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MySpace to Drop Cash in Photobucket?

If you can't beat 'em, buy 'em. That seems to be the attitude MySpace has toward its sometimes tenuous relationship with Photobucket. Although it has yet to be confirmed by either company, numerous sources are reporting that MySpace is purchasing the four-year-old Photobucket for close to $300 million in cash, thus merging the photo-hosting service with the social-networking site it's grown off of.

Photobucket is a popular photo service that allows users to post photos on the Web, including social networking sites such as MySpace, Facebook and Friendster. Most of the photos that appear on MySpace are hosted by Photobucket. Although many sites host photos, such as Yahoo's Flickr, Photobucket is the most popular with about 40 million users and growing.

In addition to hosting photos, in February the company launched an online photo and video editing service, complete with webcam support.

"It makes sense from a synergy perspective," said David Carr, vice president and senior analyst at JupiterResearch. "The deal is a logical extension of everything Fox Interactive is offering." Carr said that even though MySpace probably could have built its own Photobucket equivalent, and it already does host photos, it was probably easier to just purchase the service outright.

The timing was right, as well, since Photobucket hired Lehman Brothers in April to look into selling the company.

MySpace, which for months was unnerved by the way Photobucket embeds advertising in its product, temporarily blocked Photobucket photos and videos in April. MySpace claimed the advertising was in violation of its user agreement. According to Nielsen/NetRatings, MySpace has 55.9 million monthly unique visitors. Photobucket has only 14.7 million.

However, Photobucket received 57 percent of its upstream traffic from MySpace in March. Photobucket also accounted for 73 percent of the "Photography" category visits leaving MySpace in the same time period.

In an age where Web users have grown accustomed to creating their own content, blocking Photobucket could have had dire consequences for MySpace.

A post on TechCrunch.com in April by Photobucket's CEO Alex Welch pointed out that if MySpace users are restricted from using certain applications, such as Photobucket, they would vote with their feet, or keyboards, as it were, and use other social-networking sites. This could have driven traffic down and meant less advertising revenue for MySpace.

Welch wrote, "By limiting the ability of its users to personalize their pages with content from any source, MySpace is contradicting the very ethos of personal and social media. MySpace became successful because of the creativity of its users and because it offered a forum for self-expression. By severely restricting this freedom, MySpace is showing that it considers its users a commodity which it can treat as it sees fit."

James McQuivey, an analyst with Forrester Research, said that about half of the 40 million Photobucket users are already MySpace users. Even if half of the remaining 20 million join MySpace, MySpace would have acquired 10 million new users through the deal, at about $25 each, which they could easily make back in advertising.

There's also the youth factor to consider. "MySpace users are an attractive audience," McQuivey said. "Even though the site became popular with college students, MySpace doesn't want them to grow out of it. Acquiring Photobucket is another way to keep them connected."

Even if it keeps users connected and logging on, McQuivey isn't convinced that the deal will have much effect on the price of News Corp.'s stock. "MySpace and Photobucket are a small piece of News Corp., overall," he said. "It'll bring in more viewers and visitors, but not that many new opportunities."