Analyzing the New MySpace’s Spotify-Style Subscription Model

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Last week we wrote about what we want out of band websites in 2012, and in doing so, wondered what the relaunched, Timberlake-helmed version of MySpace might bring to the party, given that the virtual landscape into which it’s being launched is very different from the one it dominated back in the early and mid-’00s. It appears that we’re a little closer to knowing the answer today, with the news that the site is seeking funding to relaunch itself as a music subscription service that would put it in competition with Spotify and Pandora. According to a presentation obtained by Business Insider, MySpace’s parent company Interactive Media Holdings is a seeking a $50m capital investment to fund its world domination plans. Anyway, after the jump, we analyze what this all means, so you don’t have to! Read on and let us know what you think in the comments section.

First, a bit of background: after Rupert Murdoch finally gave up last summer on his ill-fated acquisition of MySpace, the site was sold to a company called Specific Media, which does nebulous things to do with web advertising. The two properties — MySpace and Specific Media — were consolidated under a company called Interactive Media Holdings (which we’ll call “IMH” for convenience’s sake from here on in.) It’s IMH that’s now seeking $50 million of cold, hard cash from investors in order to fund the reinvention of MySpace.

The document obtained by Business Insider is essentially a sales pitch — it outlines IMH’s strategy for MySpace, including what the new site is going to do and how it’s going to make money (in theory, at least.) The whole thing is couched in the sort of arid corporate language you’d expect from a corporate presentation, but there are some really fascinating facts to take away from it:

– For a start, in 2012 MySpace has 28 million US “consumers.” Quite how “consumer” is defined for these purposes is unclear, but in any case, it’s a pretty pitiful amount in comparison to MySpace’s one-time competitor Facebook (and, for that matter, in comparison to Twitter, Tumblr, etc.)

– Wisely, then, IMH’s headline pitch claims that MySpace’s biggest asset isn’t its user base; it’s the site’s 42-million-song music catalog, which IMH claims is the “biggest in the world.” If you’re wondering how this can be (even the iTunes store only has some 28 million songs), the answer comes a little further along in the presentation: 27 million of those songs are from the unsigned artists who’ve uploaded their songs to MySpace over the years. Yep, that’s right: if you’re a musician, we hope you read the site’s terms and conditions before you uploaded your demos back in 2005. And either way, don’t expect to make any money out of this, because…

– Perhaps the most interesting slide in the presentation is this one, wherein IMH laments that “one of the biggest challenges facing online music streaming services is the significant cost of content associated with such services.” Or, in English, “it’s hard to make money when you actually have to pay the artists who make your ‘content.'”

– However, the presentation proclaims proudly that MySpace has an ace up its sleeve here: “MySpace has a significant cost advantage with respect to music streaming costs… our proprietary 27m song library from unsigned artists accounts for ~50% of our song plays… and has a ZERO cost basis.” Or, again, in English: “Because over half of our library consists of tracks by unsigned artists, half the time we don’t have to pay anyone anything! Woo hoo!” Quite what assumptions this is based on are, again, unclear — it’s hard to imagine that unsigned artist tracks that cost MySpace nothing will be played nearly as much as, y’know, the new Coldplay single or something — but in any case, the business model here appears to be “make a shitload of money out of not having to pay the unsigned artists who’ve provided half of our content anything at all.” This idea isn’t entirely surprising, of course, but it’s still chastening to see it set out so baldly for the benefit of cashed-up VC investors.

– This library will be used as the basis of MySpace’s new subscription service, which is planned to launch in the second quarter of next year. There’s no indication on how pricing will work as yet, but IMH is clearly confident that it will be a license to print money. This is just as well, because…

– Unsurprisingly, MySpace has been a financial train wreck over the last couple of years: it had revenues of $9 million in the part-year since it was acquired by IMH in 2011, and $15 million in 2012. In 2011 it made a $20 million loss — that’s before interest and tax, by the way — and in 2012 it’s projected to lose $42 million. If these numbers are all a bit esoteric, let’s put it like this: if your losses are twice the amount of money you’re bringing in, you’re up to your neck in it.

– Notwithstanding this, the company is budgeting $10 million — two-thirds of MySpace’s 2012 revenue — for marketing the MySpace relaunch. That swanky video didn’t come cheap, presumably.

– But wait! Despite the company’s current basket-case status, its much-heralded relaunch is apparently going to turn into a profitable business by 2014. The presentation estimates revenues of $58 million in 2013, $102 million in 2014 and $140 million in 2015, with a $10 million profit in 2014 and a $33 million profit in 2015.

– If you’re a potential investor, this is the bit where you ask: wait, but how? The specifics are pretty few and far between on the slides themselves — perhaps this is where whoever was doing the presenting did their most convincing sales pitch. One thing that does get a mention is that the site is also planning “additional revenue models” that include “subscriptions and transactions,” namely music downloads, band merchandise, and event tickets.

– At this point, you probably also ask, well, where’s my $50 million going? The answer is that $10 million will go to fund the aforementioned marketing budget for the site’s relaunch, with another $15-$25 million going toward renewing licenses with the record companies that MySpace does actually have to pay for content, and the rest going into the bank for “general working capital purposes.”

If you’re interested, you can look at the entire presentation here. How it leaked out, we’re not sure, given that the document’s first page makes it clear that it was “furnished to prospective investors on a confidential basis” — but anyway, it’s somehow amusing and resassuring to see that even multimillion-dollar investments involve the sort of sad little PowerPoint presentations that you see harassed-looking businessmen carefully formulating on planes.

Anyway, what say you, gentle readers? If you had a spare $50 million, would you be throwing it MySpace’s way? Is this hybrid social network/streaming service idea based around “content” provided on a “zero cost basis” going to fly? Or is it a fine example of VC pie in the sky? For what it’s worth, if it was our wallet that contained this cash, we wouldn’t be reaching for it just yet, even if the whole “ZERO cost” model didn’t make us feel just the slightest bit soiled.