Portrait of a Dot-Com Buyout

Sleeping with the enemy isn't just good business -- it also makes for a heck of a photo op. Valleywag is reporting that MySpace parent News Corp. (NYSE: NWS  ) has inked a preliminary deal to acquire photo-sharing site Photobucket. TechCrunch followed up on the story, noting that the cash deal will be for $250 million, with as much as $50 million in earn outs.

The price certainly seems high for a site that generated just $6.3 million in revenue last year. However, just as with Google's (Nasdaq: GOOG  ) lofty price-to-sales purchase of YouTube last year, the deal is all about hooking an online phenom before it grows into a rival.

Yes, Photobucket is booming; it has 41 million users, hosting 2.8 billion images in the form of digital stills, remixed slideshows, and short videos. The site is free, though users can pay for a premium offering for $25 a year, which includes more storage capacity, longer videos, and larger image uploads.

The site is growing quickly, often at the expense of older sites like CNET's (Nasdaq: CNET  ) Webshots and Kodak's (NYSE: EK  ) EasyShare Gallery (formerly Ofoto.com). Photobucket was an early adopter of the embedding movement, encouraging users to deep-link to Photobucket uploads on their blogs, websites, and social-networking profile pages. It's the same strategy that YouTube ultimately used to get ahead of its more restrictive peers -- and it's clearly worked for both companies. YouTube is the top video-sharing site, while Photobucket has now lapped its rivals to become the most popular photo-sharing site according to ComScore.

The odd couple
The union hooks up two companies that were at each other's throats last month. That was when MySpace began blocking the embedding of Photobucket videos and multimedia slideshows on its site.

The MySpace camp argued that its member agreements prohibit third party ads on its profile pages. Blocking the Photobucket moving pictures -- but not the stand-alone snapshots -- was its way of making sure that it was the one selling all of the ads on its site.

It's a gray area. MySpace is populated with free third-party widget and template providers. There is also no way of knowing whether a popular user's favorite things aren't actually paid product-placement endorsements. In short, it's a tough policy to police.

However, the spat was smoothed over a few days later. As a prelude to this week's kiss, Photobucket CEO Alex Welch noted in his blog that both companies hashed out their differences.

"Following discussions with MySpace, we're pleased to announce that all Photobucket videos and remixes are enabled once more on MySpace with immediate effect," Welch wrote two weeks ago.

"Moving forward, we've established open lines of communication and procedures with MySpace to prevent a sudden block of Photobucket content in the future. We want our users to be able to share their content and understand it must be within the framework of MySpace's Terms of Service for it to appear on the site."

Obviously the negotiations weren't entirely platonic. We live in acquisitive times, and it pays to be frisky.

The challenge of monetization
"My philosophy is to build a stand-alone business," Welch told CNET two months ago. However, "if you are always looking at the best interest of the company, you're going to have strategic options."

That was around the time that the company hired Lehman Brothers (NYSE: LEH  ) to smoke out some of those strategic options.

The asking price was probably too rich for the companies that could have used Photobucket the most, like Kodak and CNET. Google could have probably been a player if not for the $3.1 billion DoubleClick deal that it's trying to complete. Photobucket would have looked nice next to the stylized prowess of Yahoo!'s (Nasdaq: YHOO  ) Flickr, but it could have created a corporate culture clash between the two fast-growing photo-sharing sites.

So all roadblocks led to MySpace. The challenge for News Corp. will be the ability to cash in on the more than 17 million unique visitors to the site, and the countless more that are exposed to Photobucket media embedded elsewhere.

The simple solution would be to attach ads, either as stand-alone graphics or branded watermarks, but that's not an easy spigot to twist. Users would be likely to revolt, jumping ship to a less commercialized clone. The only way to smooth that over would be to follow YouTube's lead in going with a revenue sharing agreement, rewarding the content creators with financial incentives to expand their reach.

It's not the perfect solution, I know. But in the neverending quest for "monetization without alienation" -- yep, I may have just coined a new mantra -- you sometimes have to settle for what the market will give you.

Yahoo! is a Motley Fool Stock Advisor newsletter selection. CNET is a Rule Breakers recommendation. If a Photobucket image is worth a thousand words, then a click on either newsletter link will be good for a 30-day free trial subscription.

Longtime Fool contributor Rick Munarriz went to school when social networking meant shaking a lot of hands. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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