News Corp, Google Deal Deconstructed

The $900 million deal between News Corp. and Google might seem to be all about MySpace, but in reality its all about other Fox Interactive properties, such as IGN. It is also a tactical admission by News Corp., that when it comes to running big ad networks, it doesn’t have the in house expertise, and Google is the current master of the online advertising.

Under the terms of the agreement, Google starts making minimum payments starting first quarter of 2007 through the second quarter of 2010. That works out to about $20 million a month for 45 months. In exchange Google becomes the default search provider, and also the exclusive provider of text-based and keyword ads on all Fox Interactive Media properties with the exception of Fox Sports’ website.

Ross Levinsohn & Co., have in fine stroke goosed up their online revenues quite nicely. FIM sales were estimates at over $300 million in 2006. From a Google’s perspective, they got off cheap. In fact so cheap, that they got the search business for free.

Robert Young, a writer for GigaOM, and an expert in social networks says that “had google just struck a deal for search, my reaction to the deal would have been negative. However, Google was smart and secured the ad serving component as well. By doing so, they essentially got the default search deal for free.”

In a conference call, FIM executives noted that a very large number of people leave MySpace to go to Google. According to data collected by Hitwise, an Internet traffic tracking service, nearly 10.8% of Google’s traffic was coming from for the week ending July 29, 2006. Had Fox gone with Yahoo or Microsoft, it could have been a serious blow to Google.

It also gives them access to inventory to sell more ads, and thus become even a bigger player in the fast-growing online advertising business. But the ad-inventory that can be sold is unlikely to come from MySpace. Rich Greenfield of Pali Capital notes that most of the safer (read advertiser friendly) “Myspace-programmed” sections such as the homepage, main Music page, main Comedy page, etc are off limits for Google. Eric Schmidt, Google CEO during the conference call said that they would not serve ads on all MySpace pages and in fact they will let a lot of ad inventory go unserved.

While reporting The Sly Fox for Business 2.0, many in the online advertising industry had suggested that the company was getting about $1 as its CPM, or cost per 1,000 impressions. Others said it was even lower, much lower.

“It has so much inventory that their salespeople have not been able to fill it up,” Jeff Lanctot, vice president of Avenue A/Razorfish, the online ad-buying arm of aQuantive in an interview with Business 2.0.

“What they will do is to optimize revenue-per-user on an annual basis (vs. CPM). By the end of the term of this deal in 2010, it’s very likely that Google will end up having built the world’s best ad network for social media (the holy grail that everyone is chasing at the moment,” says Robert Young, a writer for GigaOM, and an expert in social networks. “The real story here (in my opinion) is how Google is now going to adjust/modify their ad network to optimize for social networks.”

But in the meantime, where do the ads go? On IGN and other sites of course! FIM’s gaming, movie and college sports sites are ideal for keyword and display advertising. IGN’s pageviews have been growing at a monster pace, up about 300% in page views from the time FIM bought them for a whopping $650 million.
Google seems to have taken a calculated gamble – sell ads, especially on properties where it can make some money, and get the MySpace search business. Ben Schacter, analyst with UBS notes, estimates that at a “likely 85-90% TAC rate, Google must generate between $1.0-1.059b in revenue to cover TAC payments.” Hopefully, that is something Google can do – they are an ad-based search company!