Chernin's exit from FIM casts doubt on monetizing social search

This morning's announcement of the June exit of Peter Chernin from the Chief Operating Officer's post of News Corp. -- a post that's more influential than most COO positions in the world -- is probably more than what financial journalists are speculating this morning: a way for CEO Rupert Murdoch to pave the way for a line of succession for his immediate family. Chernin's position put him in effective operational control of Fox Interactive Media, with the mandate to work out some kind of workable business model for the operation.

Square one for Chernin came in August 2006, brokering a deal with Google that led to Google paying FIM's MySpace $900 million to be its search provider. But every other component of the business model -- some way to monetize the indisputably high-traffic business of social networking -- never came together. During its last earnings call, Google said it was having trouble monetizing the business of search with social networking, and Google's biggest deal to date in that department was with MySpace. In response, Chernin attempted to reassure analysts last Feburary 4 (our thanks to Seeking Alpha for the transcript) that FIM and Google were still trying to work out a way to make that business profitable.

"First of all, clearly our revenue from Google is guaranteed, so that's not a particular issue for us," Chernin said. "Secondly, the assumptions on which that deal were made always suggested that Google expected the deal to reach break-even towards the latter part of the three-year period and for the deal to function as a loss leader during the early period. So I think their performance is no surprise. That being said, we are regularly working with them to continue to improve their performance. We think they are an important partner to us and we want to see them continue to grow their revenue and that has all sorts of things...you know, it's trying to do a better job monetizing the data, it's...we're constantly looking at the placement of the search box on the page, the size of the search box, where we deliver the ads, how to get higher click-thru rates."

The key word there was "trying," and after two and a half years, it wasn't what analysts wanted to hear...and it was probably not what Murdoch wanted to hear either.

It's not that FIM has been doing all that badly, posting an 87% annual revenue increase to $233 million, and a profit of $47 million that looks better in black than the $11 million number looked in red last year. A big chunk of that revenue did come from Google. But the apparent fact that the deal isn't delivering positive numbers from Google casts doubt on whether the long-term Google deal will continue. Losing Google would almost definitely mean accountants at News Corp. would have to relocate their red pens.