Bronte Media

Is MySpace laying off one-third of its staff due to the declining nature of the business? To some extent, but to a larger one this move is due to one thing and one thing only: The Google ad-repping contract is up, the ‘Plex realized they have over-paid for it and there is no one dumb enough (maybe Microsoft) to renew it at anywhere near the same value.

Google agreed to give MySpace $900m over three years and that deal will run it’s course in July of next year. When it is renewed, Techcrunch has speculated that the new value maybe $75m/year (vs $300m/year now).

Long time readers of this blog know that one area that has perplexed me and shown ‘bubble’ signs is the ad-repping deals for sites like MySpace, Facebook and Digg. I called them Madonna deals in 2007, named after the deal Madonna signed with LiveNation where the latter chased PR with financially destructive results.

Now, let’s look around for other Madonna deals in the online advertising space. Where might they be? Oh, there you are Facebook. Microsoft signed an advertising agreement to rep US inventory in 2006 with Facebook and expanded that agreement when it invested in the company in 2007. The advertising deal runs through to 2011.

What does that mean? Well Facebook has grown so astoundingly that Microsoft’s ad deal may actually make sense in a world of crashing CPMs. But likely it does not and when it comes time to re-negotiate next year it will be temporary headache on Facebook’s journey to stardom. Make no mistake though, they’ll miss the $50-100m yearly ad revenue guarantee post-2011.

Facebook has two years to discard the dream of brand advertising and instead try to mint money with automated bottom-feeding affiliate ads, enabling payments for games and applications and more promisingly (IMHO) plugging its data into external sites to drive merchandising algorithms.