Analyst: Google, MySpace Make a Bad Fit

Google doesn’t care about social networking. But perhaps it should, since social-networking platforms are gradually making search less relevant.

Those are just two of the more pointed conclusions found in a report issued today by Pali Research analyst Richard Greenfield, who examined MySpace’s business and its long-term ad relationship with Google. In the report, Greenfield reiterated a contention he made last July that the underperformance of search ads in MySpace is not simply a product of the non-responsive nature of these sites’ users. Rather, according to Greenfield, Google’s algorithm isn’t well-suited to social-networking sites -- and that’s something Google isn’t necessarily concerned with.

“Nine months have gone by since our note, with MySpace now having just over a year left on its search deal with Google...and Google has done nothing to improve its social search algorithms,” wrote Greenfield. “Increasingly it appears as though Google simply does not care about social search.”

The reason the company doesn’t care, said Greenfield, is that the basic functionality of social platforms like MySpace, Facebook and Twitter is "diminishing the importance of search.” He points to users’ growing inclination to search for specific information by tapping into friends’ and colleague's knowledge through platforms like Twitter’s own search product, as well Facebook’s status update tool.

As for MySpace, Greenfield predicts major layoffs and possibly a new leader sometime this year. He believes that while the search ad deal with Google now accounts for roughly 35 percent of MySpace’s annual revenue ($300 million per year) -- since Google is perceived to have seriously overpaid -- any new pact signed in 2010 will result in at least a 50 percent drop in fees.

As for Fox Interactive Media (FIM), which encompasses MySpace, IGN, FoxSports.com and other properties, Greenfield predicts major layoffs and possibly a new leader being installed sometime this year. He believes that while the search ad deal with Google now accounts for roughly 35 percent of FIM’s annual revenue ($300 million per year), and since Google is perceived to have seriously overpaid, any new search deal signed in 2010 will result in at least a 50 percent drop in fees.

To boost revenue, Greenfield recommends that MySpace continue to expand its portal-like ad strategy, which has proven successful in attracting major advertisers to its home page and music channels.

However, FIM’s bigger problem is that while revenue is dipping slightly due to the current downturn, profitability has suffered to a greater degree because of expenses. “We believe FIM has little choice but to start reducing headcount more significantly,” Greenfield wrote. He also expects that News Corp. will move to better closely align its other digital properties, like IGN, possible under a the leadership of a single executive. “A new digital 'guru' would not be a surprise,” he said.
-By Mike Shields
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