News Corp. to Acquire MySpace

MySpace.com, a website that’s the flavor of the moment for teenagers and young hipsters, has attracted a new kind of fan: a 74-year-old billionaire.

Rupert Murdoch’s News Corp. agreed Monday to acquire Los Angeles-based Intermix Media Inc., the parent company of MySpace, for $580 million in cash. The deal continues the rush of old-media giants snapping up fast-growing Internet ventures in the pursuit of the advertising dollars flowing onto the Web.

With the acquisition, expected to close in the fourth quarter, News Corp. expects to triple its Web traffic, vaulting it into the ranks of the Internet’s five most visited sites from its current place in the 40s, said company President Peter Chernin.

MySpace, which lets its users watch videos and listen to music on their computers, also would give News Corp. a new young audience for clips from its Fox news, sports and entertainment programs.

“We thought there was a real opportunity to jump-start our entertainment efforts on those demographics,” Chernin said in an interview.

News Corp. is the latest major media company to bolster its Web presence, encouraged by the $9.6 billion spent on Web advertising last year.

Viacom Inc.’s MTV Networks last month agreed to pay $160 million for Neopets.com, a website that lets children create and care for virtual pets. Pursuing older Web surfers, E.W. Scripps Co., Dow Jones & Co. and New York Times Co. have all bought online companies in recent months, seeking to cash in on ad dollars flowing to the Web as their own growth slows.

“There’s a lot of pressure on traditional media,” said John Tinker, an analyst with ThinkEquity Partners.

But the deal comes with risks. Intermix has faced criticism for installing spyware on consumers’ computers. The company says it agreed to pay New York $7.5 million to settle a lawsuit over the practice and has stopped placing the malevolent programs on PCs.

The centerpiece of the deal, MySpace, also carries its own baggage. School officials have warned parents that children can easily find explicit sexual information on MySpace, in both text ads and postings by other members.

Chernin said News Corp. was sensitive to such concerns and would be vigilant in policing MySpace.

But the anything-goes edginess that made the site so cool to loyalists could prove difficult for an established media company -- even the one behind such reality shows as “Married by America” and “Who’s Your Daddy?” -- to tolerate.

“If they want to sustain the buzz of something like MySpace.com, they’re going to have to be in it for the advertising revenue purely, not make it more of a corporate-feeling experience,” said Patrick Mahoney, a senior analyst with Yankee Group. “If they do, they risk the problem of discontent.”

MySpace also has a limited track record. It is growing by leaps and bounds -- its 18 million visitors in June marked a 15-fold increase over the same month last year -- but analysts noted that young consumers were fickle. Just as the “it” restaurant in Los Angeles can change in a moment, so can the tastes of young Web surfers.

Yet so far, MySpace has surpassed the other so-called social-networking websites that have sprung up in the last few years. These services, such as that of onetime leader Friendster Inc., persuade Web surfers to create detailed profile pages and invite friends to join them. But only MySpace has discovered a recipe for getting many users to stick around, come back and bring their friends along.

Music is a key ingredient. More than 350,000 bands and solo artists, from the unknown to the famous, have set up pages on the website to let people sample and share songs, exchange e-mail with the bands and see tour dates. Artists such as R.E.M., Weezer and Black Eyed Peas have streamed new albums on MySpace for a week before their records hit stores.

Users also spend hours on the site writing online diaries known as blogs, exchanging e-mail, reading classified and personal ads and playing video games.

MySpace and the more than 30 websites operated by Intermix will be folded into Fox Interactive Media, a division that News Corp. created Friday to oversee websites for Fox Broadcasting, Fox Sports, Fox News Channel and the Fox television stations. News Corp. websites attracted 11.9 million visitors in June, compared with 17.7 million for MySpace and 11.8 million for Intermix, according to ComScore Networks, a research firm.

Only Yahoo Inc. and Microsoft Corp. displayed more Web ads than MySpace in May, according to another research firm, Nielsen/NetRatings.

News Corp. had competition for MySpace: MTV and Barry Diller’s InterActiveCorp also explored buying the Web service, according to people familiar with the discussions. News Corp. agreed to pay $12 a share for Intermix, a 12% premium over Friday’s closing price.

Company insiders say that Murdoch’s recent infatuation with all things digital sparked the deal.

The News Corp. chairman shied away from online investments in the late 1990s after a disastrous and costly acquisition in 1993 of Delphi, an early Internet service provider.

His reluctance saved News Corp. pain when the Internet bubble burst, forcing many big media companies to take write-offs that in some cases reached into the billions of dollars. The union of America Online Inc. and Time Warner Inc. was the biggest of those flops.

But in the last year, as his newspapers and TV stations have been threatened by online advertising, Murdoch has turned his attention to Internet acquisitions. He personally spearheaded the formation last week of the new group created to oversee News Corp.’s online activities, company insiders said.

“This acquisition is a major step for News Corp. as it attempts to improve its competitive positioning in the strategically important online space, an area where the company trails its key rivals,” Jessica Reif Cohen, an analyst with Merrill Lynch & Co., wrote in a report to clients.

Intermix has a troubled history. The company was founded by Brad Greenspan in 1999 under the name EUniverse Inc. It began selling music CDs online but quickly shifted strategies and began running entertainment and game sites, the most popular of which is Grab.com.

Greenspan, then chairman, was ousted during a bruising proxy battle after the company was forced to restate two years of earnings results and Nasdaq suspended trading of its stock.

Analysts said the new management at Intermix had largely turned the company around. Its shares, which have soared in recent weeks from as low as $3.60 in May, rose $1.02 to $11.74 on news of the deal. News Corp. slipped 2 cents to $17.45.

Intermix earned $4.5 million on revenue of $79 million during its most recent fiscal year, which ended March 31.

MySpace, which does not disclose its financials, also has dramatically increased its valuation. Last year Intermix sold a 25% stake in the social-networking site to Redpoint Ventures for $11 million, meaning it believed MySpace to be worth $44 million, Greenspan said in an interview Monday.

Intermix said Monday that it had exercised its option to purchase the 47% of MySpace shares it didn’t already own for $69 million.

Greenspan, who still owns about 10% of Intermix shares, said he believed the $580-million price was too low.

“I think shareholders should vote against it,” he said. “I think management clearly has shown they’re not able to understand how to value media assets.”

VantagePoint Venture Partners, Intermix’s largest shareholder, with a 22.4% stake, has agreed to vote in favor of the acquisition, News Corp. said.

An Intermix spokesman declined to comment.

The rapid changes of fortune at Intermix and MySpace show how tricky betting on Internet companies can be.

Rob Sanderson, a media analyst with American Technology Research, says News Corp. and other companies that acquire new-media ventures are asking themselves, “What can we grow this into?”

“No one really knows,” he said. “Even though we have some very mature and proven businesses on the Web, we’re still very early in all this.”