Google’s Loss Is Murdoch’s Gain

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By Saul Hansell

The stock market may be fretting over Google’s disappointing earnings, but somewhere Rupert Murdoch is smiling.

One of the weaknesses that Google’s management highlighted in its conference call was advertising on social networks. The company said its traffic acquisition cost, the money it pays to sites on which it places ads, rose in the fourth quarter because of required minimum payments it must make to certain sites.

“We have found that social networking inventory is not monetizing as well as we would like,” said George Reyes, Google’s chief financial officer, implying that the sites on which the minimum payments are due were social networks. By far, the largest social network on which Google sells ads is MySpace, which is owned by Mr. Murdoch’s News Corporation. In 2006, Google agreed to a three-year deal to sell ads on MySpace, committing to pay a minimum of $900 million.

People involved in that deal said that Google never assumed that it would earn its $900 million back from that deal, but it appears to be losing even more than it had expected.

Sergey Brin, the company’s co-president, was direct about some of the company’s ideas failing, but he said it would keep trying to figure out what to do with the vast number of pages on which it can place ads.

“We have a huge amount of social networking inventory, including the MySpace relationship,” Mr. Brin said. “I don’t think we have the killer best way to monetize social networks yet. We are running a lot of experiments and we have had some significant improvements. But some of the things we were counting on in Q4 didn’t pan out. There were some disappointments there.”

Jonathan Rosenberg, Google’s senior vice president for product management, said the company was looking at different formats and methods of targeting to increase the performance of ads it places on social networking sites. “We need to find ways to target people of particular demographics that are comparable to the people you might find in The New York Times or a particular publication that you may be familiar with,” he said.

I guess I’m being thick, but this article didn’t really explain why Murdoch would be happy about this. Are you saying that Google overpaid? If advertising on the SN sites doesn’t work very well, then ultimately the value of MySpace will suffer. Why would he be happy?

†Posted by blockhead

Google’s loss in social networks is a sign that they are not the place to make money. People do not go to a social network to search for things to buy but to socialize. You don’t go to a bar to buy clothing.

†Posted by Trader

I think the bar analogy is wrong, It’s different online. You can’t go from a bar to a clothing store in one click. I think Google is stepping around Myspace’s inherent issues. A quick visit to any Myspace user’s page shows low-quality flashing ads about “free” ringtones. The Myspace audience is simply too low quality, teens who typically spend little online, when compared to other networking sites like Facebook and Linkedin.

†Posted by Sam J

Its all Aura…unless Eric Schmidt goes…we are seeing the beginning of the downwards of Google.

Eric is taking Google all hardcore way, Android is another failure which shows, when the competition was extended.

WHAT ARE THEY WAITING FOR..they should have by now developed an operating system specifically for the Internet..with Eric..they ain’t going no where.

Sad to a two great YOUNG men burdened by the old mens karma

†Posted by Sunil

Murdoch would be happy because Google pays $900M no matter how much they make on the ads they sell. So Murdoc gets $900M for selling space that’s only making, say $500M, and hence should have sold for something less than that strictly on it’s direct value.

†Posted by Igor

Google lost money by guaranteeing Rupert Murdoch’s News Corp $900 million in ad revenues over a three year period, hence Murdoch’s smiles.

†Posted by K Betts

I don’t see how Murdoch gains from this either. He entered a contract with a minimum and only earned that much, the equivalent of an employee earning no bonuses to his salary. That certainly wouldn’t make me happy. If the social networks turn to be a big bust of low income sites he’s going to lose money eventually.

†Posted by Charles

Yeah, I don’t get it either. Murdoch gets $900 million no matter how well or poorly Google does, right? So how is Google’s poor performance Murdoch’s gain? All it means is that when the deal is up, if Google wants to continue, they will negotiate a much lower rate.

†Posted by kel

Very interesting development! The chinks in Google’s armor are starting to be more visible. People already spend more time on SN sites than just about any other type of site, so it is the place where advertisers have to go*. So Google’s choices are Facebook and MySpace. Facebook wants to do it themselves and MySpace is not paying off. Google, as smart as they are, needs to figure out how to monetize ads in the SN space - which will not be easy.

Google also has other problems - with Microsoft buying Yahoo, the battle of the titans is going to be huge, and we all get a ring side seat to watch.

One final note, Mr. Murdoch will not be smiling for long. Facebook will overtake (if it has not already) MySpace as the most popular SN site. Facebook provides a much better experience to the users so it is not surprising. Pretty soon, MySpace property will be a second tier destination and its ad rates and overall value will reflect that.

You can read more of my insights on social networks at enterprisesocialnetworking.blogspot.com.

(* I know people really do not want to see ads while socializing, but they put up with them to keep the site free to them. The trick for the advertisers to be respectful of people’s privacy and intelligence - though I doubt that will happen.)

†Posted by David Dines

This is my second comment in this forum; my first was not published, although it was on-topic and was not in any way abusive. I’d like to better understand your approach to censoring Comments … . That said, Murdoch cannot be happy about Google’s comments about monetizing Social networks. Whenever the agreement expires (sometime in 2009), its unlikely that Murdoch will get MORE than the current $900 million on renewal (if Google is even interested), given that the payor is not getting ROI to justify the huge cash investment. . MySpace better keep working on helping Google get its value for this investment. Otherwise, they could substantially drive down future investments in MySpace.

†Posted by Bill

If Murdoch is indeed smiling, I would be surprised. Nobody builds a good business by screwing their partners, and surely he knows that a short term gain at the expense of Google will not lead to a continuing relationship. Much better to have your partner make a few bucks and have a continuing relationship whereby you *continue* to make money - and more money - each succeeding year, than in being happy that your partner, the one who sells your advertising - is in the dumper until the end of a contract, at which time the rate will go down, or be eliminated altogether.

†Posted by Rick

Surely Murdoch is happy that Google pays him 900MM no matter how bad actual revenues are till 2009. By then, his rationale probably goes, they will have figured out which ads work. And command more next time around, or go with Yahoo/MS if they offer more, or do it himself…

So Google is basically covering Murdoch’s start up losses with no guaranteed upside. Google needs to make this work within the 3 years of the current deal…

†Posted by J. Lange

All Google needs to do is figure out how to make money selling ads to the teen users of MySpace. And all MySpace needs to do is clean up their interface a bit, so they appeal to a broader audience. Their marketshare is still almost double that of Facebooks, and to assume that kids are just going to switch to Facebook because it has a better interface is to think like an adult too much.

AOL still dominates the IM market, even though AOL is long gone as a competitive browser. Why? Because its what we all started with. It’ll be the same with MySpace, Google will start reaping those rewards in about 5 years. Murdoch as well unfortunately.

†Posted by clare warburton

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