Ovum comment: News Corp to trade MySpace for 25% of Yahoo‾

The Times reported today that News Corporation has discussed swapping MySpace, its Internet social networking unit, with Yahoo in return for a 25 per cent stake in the enlarged group. Other News Corp digital assets, including the games network IGN, bought in 2005 for $650 million (£326 million), are also thought to have been offered to Yahoo.

Ovum principal analyst John Delaney comments:

Among its shareholders, Yahoo has some heavy convincing to do at the moment. Its revenue from online advertising has been growing tolerably but not spectacularly - and in online advertising, 'spectacular' is the performance benchmark, set by Google. Yahoo has a lot of diverse properties that carry advertising, but unlike Google it lacks a single really big 'hit'.

The most obvious way to get a really big hit would be to acquire one, and the most obvious place to look for such an acquisition would be among the rising stars of social networking. A deal with NewsCorp that gives Yahoo MySpace would therefore be a powerful signal to Yahoo's shareholders that Yahoo's management is making a serious push towards changing the company's recent lacklustre fortunes. (Although if these reported talks have been taking place, it's likely that the ancient regime of Terry Semel has been closely involved with them.)

From the perspective of News Corp, divesting itself of MySpace might not seem the obvious thing to do at first. MySpace has the largest audience of the social networking sites, and one which is still growing rapidly. It's generally acknowledged now (although it wasn't then) that when News Corp paid $580m for MySpace in July 2005, it got itself a bargain.

But although MySpace is undoubtedly a hit, it covers only a small part of the spectrum of Internet services. Moreover, like all of the social networking sites, MySpace is a bit of a hothouse flower: fast-growing, but without proven longevity. In recent months, for example, MySpace's growth has been outstripped by that of Facebook, one of its main rivals. By itself, social networking is still quite a risky long-term prospect.

By trading MySpace for 25% of Yahoo, NewsCorp could simultaneously bank some of the gains it has made from its MySpace investment, and acquire a stake in a more established and more diverse Internet business, one which encompasses a range of proven Internet services including search, email and instant messaging. There is also the potential for News Corp to exploit the Yahoo properties by offering advertisers cross-media campaigns encompassing both TV and online. And of course, News Corp would still benefit considerably from continued success at MySpace, by virtue of its stake in the Yahoo group.

We believe that a deal between News Corp and Yahoo along the lines reported in The Times could offer some compelling strategic benefits for both parties.

John Delaney is a Principal Analyst in Ovum's Consumer Group

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