Just a few months ago, News Corp. (NWS
) landed a crucial deal with Internet leader Google (GOOG
). News Corp. designated Google as the search engine for MySpace, the social networking leader that News Corp. acquired last year for $580 million. The Google deal guaranteed $900 million in revenue for MySpace over a three-year period, more than enough to recoup News Corp.'s cost of acquiring MySpace, plus a tidy profit.
Now News Corp. is seeking reassurances in the wake of Google's $1.65 billion agreement to acquire Internet video leader YouTube. The YouTube deal poses several potential conflicts (see Businessweek.com, 10/10/06, "Google Competitors Beware"). Today, YouTube doesn't compete directly with MySpace, where members keep home pages loaded with photos, videos, music and messages. But YouTube has a social networking component, because its users can share playlists and other information. That could be the foundation for more YouTube social networking features that would put it into more direct competition with MySpace.
VIDEO IN PROFILES. The main point of potential conflict is the millions of YouTube videos that are embedded on the profiles of MySpace users. Google is expected to integrate advertising into YouTube videos produced by professionals and amateurs alike. As a result, Google could soon have the ability to stream ads to MySpace users who are viewing YouTube videos embedded onto their MySpace pages. The question is whether News Corp. will get a slice of that revenue, and if so, how much.
So far, little or no money has been on the line, but if revenues from online video advertising surge, as both companies predict, how that money is shared will become increasingly important. "The revenue-sharing question for MySpace and YouTube is really tough, but it has to be resolved," says Nick Holland, a senior analyst at Pyramid Research. News Corp. declined comment, and Google didn't respond to several requests for comment.
Google CEO Eric Schmidt and News Corp. CEO Rupert Murdoch have opened a series of meetings between the companies in an effort to clarify their relationship. By holding the meetings at News Corp., "Google has shown how seriously it takes News Corp. as a partner. Both companies want to work out something," said Rick Corteville, executive director of media at Organic, a digital communications agency.
AT THE TABLE. Both companies do want a deal, but they could play hardball if they don't get an agreement on terms they find acceptable. At one extreme, News Corp. could block YouTube videos from MySpace and put more resources into its own MySpace Video, which competes with YouTube. (Roughly one third of the traffic on YouTube comes from MySpace.) It's a threat with some credibility, since MySpace briefly blocked YouTube in the past. News Corp. could also yank Fox clips and other video off of YouTube and make them available exclusively on its own Net properties. Any drastic steps, however, risk alienating MySpace members, who are enthusiastic about YouTube as well.
For its part, Google could play hardball by declining to expand its current advertising agreement with News Corp. That, however, could harm the search giant's financial interests, since it wants to expand its advertising business and MySpace provides an audience of potentially great value (see BusinessWeek.com, 8/9/06, "Fox to Make MySpace More Spacious").
There are few precedents to guide the way, because the medium is so new. "Maybe something new will emerge from this. They could possibly lease ad space from each other," Corteville said.
BEYOND REVENUE SHARING. The most valuable prize for News Corp. may be what it learns about using technology to target ads to consumers. News Corp. executives appreciate the fact that Google has unrivaled technological prowess in the field of advertising. YouTube is a leader, too. "Because of the tagging technology at work on YouTube, there is much more ability for organizing and clustering than what you have on MySpace," said Tom Chavez, CEO of Rapt, which provides pricing and monetization technology for media companies including Yahoo (YHOO
) and MSN (MSFT
News Corp. would doubtless love access to the tagging technology that helps users organize and navigate sites with tags, which are like keywords. In the long run, that knowledge could be more valuable than the revenue-sharing deal that emerges from the current talks.