What Does Tencent Want With MySpace? - TheStreet

NEW YORK (

TheStreet

) -- There are new rumors out in the last week that Chinese Internet giant

Tencent

is talking to

News Corp.

(NWS) - Get Report

about buying the once-hot social networking site

MySpace

.

MySpace is a shell of the company it once was. News Corp. bought it at what now seems like a bargain basement price of $500 million in 2005 and rode it up to many multiples of that in terms of valuation. However, it is likely News Corp. would get little to nothing now.

The company has fallen far behind

Facebook

; it is not even thought of as a distant competitor. It has cycled through many different leaders since the original founders Chris DeWolfe and Tom Anderson left the company. Whatever magic was once there has left.

TechCrunch

recently reported that MySpace's unique visitors dropped 14% between January and February, increasing the pace at which the company is losing users.

So why would Tencent want MySpace?

Interestingly, it is both Tencent and DeWolfe who are supposed to be close to bidding on the company.

Obviously, DeWolfe believes that he created the original magic of MySpace and he can bring it back. For Tencent, it's a little more complicated.

Tencent is now a $50 billion company; it is no shrinking violet. It is an Internet giant that trades places with

Baidu

(BIDU) - Get Report

constantly for which is the largest Chinese Internet company.

Although Tencent isn't as well known in the U.S., it is actually a bigger social networking service than Facebook. Tencent has well more than 650 million users of its QQ service.

Back in China, Tencent is facing competition from

Sina

and its Weibo service, but Tencent is still almost 10 times the size in terms of market capitalization.

With buying MySpace, Tencent seems to be eyeing global growth. There have been other moves by the company that suggest this. Earlier this year it bought

Riot Games

, a Los Angeles-based online gaming company, to add to its mix of games offerings.

However, MySpace would be the biggest external move yet by the Chinese leader. Tencent likely sees a way of growing its QQ service internationally through a more recognizable brand. With DeWolfe's help, it also probably suspects it can rekindle some lost magic to the company.

What's ironic is that MySpace China was set up in China in 2007 and was an utter failure. The venture suffered from a number of mistakes, including an absentee board which chose to run the company as a transplanted American version of the brand instead of a localized version -- no Chinese customization, and no changes in the face of poor results. For a time, Rupert Murdoch installed his wife Wendi Deng to run the company because "she speaks Chinese."

MySpace's failure in China is partly what allowed QQ to grow so quickly. If the deal happens, Tencent will be working with DeWolfe (who was also on the board of MySpace China).

Tencent will now have to learn about giving up control to a partner. It will have to learn to do things differently in the United States from how it does business in China.

It's no slam dunk that Tencent's effort will be worth it -- even if it pays nothing for the asset. The biggest cost of this venture could be taking its eye off the ball in its home market.

With Sina pushing hard to grow its Weibo business, Tencent might think twice about whether it wants to take on the sinking ship that is the S.S. MySpace.

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At the time of publication, Jackson was long BIDU and SINA.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson