Stupidity is contagious. It gets us all from time to time. Even respectable companies can catch it. As I do every week, let's take a look at five dumb financial events this week that may make your head spin.
1. The rise and fall of MySpace
The bidding war for News Corp.'s (Nasdaq: NWSA ) (Nasdaq: NWS ) MySpace turned out to be more of a fire sale.
Web-based advertising specialist Specific Media emerged with the flame retardant gloves to catch the free-falling social network. Sources are telling Reuters and AllThingsD.com that the asking price is a mere $35 million.
News Corp. paid $580 million for MySpace parent Intermix six summers ago. The social networking craze was just starting to take off. A year later, News Corp.'s Rupert Murdoch was arguing that MySpace was worth $6 billion.
"Murdoch's price-dropping of a potential valuation for MySpace is intriguing, because it implies that News Corp. might be willing to unload the site if the price is right," we wrote at the time.
We all know what happened after that. Facebook became the new MySpace, and MySpace became the new Friendster. News Corp. either lost billions in potential profits by waiting this long to unload the site, or Murdoch vastly overestimated what the once-sticky website was worth.
If the recent fire sales of MySpace and Bebo aren't wake-up calls to those pushing Facebook up to a $100 billion valuation, they'll only have themselves to blame for underestimating the fickle nature of social networking.
2. Taking its Toll
It's not easy trying to sell shiny new houses these days. Standard & Poor's is lowering its corporate credit rating on luxury homebuilder Toll Brothers (NYSE: TOL ) this week.
The move is a surprise on a few different levels:
- Rival credit rating agency Moody's actually upgraded Toll's outlook earlier in June.
- Toll's specialty is building new digs at the high end of residential communities, a good place to be in a presumably improving economy.
- Toll's cash-rich balance sheet makes it more likely to be one of the last residential developers standing.
S&P is arguing that weak springtime trends don't bode well for the industry, but we're also comparing this quarter to last year's springtime pop as homebuyer tax credits expired. Either way, it's not a good sign when one of the stronger housing players sees its credit rating take a hit.
3. Screening in China
Share of Youku.com (Nasdaq: YOKU ) soared 30% on Tuesday, after the Chinese video-streaming site teamed up with Time Warner (NYSE: TWX ) to offer premium rentals on its website.
Really? Is this the kind of news that merits an $860 million pop in Youku's market cap?
The launch of Youku Premium isn't really news. It's been in public beta testing for eight months. Time Warner offered up Inception on the service several months ago. It is certainly encouraging to see Time Warner validate the initiative by agreeing to contribute hundreds of flicks over the next few years, but will China warm up to paying for piecemeal streams? The strategy has been a hard sell nearly everywhere else, and that's before we factor in the rampant media piracy problem in the world's most populous nation.
4. Underwriters betting the over
Shares of LinkedIn (NYSE: LNKD ) surged 12% on Tuesday, as four analysts initiated coverage of the white-collar social networking hub with bullish ratings.
It's not a coincidence these four firms also happened to be the same ones that led LinkedIn's IPO a few weeks earlier. This is a common practice, and the stock shouldn't really pop higher on the obvious development.
However, I may as well take a jab at the underwriters. Let's go over the price targets.
- UBS: $90
- Morgan Stanley: $88
- Merrill Lynch: $92
- JP Morgan: $85
The stock was at $76.38 on Monday, so these may seem like reasonable goals implying modest average-besting returns. However, why did they take LinkedIn public at only $45 a few weeks earlier?
5. This blood elf goes to 20
Activision Blizzard (Nasdaq: ATVI ) is doing away with the free 10- and 14-day trials it uses to hook World of Warcraft players. It's going the more generous route of allowing gamers to play for free until their warring characters hit level 20.
A lot of people see this as a brilliant move. Social gaming has popularized free ad-supported diversions, and that trend isn't going away anytime soon. Social gaming is what is making Zynga one of the more anticipated IPOs in the pipeline. Why can't Activision milk its juiciest premium franchise that way? Why can't World of Warcraft's addictive ways cash in by being more inviting to new players?
Well, the problem with War-Crack is that I don't think this will lead to a spike in paying gamers. Instead of generating subscription revenue after a few days of playing, casual gamers will just move on after they hit the tollbooth requiring $13 to $15 a month to continue advancing in the game. Existing players may also resent the freeloading.
Perhaps more importantly, what's the message Activision Blizzard is sending here? It wouldn't be tweaking its model unless the social gaming trend was starting to work against the franchise.
It's not about quality, since no one would dare compare Activision Blizzard's rich games to the free apps and Facebook games. It's all about time, and more gamers are settling for cheaper, casual diversions.
Which of these five moves do you think is the dumbest? Share your thoughts in the comment box below.
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