Is a second dot-com crash coming?

Web 2.0 may be whimpering to an end

The first Internet bubble ended with a bang; Web 2.0 may be ending with a whimper. News Corp’s MySpace social network is cutting 30 per cent of its staff and looks set to lose money when Google renegotiates its partnership. When News Corp paid $580 million for my MySpace in 2005, some thought chief executive Rupert Murdoch had lost his marbles. After all, the site only had 14 million monthly users. By valuing MySpace’s juvenile denizens at $41 a head, News Corp helped make social networking a hot ticket. Microsoft’s $240 million investment in Facebook two years ago, valuing it at a whopping $15 billion, only intensified the frenzy. So did talk a few months ago that Twitter, a company with no revenues, was worth $250 million. Yet Murdoch seemed largely vindicated. Four years on, MySpace has 130 million monthly visitors. And it has proved one of the few Web 2.0 companies able to turn a buck. The site brought in $1.6 billion in revenues over the past three years and probably earned some $200 million last year, assuming roughly 20 per cent profit margins on its $900 million of revenues. The problem is that most of that money came from the site’s three-year, $900 million search advertising deal with Google, which expires next year. The search giant has made it clear that it will only renew at a far lower price. Not only have advertisers had difficulty getting much out of advertising on social networks, but MySpace has lost the top spot to current market leader Facebook. Without Google’s business, MySpace could be set to lose $100 million annually. That may help explain the cuts demanded by Owen Van Natta, the new chief executive. His former employer Facebook, meanwhile, expects to generate positive cash flow next year, but if advertisers are becoming skeptical, that’s no certainty. Either way, the Web 2.0 bubble looks rather deflated.

The Telegraph

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