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Tuesday, August 08, 2006

The Google Train Rolls On

From Information Arbitrage

As I'm sure you've seen, Google just announced a blockbuster deal with News Corp. to be the exclusive provider of search and text-based advertising for MySpace and other Fox Interactive Media properties for the low, low price of $900 million. As reported in the Wall Street Journal Online:
The multi-year agreement calls for Google to power the search functions on the popular social-networking site and other Fox Interactive Media properties, such as videogame site Google will also be the exclusive provider of text-based ads and keyword ads through its AdSense program.

In exchange, Google has guaranteed News Corp. at least $900 million in revenue share payments. The payments will begin in the first quarter of 2007 and continue until the second quarter of 2010.
"Our partnership with Google underscores News Corp.'s continued evolution to become a powerful force in the digital media marketplace,'' said Peter Chernin, chief operating officer of News Corp., which acquired MySpace in July 2005.

Is it just me or does it seem that Google is mounting a major offensive to knock Yahoo! (forget about AOL) out of the box? While Yahoo! spent big dollars to pursue the joint paths of content creation and content distribution, with an eye towards creating a competitive edge, Google has remained true to its distribution roots and monetized the hell out of it. And it is this booty that is fueling the deals for deepening its relationships with content providers (without becoming one itself) while furthing its massive investment in leading-edge data processing infrastructure. Is there any question as to who's doing better at the moment?

This kind of reminds me of the corporate finance arguments over conglomeration versus specialization, with the conglomeration logic being "we diversify risk by investing across an array of assets" while the specialization rationale purports that "we do better by being the best at what we do, and it is impossible to be the best at everything." As a student of finance in theory and practice for over 20 years, my strong belief is that the speciality model wins by a wide margin over time, and this happens to be the approach Google has been pursuing with laser-like focus and efficiency. Why create media when others are spending billions to do it themselves, but who lack the distribution power and aggregation platform of a top search company like Google?

As Peter Chernin himself said, News Corp. wants to be "a powerful force in digital media." Great. How can they best monetize that asset? By letting someone like Google share their billions of eyeballs with News Corp. and to split the advertising bounty. As an investor, would you rather have Google managing your search and distribution assets and News Corp. managing your digital media assets or to have Yahoo! managing both? This is not a knock on Yahoo! or Terry Semel, it just seems to me that there is more content out there than anyone knows what to do with, and that time and money is better spent making better, more accurate (read: powerful, domain-specific, vertical) search algorithms and advertising models than trying to create bespoke content. A key factor in success in business as in life is to know what you are good at and to fully leverage these assets; otherwise, underperformance and disappointment is simply a certainty.

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