The media industry has now lost US$1.5 billion on investments in the social networking craze after AOL sold Bebo last week for a fraction of the price it paid for the business two years ago.
The soured investments in Bebo, MySpace and Friends Reunited underline the hazardous nature of gambling big money on Internet businesses. Ever-developing applications and a lack of customer loyalty mean social networking sites can become huge virtually overnight and then crash almost as quickly.
AOL paid US$850 million for Bebo, but after a collapse in profits and the failure to gain traction in the US, it was sold at a “fire sale” price rumored to be below US$10 million. But AOL has not been the only big media concern to get its fingers burned.
In 2005, as Rupert Murdoch began to embrace digital media, News Corp spent US$580 million on MySpace. Last year, the media group took a US$450 million impairment charge against the business. Also in 2005, the British TV company ITV paid £175 million for Friends Reunited, only to watch users abandon it as free-to-use alternatives began to appear. It sold the business for just £25 million (US$37 million) last year to DC Thomson, making a loss of £150 million.
Each site has been overshadowed by the rise of Facebook, launched in 2004. According to reports on Friday, its revenue more than doubled last year to US$800 million. It has almost half a billion users and is attracting big-name advertisers including Ford and British Airways.
“The conclusion is that barriers of entry are very low and so if someone comes along with a better idea, it is very hard to protect against that,” Enders Analysis analyst Ian Maude said. “Facebook looks like it has some momentum still; it is still growing. It is also much more appealing to a wider audience. But someone could come along with a better idea tomorrow.”
MySpace has cut hundreds of jobs and last year replaced co-founder Chris DeWolfe. His successor, Owen van Natta, lasted less than a year. But Murdoch was wily enough to sign a three-year deal with Google to sell advertising on the site that guaranteed US$900 million in revenue, if targets were met.
Maude says the two most successful businesses, Google and Facebook, have stayed independent.
“Research shows mergers and acquisitions don’t work,” he said. “If you get sucked into a corporate bureaucracy and are forced to fit in with another company’s goals and culture, it almost certainly leads to a dilution of the business.”
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