MySpace needs more than fresh blood

Social network MySpace is considered one of Rupert Murdoch’s savviest buys. But the likelihood that the News Corp-owned site will renew its lucrative advertising contract with Google is dimming. It is falling behind fast-growing Facebook and needs to turn around quickly. That explains why MySpace’s founders just got the boot.

Murdoch still looks to be in the money on MySpace. He bought the social network for just $580m in 2005. It has brought in $1.6bn in revenues over the past three years and most likely made close to $200m in profits last year alone.

But the bulk of that comes from the $900m search advertising deal it inked with Google in 2006. That comes up for renewal next year and the odds of Google agreeing to anything similar are slim.

It was signed at the height of the social networking boom, well before today's market troubles. Google and others have repeatedly said it is difficult to generate revenues from advertising on social networks. And, perhaps most importantly, MySpace has been unseated as the preeminent site by Facebook.

When News Corp bought MySpace, it had 14m monthly users while the nascent Facebook was still raising venture capital. Now MySpace has 126m users next to Facebook’s 200m. And Facebook continues to grow – its user base increased 116% last year – while MySpace is stagnant. On top of that, Facebook has more impressive user demographics.

So Google may be more interested in signing a deal with Facebook than renewing with MySpace. That explains why Murdoch is seeking to gussie up MySpace by giving its founders the boot, reportedly in favour of Facebook’s former chief operating officer.

But it’s going to take more than fresh blood to revive MySpace. Facebook has succeeded with its hokey “openness” mantra by becoming a place for users to simply share personal information, while MySpace has focused on jazzier verticals like music. But people value connections more than content - after all, telecommunications are a far bigger part of the economy than media. And network effects mean Facebook could increase its lead.

Murdoch’s investment in MySpace still looks smart. But it’s going to lose a lot of its shine if MySpace can’t gain ground on Facebook fast.