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MySpace Battens Down the Hatches

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Brief scrutiny of today's headlines.

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If you're wondering where the job-cutting ax may fall next, MySpace looks like a decent bet.

Richard Greenfield, an analyst at Pali Research, says declining revenue will force MySpace, a division of News Corp. (NWS), to make drastic changes in about a year, including layoffs.

Google's (GOOG) search advertising deal with MySpace ends in June 2010, and it appears that the search leader has little interest in social search so it's unlikely to sign a new contract.

Greenfield estimates MySpace will generate about 35% of its revenue this fiscal year and next from Google. MySpace may receive bids on a new deal from Yahoo (YHOO), Microsoft (MSFT) or AOL (TWX), but at a much lower level - perhaps as much as 50% less than the Google deal.

This plays out against rising costs and declining revenue at Fox Interactive Media, the News Corp. unit that includes MySpace. In the last quarter, revenue fell $7 million and profits plunged $40 million from a year ago.

"The need for substantial cost reductions is clear," Greenfield says in a research report.

He also says there could be changes in management in addition to job cuts.

Assuming a new search deal is signed at 50% of the current rate, Greenfield calculates that MySpace would need 27% internal growth in the June 2011 fiscal year to make up for lower revenue generated by search.

Greenfield says it's unclear that MySpace founders Chris DeWolfe and Tom Anderson will stick with the company when their contracts run out later this year.

Some have argued class divisions can been seen in the different users who are attracted to MySpace and Facebook. It appears that upscale and college-bound kids favor Facebook. If so, this shouldn't be a surprise because Facebok was launched in 2004 as a Harvard University-only site and gradually expanded to include students from other schools.

If the split is real, look for more advertising dollars to flow to privately-held Facebook in the future, further diminishing MySpace's prospects.
No positions in stocks mentioned.
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