News Corp says MySpace risks $900m Google deal

MySpace, once the centerpiece of Rupert Murdoch's digital strategy, has fallen "significantly" short of expectations and is jeopardising a critical $900m internet search agreement with Google (NASDAQ: GOOG - news) .

Weaker traffic means the News Corp division is now expected to receive about $100m less from a deal that had underpinned investors' confidence in the MySpace acquisition, executives revealed.

"We're still losing traffic," said Chase Carey, chief operating officer of News Corp. "It's a business in transition."

The surprise disclosure, as News Corp announced an 11 per cent rise in group net profit and raised its outlook, is the latest disappointment at MySpace, which made social networks a household phenomenon.

Google agreed in 2006 to pay News Corp $900m for the exclusive right to provide search advertising to the once-thriving site over three years if MySpace could guarantee a minimum volume of traffic.

The agreement essentially paid for the estimated $580m purchase price of MySpace, which now trails rival Facebook.

Mr Murdoch, who in May vowed to start charging for access to at least one of its online news properties sites within 12 months, also cautioned that those plans may be delayed. "I wouldn't promise that we are going to meet that date," he said.

The disclosures masked an otherwise strong outlook for its fiscal year. News Corp, which said three months ago that it expected high single-digit percentage growth in operating profit, now forecast it could go as high as low double-digits in the latest sign of returning confidence among media executives.

Profits staged a double-digit rebound in the three months to September 30, with 85 per cent of operating income now coming from cable channels including Fox News and its Hollywood studio, which will launch James Cameron's 3-D film Avatar next month.

Mr Murdoch said that significant cost-cutting in the past year had offset revenue declines in its television stations and newspapers, and even these divisions "are having a great November".

First-quarter net income rose 11 per cent to $571m or 22 cents per share, beating expectations of 18 cents.

Group revenues fell 4 per cent, dragged down by a $300m decline in its newspaper portfolio, which stretches from the Sun in London to The Wall Street Journal in New York. Operating income from newspapers and information services fell from $134m to just $25m, or 2.4 per cent of total profits.

The cable networks division secured its place as News Corp's biggest profit engine, raising operating income by 41 per cent to $495m, owing largely to Fox News.

Fox film studio profits rose 56 per cent from the box office success of Ice Age: Dawn of the Dinosaurs and DVD sales of X-Men Origins: Wolverine.

News Corp's TV station profits halved, but Mr Murdoch said they had seen a marked improvement and were now producing the "best results we've seen in seven quarters".

Mr Murdoch again highlighted "the security of a strong balance sheet" as News Corp ended the quarter with $7.8bn of cash and cash equivalents.