December 16, 2010 11:44 pm

New Google deal underlines MySpace’s decline

Google and MySpace have renewed a landmark 2007 advertising deal that represented the high water mark for the social networking service, but on new terms that reflect how MySpace’s fortunes have declined since then.

The search group originally guaranteed to pay MySpace a minimum of $900m over a three-year period in return for powering its search service and placing search ads in front of its users. The agreement, coming two years after Rupert Murdoch’s News Corp bought MySpace for $580m, appeared to bring early vindication for what had been seen as a high-priced deal.

But as MySpace fell behind Facebook its advertising revenues fell and Google is understood never to have generated enough business to cover the $300m annual payments.

On Thursday, the internet companies announced they had reached new terms, including extending their relationship to include some of Google’s display advertising services.

Terms for the new relationship were not disclosed, and both companies refused to comment.

However, according to one person familiar with the arrangement, Google will no longer pay any guaranteed minimums, with the two sides splitting revenues from any advertising that comes through the search giant.

MySpace’s revenues have fallen sharply. According to research group eMarketer, they will be $347m this year, down from $470m in 2009. After his deal with Google, Mr Murdoch predicted they would quickly rise to $1bn a year.

The new deal will involve the social networking site tapping into Google’s DoubleClick Ad Exchange and its display advertising network, though it will continue to sell display advertising directly. While the original MySpace partnership came at a time when Google was prepared to pay a high price to extend the reach of its search advertising system across the web to keep Microsoft and Yahoo at bay, its latest drive has been to establish a toe-hold in display.

As MySpace’s attractions to advertisers have declined, those of rival Facebook have risen this year as its audience has boomed. eMarketer puts Facebook’s share of US online display advertising at nearly 10 per cent this year. An estimate from ComScore says in volume terms it accounts for one in four online display adverts placed in the US.

Owen Van Natta, then chief executive of MySpace, said a year ago that the company was not interested in competing with Facebook, in effect conceding defeat in the race to become the largest online social network. He said it instead aimed to become an online hub for music and entertainment. “Facebook is not our competition,” he said. “We’re very focused on a different space.”

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