From a Social Media Darling

question 99

Essay

From a Social Media Darling
to an Afterthought—The Demise of Myspace

It is critical to understand a firm’s competitive edge and what it takes to sustain it.
Sustaining a competitive advantage in a fast-moving market requires ongoing investment and nimble and creative decision making.
In the end, Myspace appears to have had neither.
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A pioneer in social networking, Myspace started in 2003 and reached its peak in popularity in December 2008. According to ComScore, Myspace attracted 75.9 million monthly unique visitors in the United States that month. It was more than just a social network; it was viewed by many as a portal where people discovered new friends and music and movies. Its annual revenue in 2009 was reportedly more than $470 million.

Myspace captured the imagination of media star, Rupert Murdoch, founder and CEO of media conglomerate News Corp. News Corp seemed to view the firm as the cornerstone of its social networking strategy, in which it would sell content to users of social networking sites. To catapult News Corp into the world of social networking, Murdock acquired Myspace and its parent firm, Intermix, in 2007 for an estimated $580 million. But News Corp’s timing could not have been worse. Between mid-2009 and mid-2011, Myspace was losing more than 1 million visitors monthly, with unique visitors in May 2011 about one-half of their previous December 2008 peak. Advertising revenue swooned to $184 million in 2011, about 40% of its 2009 level.

In the wake of Myspace’s deteriorating financial performance, News Corp initiated a search for a buyer in early 2011. The initial asking price was $100 million. Despite a flurry of interest in social media businesses such as LinkedIn and Groupon, there was little interest in buying Myspace. In an act of desperation, News Corp sold Myspace to Specific Media, an advertising firm, for only $35 million in mid-2011 as the value of the MySpace brand plummeted.

What happened to cause Myspace to fall from grace so rapidly? A range of missteps befuddled Myspace, including a flawed business strategy, mismanagement, and underinvestment. Myspace may also have been a victim of fast-moving technology, fickle popular culture, and the hubris that comes with rapid early success. What appeared to be an unimaginative strategy and underinvestment left the social media field wide open for new entrants, such as Facebook. Myspace may also have suffered from waning interest from News Corp’s top management. As consumer interest in Myspace declined, News Corp turned its attention to its acquisition of the Wall Street Journal. Culture clash also may have been a problem when News Corp, a large, highly structured media firm, tried to absorb the brassy startup. With a big company, there are more meetings, more reporting relationships, more routine, and more monitoring by senior management of the parent firm. Myspace managers’ attention was often diverted in an effort to create synergy with other News Corp businesses.

In the new era of social media, the rapid rise and fall of Myspace illustrates the ever-decreasing life cycle of such businesses. When News Corp bought Myspace, it was a thriving online social networking business. Facebook was still contained primarily on college campuses. However, it was not long before Facebook, with its smooth interface and broader offering of online services, far outpaced Myspace in terms of monthly visitors. Myspace, like so many other Internet startups, had its “fifteen minutes of fame.”

Adobe’s Acquisition of Omniture: Field of Dreams Marketing?

On September 14, 2009, Adobe announced its acquisition of Omniture for $1.8 billion in cash or $21.50 per share. Adobe CEO Shantanu Narayen announced that the firm was pushing into new business at a time when customers were scaling back on purchases of the company’s design software. Omniture would give Adobe a steady source of revenue and may mean investors would focus less on Adobe’s ability to migrate its customers to product upgrades such as Adobe Creative Suite.

Adobe’s business strategy is to develop a new line of software that was compatible with Microsoft applications. As the world’s largest developer of design software, Adobe licenses such software as Flash, Acrobat, Photoshop, and Creative Suite to website developers. Revenues grow as a result of increased market penetration and inducing current customers to upgrade to newer versions of the design software.

In recent years, a business model has emerged in which customers can “rent” software applications for a specific time period by directly accessing the vendors’ servers online or downloading the software to the customer’s site. Moreover, software users have shown a tendency to buy from vendors with multiple product offerings to achieve better product compatibility.

