Merrill Lynch analyst Justin Post estimates that the alliance will generate at least [added later: in net] $225 million in revenue over three years for Google, or an average of $75M per year.
HipMojo’s own analysis a few months ago pegged the potential value of the deal, looking only at search revenue and assuming many things and a 50-50% revenue share, at $63M per year. Tack on a modest growth rate, and we’re not far off from Merrill Lynch’s numbers.
The bottom line is that Google is paying $900 million over three years to recoup $225 million, so, to defend itself against its competitors, it’s considering losing $675 million. That might seem foolish, but Google not only defended against FIM from becoming a competitor as well.
I misread and misunderstood Merrill Lynch’s report, which claims Google will make a net $225 million, in other words, Merrill’s analysts estimate Google’s revenue at $900 million + $225 million = $1.125 billion.
All right, maybe someone can pass me the koolaid, but there is no way Google can generate over $1 billion in revenue from Myspace. Yes, Google did get 10% of its traffic from MySpace, but Google generates (at least it did when I read the SEC prospectus a couple of years ago) the bulk - we’re talking percentages in the high 90s folks - of its revenues off and on www.google.com and not through its network. In search, not all traffic is created equally.
The key metric is that MySpace (and all social network, I’m not picking on FIM’s MySpace alone here) users have a low propensity to search. People go there for anything but search.
But, of course, is Google can generate +$1 billion off that deal - great!
Bottom line: This is not a revenue deal for Google, it’s a loss leader and it is a smart move. It ensures that MSN and Yahoo do not increase market share; it also dangles a large enough carrot in front of News Corp. to ensure it does not enter search and compete with Google, who has done a masterful job of positioning itself as a technology company and not a media company. If it were a media company, surely Viacom and News Corp. would think twice about sleeping with the enemy. Yahoo, who boasts about being a media company, naturally will have some naysayers in old media companies anytime negotiations come up.
All to say, I cannot understand how Google can make money on this deal - given today’s traffic numbers and factors - when you know that Google had to give up a lot of revenue share. I would estimate that News Corp. probably played up Yahoo and MSFT’s interest to get anywhere from 70-100% revenue share.
Score one for Google in terms of positioning here. Who knows, maybe all of those IR lessons are starting to teach the folks at Mountain View a thing or two.
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