Google Flashes Its Cash

Google (NASDAQ:GOOG) scored a victory in the search engine wars as the winning bidder to provide search for News Corp.'s (NYSE:NWS) MySpace. But one might wonder how sweet a victory it might be over the long term, considering the high price Google paid for the privilege of catering to the MySpace crowd.

The search giant said it will pay $900 million to News Corp. to provide search in the MySpace community during the three-year period specified in the agreement. Given all of the attention the social network has been getting -- and its formidable draw of youthful, engaged, content-generating users -- it makes sense that all of the search giants would be wild about the idea of getting a piece of the action.

There's no doubt it's a bummer for Yahoo! (NASDAQ:YHOO), which had been providing search queries within MySpace and now loses that advantage, as well as for Microsoft's (NASDAQ:MSFT) MSN, which is just as interested in the search market. Of course, Web monitoring researchers said that a good percentage of MySpace users were already going to Google for their search needs, which is understandable since, to many, Google is the very definition of "search." That certainly must sting Yahoo!, especially with recent word that MySpace had surpassed some Yahoo! features in terms of Web traffic. On the other hand, Google still felt the need to be embedded within MySpace, so there's obviously some competitive fear there.

The $900 million price tag made me jump -- although Google investors will be glad to know that the payments do include the caveat that News Corp. has to hit certain traffic parameters. Plus, there is somewhat of an ironic twist here. News Corp. bought MySpace and some other Intermix sites, lock, stock, and barrel, for a mere $580 million or so last year.

It's also clear that Google's paying out the nose to shore up its search leadership and build the highest-profile, most lucrative search deals. Case in point: the $1 billion it shelled out for its 5% stake in Time Warner's (NYSE:TWX) AOL. It's not hard to see the parallel here, and indeed, when I covered Google's earnings, I couldn't help wondering whether Google's gone amok with the cash it's doling out to keep its leadership position -- and its torrid growth -- where the moat is flimsy at best.

Although I can see the importance of a partner like MySpace, which has a large community populated with a highly coveted market demographic, I still have to wonder whether MySpace can keep it up. After all, social networking is a historically fickle Internet pastime. And some of News Corp.'s initiatives on the business end could ultimately alienate some of its users -- MySpace is, after all, already being infiltrated by an influx of marketers. MySpace could end up shooting itself in the foot if its youthful users begin to get advertising burnout and decide to defect to less commercially oriented social networks.

The deal certainly gives News Corp. something to crow about -- there's no doubt about that. When it comes to Google, it's logical to want the search real estate. But given the high price tag on the deal, will it make sense for Google in the long term? That's the question, and the answer is yet to come.

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Alyce Lomax does not own shares of any of the companies mentioned.