Omniture makes software designed to track the performance of websites and online advertising campaigns. Specifically, its Web analytic software allows its customers to measure the effectiveness of Adobe’s content creation software. Advertising agencies and media companies use Omniture’s software to analyze how consumers use websites. It competes with Google and other smaller participants. Omniture charges customers fees based on monthly website traffic, so sales are somewhat less sensitive than Adobe’s. When the economy slows, Adobe has to rely on squeezing more revenue from existing customers. Omniture benefits from the takeover by gaining access to Adobe customers in different geographic areas and more capital for future product development. With annual revenues of more than $3 billion, Adobe is almost ten times the size of Omniture.

Immediately following the announcement, Adobe’s stock fell 5.6 percent to $33.62, after having gained about 67 percent since the beginning of 2009. In contrast, Omniture shares jumped 25 percent to $21.63, slightly above the offer price of $21.50 per share. While Omniture’s share price move reflected the significant premium of the offer price over the firm’s preannouncement share price, the extent to which investors punished Adobe reflected widespread unease with the transaction.

Investors seem to be questioning the price paid for Omniture, whether the acquisition would actually accelerate and sustain revenue growth, the impact on the future cyclicality of the combined businesses, the ability to effectively integrate the two firms, and the potential profitability of future revenue growth. Each of these factors is considered next.

Adobe paid 18 times projected 2010 earnings before interest, taxes, depreciation, and amortization, a proxy for operating cash flow. Considering that other Web acquisitions were taking place at much lower multiples, investors reasoned that Adobe had little margin for error. If all went according to plan, the firm would earn an appropriate return on its investment. However, the likelihood of any plan being executed flawlessly is problematic.

Adobe anticipates that the acquisition will expand its addressable market and growth potential. Adobe anticipates significant cross-selling opportunities in which Omniture products can be sold to Adobe customers. With its much larger customer base, this could represent a substantial new outlet for Omniture products. The presumption is that by combining the two firms, Adobe will be able to deliver more value to its customers. Adobe plans to merge its programs that create content for websites with Omniture’s technology. For designers, developers, and online marketers, Adobe believes that integrated development software will streamline the creation and delivery of relevant content and applications.

The size of the market for such software is difficult to gauge. Not all of Adobe’s customers will require the additional functionality that would be offered. Google Analytic Services, offered free of charge, has put significant pressure on Omniture’s earnings. However, firms with large advertising budgets are less likely to rely on the viability of free analytic services.

Adobe also is attempting to diversify into less cyclical businesses. However, both Adobe and Omniture are impacted by fluctuations in the volume of retail spending. Less retail spending implies fewer new websites and upgrades to existing websites, which directly impacts Adobe’s design software business, and less advertising and retail activity on electronic commerce sites negatively impacts Omniture’s revenues. Omniture receives fees based on the volume of activity on a customer’s site.

Integrating the Omniture measurement capabilities into Adobe software design products and cross-selling Omniture products into the Adobe customer base require excellent coordination and cooperation between Adobe and Omniture managers and employees. Achieving such cooperation often is a major undertaking, especially when the Omniture shareholders, many of whom were employees, were paid in cash. The use of Adobe stock would have given them additional impetus to achieve these synergies in order to boost the value of their shares.

Achieving cooperation may be slowed by the lack of organizational integration of Omniture into Adobe. Omniture will become a new business unit within Adobe, with Omniture’s CEO, Josh James, joining Adobe as a senior vice president of the new business unit. He will report to Narayen. This arrangement may have been made to preserve Omniture’s corporate culture.

Adobe is betting that the potential increase in revenues will grow profits of the combined firms despite Omniture’s lower margins. Whether the acquisition will contribute to overall profit growth depends on which products contribute to future revenue growth. The lower margins associated with Omniture’s products would slow overall profit growth if the future growth in revenue came largely from Omniture’s Web analytic products.
-Who are Adobe's and Omniture's customers and what are their needs?

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