Justin Timberlake and Ad Company Get MySpace for a Song

Justin Timberlake.Photo by Lucy Nicholson, Reuters
Justin Timberlake. Photo by Lucy Nicholson, Reuters

(Reuters) – News Corp. has sold Myspace for $35 million, a fraction of what it paid for the once-hot social media site even as a new generation of Web-based startups is enjoying sky-high valuations.

Advertising company Specific Media will team with the singer Justin Timberlake to acquire Myspace in a deal that caps a tumultuous period of ownership under Rupert Murdoch’s News Corp., which swooped in to buy Myspace for $580 million in 2005.

The sale was a boon for the venture firms that backed MySpace’s parent company, Intermix Media (formerly known as eUniverse). VantagePoint Venture Partners and Redpoint Ventures invested a total of $12 million in Intermix over two rounds, according to  Thomson Reuters (publisher of peHUB). VantagePoint put $8 million into Intermix at a post-money valuation of $51.72 million in November 2003, while VantagePoint and Redpoint each put up $2 million in a $4 million follow-on round with a post-money valuation of $144.83 million in November 2004, Thomson Reuters reports.

Back in 2005, Myspace was among the world’s most popular websites, and News Corp.’s success in beating out rival Viacom Inc in a bidding war was viewed as a major victory for Murdoch. Since then, however, Facebook has eclipsed Myspace in popularity, and the deal has become a hard lesson in what can happen when a traditional media company imposes its will on a startup.

It also shows how quickly audience — and investor — tastes can shift in the world of social networking. Indeed, Wednesday’s deal contrasts sharply with the current frenzy over social media companies, including LinkedIn, Twitter and Groupon, among investors looking for the next big thing.

Another of the hot startups, Zynga, an online social game company, plans to raise up to $2 billion in an initial public offering that could be filed by Thursday, valuing the company at $20 billion

“This is a mistake that will repeat itself,” James McQuivey, an analyst with Forrester Research, said of the Myspace saga. “I’m not sure that someone being pushed on by early round investors, someone reading their own press, which is praising them, will stop and say, ‘Wait, is this a one-year fad, a two-year fad? Or is this a five-year to 10-year change in the way things are done?'”

The Myspace transaction calls for News Corp. to retain a minority stake in the website, the companies said in a statement, confirming a deal that was reported earlier.

Specific Media, which specializes in digital advertising, did not disclose financial terms. It announced, however, that Timberlake — who happens to have played Facebook adviser and investor Sean Parker in the movie “The Social Network” — would take an ownership stake and serve a “major role” in developing a strategy for Myspace.

A source familiar with the transaction said the deal is worth $35 million and is a mix of cash and stock. News Corp. will retain about 5 percent, the source said.

Additionally, more than half of Myspace’s 500-strong workforce is expected to be laid off because of the sale, the source said.

The deal comes after a four-month bidding process in which a number of different possible buyers surfaced, including other social networking sites and private equity firms. The auction had been expected to fetch in the neighborhood of $100 million.

In the end, the sale serves as the latest example of what can happen to a once coveted company with a rocket-like trajectory that quickly loses its luster as competitors zoom past it in popularity.

Founded in August 2003 by Chris De Wolfe and Tom Anderson, Myspace was conceived as a way for friends and fans to connect with one another as well as with their favorite bands and artists.

Myspace, a kind of musical version of pioneer social network site Friendster, fast became wildly popular with teenagers and young adults, who spent hours designing their own pages with their favorite digital wallpaper, posting photos and adding friends.

At its peak in 2008, Myspace attracted nearly 80 million people in the United States, almost double that of Facebook.

The growth was too fast and Myspace had trouble scaling the number of users who were flocking to the site. Meanwhile Facebook had opened up its platform to third-party developers, such as Zynga and its popular FarmVille game. That attracted more people and kept them on the site.

By 2011, the number of U.S. visitors to Myspace fell to about 40 million while those visiting Facebook totaled about 150 million, according to online measurement firm comScore.

For the quarter ended March 2011, News Corp. reported a segment operating loss of $165 million, mainly due to declines at Myspace.

By Jennifer Saba, Reuters

Additional reporting by Paul Thomasch, Reuters, and Lawrence Aragon, peHUB; Editing by Bernard Orr, Steve Orlofsky and Matthew Lewis, Reuters