was sold to News Corporation caused a raft of displeasure, and some of that continues to fester. The Murdoch empire is a far different enterprise to the efforts of Thomas Anderson and Christopher DeWolfe, after all.

Threats

Appreciating that a big, popular target inevitably attracts criticism anyway, MySpace is nonetheless facing real threats (some of which, and this is beyond the scope of this article, are legal challenges of sorts). For instance, in the crucial younger demographic, Bebo has overtaken MySpace in the UK, and if that trend continues, then a vital advertising-generating argument becomes diluted.

Moreover, a deal involving one of its competitors - such as the long-talked about union of Yahoo and Facebook - could leave it facing an almighty challenge to keep its nose in front. How much room is left in the social networking universe for it to keep growing is also something that's leaving analysts glued to their screens.

Still, keeping matters in some context, none of these alone are issues enough likely to see News Corporation move MySpace on, although there's always the argument that an amalgamation of many smaller factors would have more power to do so. It's still not very likely, though.

So perhaps that's why the more popular thinking is that were Murdoch to sell, it would be to secure a more attractive asset. But just what would that be?

Since Rupert Murdoch snapped MySpace up, his name inevitably gets attached to any major deal in the sector. More recently, his attention has been diverted by his takeover of Dow Jones, but the name that does keep cropping up is Yahoo.

Yahoo, as we discussed in a previous entry in this series, is one of the prime and most available targets in the Web 2.0 space at present, courtesy of management restructuring and perceived underperformance. It's also a hefty, and comparably mature, brand name.

Yahoo also lacks a social networking application of note, with Yahoo 360 failing to ratchet up expected numbers and lagging some distance behind its competition. What's therefore very possible is that Murdoch merges MySpace in with Yahoo, and gains a sizeable stake in the latter without having to even reach for his chequebook. After all, if you accept the argument that Facebook is on the block for $1-2 billion (and it was reported earlier this month that $6 billion was the current asking price), then the value of MySpace is, by the sheer weight of its numbers, going to be in excess of that (even factoring in the argument that MySpace has realised much of its potential already). That rules out all but the very deepest pockets.

Naturally, that points things in Microsoft's direction, although there's been little sign that that's even been considered. Not least, of course, because the various monopoly authorities would jump at the chance to block a deal that would, realistically, stand little chance of reaching completion. And when you start hunting around for other companies in the sector who could meet the multi-billion dollar price tag, you come up short.

Vulnerable?

MySpace is still vulnerable to the competition usurping it and hurting its asking price, to bring it within reach of potential buyers, and vulnerable to the whims of its owners, who may yet cash in their chips while the value is still high in the sky. Realistically, while a $5 billion-plus asking price isn't unthinkable right now, maintaining that level for the next few years - not least given the spurious economic predictions - would be some achievement.

Certainly there's no external pressure to sell, though, with no dissatisfied board of directors, no shaky share price and no impending business collapse seemingly on the horizon. But there is a very powerful owner, and a very ambitious one. And there's a very real chance that his ambitions for his company's future are intrinsically linked to the future ownership of MySpace. Thus, while a transaction remains unlikely, few would completely rule it out.

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