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Google Deal Bails Out MySpace

Outside of mergers and acquisitions, there are big deals and then there are $900 million deals.

Google's deal with Viacom on Monday to syndicate MTV content over its AdSense network was a big deal.

Google's deal with News Corp. to provide search and display advertising to MySpace users for the next three years and nine months was blockbuster.

It solves what were becoming serious monetization problems for MySpace and ships a truckload of feather pillows to Google to pad its AdSense revenue, a crucial part of its overall profits.

"It's a good deal," JupiterKagan analyst David Card told internetnews.com.

"Combining MySpace's big audience, fanatical, heavy users and Google's leading paid search network makes perfectly good sense."

MySpace had over 45 million unique visitors in June, according to Nielsen//NetRatings. That's a lot of clicks.

News Corp. bought Intermix Media and its MySpace property last year and promptly watched its popularity explode.

In July, Hitwise named the site the most popular one in the U.S.

But until Monday, News Corp. had still not found a way to turn that popularity into a cash return on its $580M investment.

The challenge was that, though Internet advertising revenues went up 30 percent in 2005, their MySpace product wasn't rising with the tide.

That's because sponsored search results and contextual ads drove the growth, not the type of banner advertising MySpace sells on its user profiles.

Banner advertising can be lucrative. It works for Yahoo.

But that's because Yahoo sells to blue chip brand advertisers, the kind that refuse to put pictures of their products on MySpace profiles for fear that consumers will get the wrong impression.

User-generated content is too unpredictable for brand managers, Forrester Research Analyst Brian Haven told internetnews.com.

"If I've got a tried-and-true brand that's been around for decades, I don't want to find it hanging out with some video of a kid jumping off his roof and hurting himself," Haven said.

So there was MySpace, bubbling over with 100 million user profiles and growing market share in the social networking space: a clear success that wasn't.

That is, until the Google deal, which promised an initial $900 million return on News Corp.'s $580 million investment.

Suddenly, sponsored search results and contextual ads are a crucial MySpace ingredient.

"There's a lot of bad advertising inventory on MySpace," Card said. "Working with ad network is the easiest way to short cut that problem."

Of course, transactional advertising has its limitations.

Flickr, a popular social network built around photo sharing, decided to stop placing contextual ads on its user profiles after an animal rights activist complained about fur coat ads next to her protest photos of seal hunters in Newfoundland.

Card said he also maintained some skepticism as to whether MySpace users are the best audience for contextual advertising.

"If all you're doing is talking about parties and sharing pictures of each other various stages of undress, it's not clear that there's a whole lot of transaction-oriented ads that are going to catch your eye."

Still, despite those challenges, Card feels comfortable with Google's $900 million bet. Google does, too.

CEO Eric Schmidt told a conference call of analysts and journalists as much on Monday.

"We think it's important that we move Google to where the users are, and the users are moving to user-generated content and in particular the sites of Fox Interactive."