Google and Fox Interactive Ink $900 Million Multi-Year Deal

Google and Fox Interactive signed a three-year and nine-month agreement worth $900 million, assuming certain traffic levels are achieved. As part of the deal, Google will become the exclusive search and text-based ad partner for Fox Interactive properties including MySpace. Google will power search across the properties. A search tool bar, currently in development at Fox Interactive, will be added to MySpace pages and will include Google search.

Google is the No. 1 exit point for MySpace users, therefore an integrated search experience is an important unifying feature. In future iterations of Google's ad engine, advertisers will be able to target broadly (like search today) or target MySpace specifically through a variety of options. Small and medium-sized businesses will have a choice on how they target. Demographic targeting is a likely scenario, but executives would not comment specifically on this issue. Given the fragmented audience, Google's mobile targeting initiatives and other monetization projects, a targeting option that includes demographics is an extremely likely if not foregone conclusion. Although it was not discussed and is not part of this deal, it is worth considering demographic targeting in the context of Fox's broadcast and studio assets. A demographic ad engine that works both online and off would be highly valuable. Google already offers day-part ad targeting.

Fox Interactive was not shy in saying that it was testing other providers, meaning Yahoo! and MSN. Google and Fox arrived at the deal after testing conversion rates from MySpace and backing out what was termed a "conservative revenue per search figure." Executives from Fox and Google believe that they will exceed the user metrics given the heavy cross usage between the two groups of sites. Google has good experience regarding user search lift resulting from its search application on AOL. Google was monetizing searches much better than other bidders in the test. According to investment analysts and insiders, Google's relevancy-based ad engine is roughly twice as productive from a revenue standpoint as its nearest competitor, YSM. MSN is new to the ad services market and, assuming it was actually in the running, this says a lot about how far it has come.

Fox will continue to sell graphical ads through its own sales force. As part of this deal, however, Google has the first right of refusal for all remnant ad inventory. This inventory is currently serviced by 17 providers. Google has a stated goal to grow its graphical advertisements, but it's just as likely text ads are placed in these positions. Video ads are not part of the deal, but conversations around this and other related topics are expected over the course of the agreement. Content sharing and other programming initiatives are also not part of the agreement.

MySpace users are predominantly U.S.-based, to the tune of 90 percent. Ten percent of users are from overseas. Overall, MySpace is adding 250,000 users per day. Recently, MySpace launched in the U.K. and Australia. The service is expected to launch in 12 countries in the next year and a half. It is widely expected that MySpace will pass 100 million profiles this month. The deal covers all geographies with the exception of two. Fox executives declined to say which two markets are not covered due to existing agreements.

According to Fox, this deal represents a 70 percent premium over the MySpace purchase price and pays for about two-thirds of Fox Interactive initiatives. "All the money from the deal is net revenue." According to Peter Chernin, the company's president, "We're playing with the house chips. Whoever said that we couldn't monetize this, they've probably changed their mind."

This is certainly a big deal stemming from a ton of usage at MySpace. Apparently, the deal came together over a five-day period, consisting of nearly nonstop 24-hour negotiations. Hollywood is prone to hyperbole, but something certainly pushed this deal over the edge. Eric Schmidt suggested it was a Fox Interactive deadline. There are so many media formats and outlets in play these days, however, that it's more likely this is one of Google's bets on the interactive convergence between broadcasting, studio entertainment and interactive content. MySpace usage is a convenient and — assuming Google's models are correct — profitable door to a multi-platform advertising business with Fox as its first big partner. Four years is a long time for Google to push its stated goal of extending its ad network to traditional media.