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MySpace to Acquire Photobucket for $250 Million

MySpace, part of Rupert Murdoch's News Corp., has reached a preliminary deal to acquire Photobucket, the world's top photo-sharing site, for around $250 million in cash, a source familiar with the deal said on Monday.

Photobucket functions like a kind of Swiss bank for depositing and transmitting photos, helping Web users post their photos on other social networking sites, instead of trying to keep the users locked up on its own site.

Besides MySpace, Photobucket is popular on sites such as Facebook, Bebo, Friendster, eBay, Craigslist, Blogger and Xanga.

While hardly known outside the youthful world of social network sites, Photobucket has become wildly popular with users for providing free, online storage tools for multimedia self-expression, from photos to videos to digital slideshows. Site builders turn to it for images to decorate their sites.

The four-year-old startup, based in Palo Alto, California, has signed up 41 million registered users, up from 32 million at the end of last year and 2 million in 2004. It now hosts nearly 2.8 billion images on the site.

Spokesmen for Photobucket and MySpace were not available to comment on the deal.

The agreement with MySpace, the world's top online meeting place and part of NewsCorp.'s Fox Interactive online business, is tentative and could still fall apart, the source cautioned.

Dot-Com Downturn

The site was founded in the suburbs of Denver by two young telecoms engineers at Level 3 Communications, Alex Welch and Darren Crystal, in the wake of the dot-com downturn. The two came up with the idea of providing a simple, less commercial alternative to existing photo sharing sites.

Welch, 30, the chief executive, said in a recent interview he ran the site on credit cards for the first six months until its popularity forced him to borrow money from his parents. He made do without venture capital until it was a proven success.

Eventually, Photobucket raised $2.5 million in initial financing from Trinity Ventures and another $10.5 million from a group of investors led by Trinity a year ago. It eventually moved to Silicon Valley and now counts more than 65 employees.

Photobucket holds a nearly 40% share of the U.S. online photo market, nearly four times more than second-ranked Yahoo, according to audience measurement firm Hitwise. It was the 22nd most visited U.S. site overall last week.

It recently struck a deal with top design software maker Adobe Systems Inc. to supply its users with free tools to edit, or "remix," images on its site. Its growth is fuelled by users who link to its photos from 300,000 Internet sites.

But Photobucket's growth has been largely symbiotic with that of MySpace, functioning as a kind of outsourced provider of photo services to MySpace users.

Nearly 60% of Photobucket site traffic comes from users leaving MySpace properties, Hitwise click data shows. Photobucket is the third most popular destination for MySpace users after Google and Yahoo, according to Hitwise statistics.

That relationship has proved rocky: Last month, MySpace blocked traffic from its site to Photobucket after a dispute over technical issues led MySpace to accuse Photobucket of violating the social network site's service terms.

On April 10, Photobucket posted a statement on its blog that attacked MySpace for limiting the freedom of its users to connect to outside sites such as Photobucket.

"By severely restricting this freedom, MySpace is showing that it considers you as a commodity which it can treat as it sees fit," the Photobucket statement said.

Two weeks later, on April 23, Welch said his company had talked to MySpace and resolved the dispute.

"We've established open lines of communication and procedures with MySpace to prevent a sudden block of Photobucket content in the future," he wrote at the time. Welch was not available to comment on the sudden turnaround.

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