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Building an Internet Empire

James Altucher

One billion dollars.

That's what it costs to turn a traditional media empire into an Internet powerhouse, give or take. Don't worry about cleaning up the mess afterwards. The one billion covers that, and it gets you 70 million online users, more pageviews than Google(GOOG Quote), and growth rivaling Yahoo!(YHOO Quote).

News Corp.(NWS Quote), led by media tycoon Rupert Murdoch, has recently spent $1.2 billion buying two Internet properties that could propel News Corp.'s business growth and stock price into the ranks of Yahoo! and Google. A traditional media empire (TV, film, print newspapers), News Corp. has not done as well as its Internet media peers lately, and a brief look at its stock performance over the past year may lead one to believe something is not working in Murdoch's empire.

In this time, News Corp. has underperformed both the broad market and its competitors, namely Time Warner(TWX Quote). That said, I still feel there is value to be found in the stock for two reasons. Its new Internet unit, specifically the acquisition of Intermix, is a breath of fresh air in this old media empire. Further, page six of the New York Post alone might be worth several billion, given its gossip dominance.

But the Internet is the primary opportunity.

On July 15, News Corp. announced the formation of Fox Interactive Media (FIM), "the new unit that will leverage the strength of Fox's distinctive entertainment, news and sports brands across the Internet to offer a richer online experience to its millions of users. Veteran media and interactive executive Ross Levinsohn will become president of FIM, which will be based in Los Angeles." This announcement acknowledged the company's need for an Internet unit and put forth strategic leadership by installing Levinsohn as president.

A few days later News Corp. announced it had signed a definitive agreement to acquire Intermix for approximately $580 million in cash, or the equivalent of $12 per common share. Intermix is organized in two distinct businesses. MySpace.com, the social networking community geared toward 16-to 24-year-olds, is the primary business, and the second is an online marketing unit that markets products based on data collected from its members.

A brief look at some statistics on MySpace.com provided by Comscore Metrics report will really open your eyes to the potential of this new acquisition:

• 24.2 million unique users in October, up 12% from 21.6 million in September.

• 150,000 new users a day during the first half of November, up from about 100,000 a day last summer.

• 11.6 billion page views in October (up from 9 billion in September), displacing eBay as the fourth-busiest site on the Net.

• More pageviews than any Internet destination except Yahoo!, AOL and MSN.

• Twice the pageviews of Google, which logged 6.6 billion in October.

It is clear that the Intermix acquisition will be the key driver in News Corp.'s quest for online dominance. In its most recent annual report, Intermix states: "Revenues increased 49% to $79 million in fiscal year 2005 from $52.9 million in fiscal year 2004. The increase in revenues was attributable to growth in both business segments with the product marketing segment producing $48.5 million in revenues in fiscal year 2005 compared to $29.1 million in fiscal year 2004, and the network segment producing $30.5 million in revenues in fiscal year 2005 compared to $23.8 million in fiscal year 2004." Those figures represent about half of MySpace.com's revenue, as Intermix only recently acquired the other half of MySpace.com.

Rupert Murdoch, CEO of News Corp., said: "Intermix's brands, such as MySpace.com, are some of the web's hottest properties and resonate with the same audiences that are most attracted to Fox's news, sports and entertainment offerings. We see a great opportunity to combine the popularity of Intermix's sites, particularly MySpace, with our existing online assets to provide a richer experience for today's Internet users."

Then in October, News Corp. announced a $650 million agreement to buy closely-held IGN Entertainment. IGN Entertainment is an Internet media and services company focused on the video-game and entertainment-enthusiast markets. Collectively, IGN's properties reached more than 30 million unique users a month. This acquisition brings News Corp.'s total unique monthly users to approximately 70 million.

Over the next several quarters, we should see synergies unlock as advertisers in the traditional media sectors of News Corp. start populating the ad space of MySpace and IGN. These new businesses are still growing and hitting key demographics going into the holiday season. However, as I wrote here, a stronger way to play News Corp. is to buy Liberty Media(L Quote) stock, run by John Malone.

News Corp. offers a sufficient margin of safety for those that want to play it straight, but a slightly larger cushion would be to sit side by side with Malone and buy Liberty.