How MySpace Blew It

Last week, as Iranian reform candidate Mir Hossein Mousavi was blasting out messages through Facebook—and Twitter was becoming a tool of the revolution—MySpace took a different tack: It slashed nearly a third of its staff. Today the site announced the elimination of two-thirds of its international staff and the closing of four offices outside of the United States.

The move represents a remarkable reversal of fortune since the titanic struggle between Viacom and News Corp., barely four years ago, over who would win ownership of MySpace, then considered a glittering prize.

Barely four years later, it looks like Viacom dodged a bullet—and News Corp. seems to be hemorrhaging money from the deal.

In the summer of 2005, News Corp. mogul Rupert Murdoch, the victor, was hailed as a swashbuckling visionary for stealing this supposed diamond in the rough from under the nose of Viacom’s controlling stockholder, Sumner Redstone. The $580 million price tag was aggressive but entirely justified, so went the conventional wisdom, as the deal gave Murdoch’s media conglomerate a valuable foothold in the brave new world of online monetization.

Barely four years later, it looks like Viacom dodged a bullet—and News Corp. seems to be hemorrhaging money from the deal.

Hollywood screenwriter William Goldman once famously remarked about the entertainment industry: “Nobody knows anything.” It turns out the axiom applies to the Internet, as well. The brief history of the World Wide Web—and mankind’s valiant efforts to wring profits out of same—is replete with confirming evidence of Goldman’s axiom, a kind of unified field theory of cluelessness that has yet to be disproved.

The landscape is littered with the casualties of cyber-capitalism, starting with the disastrous merger of AOL and Time Warner, which vaporized an estimated $120 billion in shareholder equity. There have been countless other miscalculations—for instance, Yahoo’s disastrous rejection of a $47.5 billion bid from Microsoft. Two years later, Yahoo’s market capitalization is less than half that sum—a piece of good news for Microsoft, which itself is reportedly losing an alarming $2 billion a year from its online businesses. Time Warner splurged $850 million for the European social networking site Bebo—and even CEO Jeff Bewkes didn’t defend that price when I interviewed him last year.

Arguably, CBS Corp., the other public company that Redstone controls, vastly overpaid when it splurged $1.8 billion last year for CNET, a collection of Web sites that have yet to unleash their value.

The latest proof of Goldman’s axiom is the sad story of MySpace. In 2005, it was acclaimed as the planet’s hottest social-networking site. Today it is widely considered an ailing property, having slashed overhead to confront the new reality in which it will no longer have Google to prop up cash flow: The search giant is pulling the plug on a reported $300 million in annual payments for the privilege of using MySpace as an advertising platform.

Recent reports cite ominous stats showing that fast-growing Facebook, with more than 70 million monthly visitors domestically, has finally overtaken its older rival, which is coping with a shrinking user base and page views, declining revenue, and no obvious strategy to reverse a slide into the abyss.

It has been, to be sure, a dizzying drop from “hot” to “on life support.” And yet neither diagnosis might be correct—or, for that matter, both of them might be. Because nobody knows anything.

Back in 2005, the proud and blustery Redstone was, by his own account, deeply embarrassed by Murdoch’s supposed triumph—which he publicly blamed on the alleged timidity of Viacom’s chief operating officer, Tom Freston. A few months after Murdoch’s acquisition, the eightysomething Redstone punished Freston by promoting him to Viacom’s top job, CEO.

Eight months after that, for reasons that remain misty, Redstone abruptly fired Freston as chief executive. In October 2006, the flame-haired Redstone appeared on the Charlie Rose show and claimed that Freston “knew he had the green light to buy it for $500 million” but dithered so long that Murdoch stepped in and got the upper hand. “You know Rupert, I knew we could never outbid him,” Redstone told Rose. “He’ll pay and pay and pay, and whatever he pays he’ll make it work.”

“How much is MySpace worth today?” Rose asked Redstone.

“A billion and a half,” Redstone answered. “And I think it could be worth a lot more in the future. So it was a humiliating experience...To lose to Rupert? Not a good thing.”

“That really stuck in your craw, didn’t it?” Rose persisted. “That you lost to Rupert and it turned out to be a bonanza to Rupert.”

Some bonanza. There were a few problems with Redstone’s account—not least the octogenarian’s whopper that he looks like a man of 40 and the backward causality in which he linked Freston’s firing with the MySpace deal. But the main problem is it was Redstone and Viacom board member (now CEO) Philippe Dauman, not Freston, who shut down the bidding for MySpace—this, according to numerous accounts, including the definitive book on the subject, Julia Angwin’s Stealing MySpace.

Too bad for Redstone. Had he admitted to being a MySpace obstructionist instead of trying to bandage his wounded vanity, he could have credibly claimed the title of visionary himself.

At another point in his television interview, Rose asked: How about acquiring Facebook? “We would not consider Facebook,” Redstone answered, “because we looked at it, it’s a great company. We thought the price was too high.”

In the summer of 2005, it’s likely that Redstone could have acquired Facebook for a rumored asking price of $2 billion, slightly more than he paid for CNET—which would have been celebrated as the bargain of the century.

That is, if anybody knew anything.

Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.