Last week's news that Google was parting with a whopping $900 million (£472 million) in a three-year deal with News Corporation's Fox International Media - its most notable site being MySpace - finally put paid to the idea that social networking sites can't make money.
While some analysts' eyes watered when Rupert Murdoch paid $580 million in July 2005 for the user-generated-content site, launched only three years ago by Chris DeWolfe and Tom Anderson, the media baron has had the last laugh by more than making his money back in one deal.
While this arrangement covers other sites in the Fox stable such as the men's lifestyle site askmen.com and the gaming sites Gamespy.com and Gamespyarcade.com (although it doesn't include FoxSports.com), it is the community site MySpace that is the prize Google was after. For, despite its relatively short life, MySpace attracts more than 250,000 new users each day and last week announced the signing of its one millionth member. The site that integrates web profiles, blogs, messaging, music streaming, videos and photo galleries is now the most popular site on the internet.
Under the terms of the agreement, Google guarantees the $900 million minimum revenue share payments, assuming Fox meets certain web traffic targets between 2007 and 2010. Google will provide text-based ads and keyword targeted ads and have the first right of refusal on display advertising sold through third parties on Fox Media's network.
So is this a good deal for both parties? From Fox's point of view, it has made its money back from the MySpace purchase and now has Google to provide some supporting technology.
As for Google, most agree it will still do well from the deal. Andrew Walmsley, the i-level founder, says: "At one stroke, Google has gained huge distribution and it's a kick in the teeth for Yahoo! and MSN, which must have wanted it badly."
Keeping out the competition is crucial, especially since Microsoft entered the search market. Rob Horler, the managing director of the Aegis agency Diffiniti, says: "I doubt that Google has paid over the odds from its point of view. What Microsoft has to do is build volume and critical mass and it needs distribution. By signing this deal, Google has taken MySpace out of the equation and it has given Yahoo! (which previously had the business) a bloody nose at the same time."
Google has deep pockets to ensure it can put in place as many commercially favourable deals as possible to maximise its distribution. Martin Kelly, the media director at Agency Republic, says: "I'm gob-smacked at the money Google guaranteed Fox, but it is quite adept at this model - it'll have an average revenue/user figure for each partner. I think it's been quite generous in terms of the offer to MySpace because it's such a huge partner and this segment of customer is very hard to find elsewhere."
The social networking phenomenon is something of a conundrum for advertisers. While these sites offer huge audiences of young people, monetising them has so far been harder to achieve. But, increasingly, brands know online is the way to target 16- to 24-year-olds. They spend 21 minutes a week more time online than the general population (and watch seven hours less TV), according to Ofcom's Annual Communications Report. Seventy per cent of this age group have used social networking sites and more than half of them use them weekly.
Google is fiercely ambitious and this tie-up with News Corp provides it with further opportunities to develop. Tim Armstrong, the vice-president of advertising at Google, says of the deal: "As both companies expand and grow, it's in the deal for us to provide more services. If you look at the overall News Corp portfolio, the opportunity for us is to add another layer of advertising relationships they may not have."
From its humble community group-based origins, social networking is now the pie the media companies want a slice of. Viacom is reportedly considering a bid for Bebo after it lost out to News Corp in the MySpace sale. Although Bebo is smaller than MySpace, it would still give Viacom a further foothold in this youth market and it is rumoured to be willing to part with $1 billion to get it.
The greatest risk in all this is the audience itself: it is a notoriously fickle market and who can judge how long MySpace will stay cool? So while Google agreed to part with these vast sums, the onus is on News Corp to deliver the audience.
WHAT IT MEANS FOR ...
- Probably relatively little. "As long as Google delivers a market-leading, innovative search offering and makes MySpace more enjoyable, then they won't see it as a problem, they will see it as a positive," Horler says.
- However, this is the start of commercialisation, albeit of a not particularly intrusive nature, so it will be interesting to see how it's taken by users, especially as this audience can be quite advertising sensitive.
- "Users are tolerant and it's about the old skills the publisher has of managing the advertising/editorial balance. They don't want to kill the goose that laid the golden egg," Walmsley says.
- For those that advertise on Google, it is good news as they will now have the ability to reach people on MySpace.
- There is a worry in some quarters that this makes Google too powerful and advertisers and agencies are now too reliant on it. Some might have preferred to see Yahoo! or MSN get the deal so the volume of search was more evenly distributed.
- The problem for advertisers on these sites is the risk of their ads appearing near dubious content. But with search, the questionable nature of the content doesn't really apply - while a display ad could appear next to porn, for search ads they'll only get displayed next to relevant searches.
- The opportunities for brand activity with search are limited. "You will see a spike in search volumes on Google on certain types of products - there'll be more traffic on ringtones, mobile phones and other youth areas," Kelly says.