Is MySpace and YouTube a fad?

The Washington Post headline warns "In Teens Web World, MySpace Is So Last Year".  That is the problem with businesses built on fashion and fads...they change so quickly you can be left heavily invested and suddenly out of favor.  Mathew Ingram puts a Yogi Berra spin on this saying "MySpace so popular - no one goes there anymore".

Will MySpace and YouTube stay "in fashion" long enough for investors to make their money back? News Corp bought MySpace for $580M last year. Google bought YouTube for $1.65B last month. This quote from the Washington Post article perfectly frames the problem.

"I think it's definitely going down -- a lot of my friends have deleted their MySpaces and are more into Facebook now," said Birnbaum, a junior who spends more time on her Facebook profile, where she messages and shares photos with other students in her network.

From the other side of the classroom, E.J. Kim chimes in that in the past three months, she's gone from slaving over her MySpace profile up to four hours a day -- decorating it, posting notes and pictures to her friends' pages -- to deleting the whole thing.

"I've grown out of it," Kim said. "I thought it was kind of pointless."

Such is the social life of teens on the Internet: Powerful but fickle. Within several months' time, a site can garner tens of millions of users who, just as quickly, might flock to the next place, making it hard for corporate America to make lasting investments in whatever's hot now.

Xanga and Friendster were very popular social networking sites before MySpace came along. Is MySpace and YouTube headed for the same fate? Another quote from the Washington Post article;

Take Xanga, the hot social networking site before MySpace: In October 2002, the typical Xanga user spent an average of 1 hour and 39 minutes a month on the site, a figure that declined steadily, reaching only 11 minutes last month, according to Nielsen-NetRatings. Friendster, another older site, hit its first usage peak of 1 hour and 51 minutes in October 2003, and then hit another peak of 3 hours and 3 minutes in February 2006. But last month, the average user was on Friendster for a mere 7 minutes.

Google will need to make $150M in profits every year forever, just to break even on its YouTube purchase. That translates into about $500M in revenues every year to generate the necessary $150M in profits. I don't see that happening anytime soon, and YouTube's popularity could fade before they are able to ramp up the revenues.

Popularity is one thing...then there is the competition. Today we hear that BrightCove is offering to split advertising revenues with video contributors. Hmmm... YouTube contributors get nothing. There will be new offerings and business models from lots of new competitors all looking for a piece of the "fashion fad" pie.

Fortune favors the low cost, fast follower, in the "fashion / fad" business. Not a good place to make huge long term investments.

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Comments

[Christian Busch]

Myspace and Youtube were both the big category openers for their respective spaces. Now you get into the race to improve upon the big two. I think both Fox and Google will make a decent return on their investments - esp. Google b/c they paid in stock. If they ask the stock market for another $5bn tomorrow to fund expansion - they'll get it. The question is whether anyone will be able to lead their category for more than a year or two. That will probaby influence the future valuations a lot more than what's currently the hottest site.

[Don Dodge]

Christian, stock or cash, it is still real money and it must make a return on the investment. The trick is to keep YouTube popular long enough to make back $1.65B in profits...just to break even.

Malay, I don't filter out any comments, and I am happy to respond to you, although I don't speak for Microsoft finance group.

To me this is easy. MSN and xBox are properties that will live on for 20 years or more. They are not a passing fad. These businesses have huge barriers to entry (billions in capital) and quantifiable revenue streams. Both MSN and xBox are players in enormous markets that are growing predictably. Those are good investments that are already bringing in lots of revenue...and will for years to come. Profits are within sight already. Not bad for starting from nothing and zero market share.

[Malav]

It is interesting that you bring up the point of being able to recover the investments made by Google to purchase Youtube. In the same light could you share your thoughts on similar numbers for Microsoft to recover its investments in MSN and XBox.
Considering that many people would be interested in such information, I am hoping that you will not filter this comment out and actually respond to it.

Thanks,
Concerned shareholder

[Alex]

When your next door neighbour buys the local deli, it's easy to quantify their expected return. When Google buys something like YouTube, I think it's very hard due to the complex network effect.

[renthusiast]

I think Youtube will probably make it in the long run, video on the internet is perhaps a natural extension now that broadband is becoming more commonplace; myspace on the other hand is a different story. it's hard to figure out a sustaining business model that not just based on advertising, plus rising spam and porn is a big turnoff for a lot of people (kids included); also accounts are getting hacked and taken over by spammers etc;

[Raize]

YouTube isn't a website anymore...its a culture and for that reason it will never fade. They have one of the most involved and loyal userbases I've ever seen on the net.

If google decides to put YouTube on cell phones they will make truckloads of money...lots of ways they can choose to go with it. And don't forget that the purchase of YouTube was a big blow to "media-oriented" Yahoo (their main competitor) so the price was worth it whether or not they break even.

MySpace will never go away (it serves its niche well) but is on the way out. By next year you will see a new leader in social networking...my guess is facebook or bebo...check their growth figures.

[Jonathan Wright]

You tube is not a fad, it is here to stay. You tube has become a community for up and coming directors, animators, and musicians. Some people who began on youtube have been "discovered" and are moving on to a career because of the work that they submitted (ie; lazy sunday, kelly).
MySpace, on the otherhand has lost the membership of several people I know including myself because of spam and hackers. If myspace does not double it's efforts to fight this, then it will end up destroying itself. However, the online communities will go nowhere.