Dissecting the Google, Fox Interactive Rumors

When Google (GOOG) released its Q4 2007 earnings, it suggested that the Fox Interactive Media / MySpace $900M deal wasn’t working out too well for Google. Some have mentioned that this deal would hang like an albatross around Google’s stock for years to come.

News Corp. (NWS) then mentioned - during its own earnings call - that Google was not able to get out of the deal, knew that the deal would only become profitable in the tail end of the deal; basically told tough luck, by News Corp. COO Peter Chernin.

Yesterday Michael Arrington reported, based on the ever-popular and reliable “anonymous sources”, that FIM is doing a rethink on Google and thinking of Microsoft (MSFT), who also powers Facebook’s ads, MySpace’s arch enemy.

I do not doubt Michael Arrington’s sources, the man has been right ahead of the news on random things like Google buying YouTube or eBay (EBAY) acquiring StumbleUpon as well as many things… but as an executive and dealmaker, I find it very odd for FIM to actually consider this. Here’s why:

• This deal does not allow Google to get out. If I were a FIM dealmaker, I would not even bring that up as a possibility. Why? It gives Google a false sense of hope and distracts any potential tweaks to the deal.
• MSFT runs ads on Facebook, no one, especially a shrewd CEO like Rupert Murdoch, would want one company (especially MSFT) to have all that data on both MySpace and Facebook, the world’s #1 and #2 social networks. Google created a $200B company (now sitting at $165B) based on access to all of that data. Yes, a database of intentions is worth more than a database of connections, but the point is, data = value and MySpace would be foolish to let this happen.
• MSFT can outspend Google, yes, but I doubt they really want MySpace. So I think an opportunistic executive from MSFT contacted MySpace and FIM to inquire about the opportunity to knock out Google… but ultimately, I think News Corp. balked for these reasons.

Why? Much the same reason that Google knocked out Yahoo! (YHOO)/Overture in 2006 for the MySpace inventory, there is nothing stopping MySpace to collect every single penny of that $900M and then strike a bigger deal with MSFT… MSFT’s thirst and hunger for online advertising and search exposure is not going away… so there is no big rush.

Furthermore, while Murdoch does not come out and say it, he welcomes weakening Google.

Tech Crunch says Sergey Brin’s knock at MySpace’s inventory “angered News Corp./FIM execs” so this is why they are re-thinking the Google deal. BS. If that is the case, then they will definitely ensure that Google stays in this deal.

That’s right: Unlike Sumner Redstone who sued Google and attacked them head-on, Murdoch likes to keep his enemies close to him… and making sure that Google pays him $900M for 2 years ensures that Google cannot necessarily invest in other areas, or other sites, like Facebook, his MySpace unit’s main enemy.

Ultimately… MySpace is better off keeping the status quo, all the while investing in its own ad network and then getting MSFT to replace Google and coexist along its own ad network in a few years.

Of course, this all begs the questions: why would anyone leak this to Michael Arrington and Tech Crunch? Well, Microsoft is targeting Yahoo! in an unsolicited $44.6B takeover bid… one of the white knight candidates has been Rupert Murdoch’s FIM. I think this is a case of MSFT gladly reminding Silicon Valley (Google and Yahoo!) that it has the firepower and

• The ability to knock off Google in any deal if it wants to
• The ability to block any option YHOO thinks it has to fend off Redmond

If you thoughts soap operas were more interesting, think again.

Disclaimer: News Corp. was my former employer from Sept. to Dec. 2005 and MySpace TV is one of WatchMojo.com’s distribution partners.