Photobucket goes to Myspace

Like a squabbling couple finally realizing they can't live without eachother — or a parasite fusing with its host — Photobucket has concluded terms of a sale to Myspace, News Corporation's social network. The photo sharing service, which had a quarrelsome but symbiotic relationship with Myspace, may announce the deal as early as this morning. After final negotiations at the end of last week, Photobucket has called an all-hands staff meeting for 10am PST this morning. We don't have the financial details of the deal, but Photobucket, and its bankers Lehman Brothers, were looking for at least $300m.

Photobucket, founded in 2003 by Alex Welch and Darren Crystal, took off in 2005 as users on social network sites such as Myspace began to use the service to store and display pictures of themselves and their friends.

That's been both a blessing and a curse. The popularity of Photobucket's free service among users of the News Corporation social network took the service to 17m unique visitors per month, according to Comscore, making it the web's most popular photo site, ahead of rivals such as Yahoo's Flickr.

But the venture's rising bandwidth costs have eaten up most of its revenue growth, according to people close to the transaction. And management's claims — that users' loyalty was to the site that hosted their photos, not the site on which they were displayed — were always a stretch.

A reminder of the balance of power between Myspace and Photobucket came last month when the social network's users found they could no longer display videos hosted on Photobucket. Myspace claimed the Photobucket was partially blocked for technical reasons alone; but the move served as a warning to Photobucket not to be too confident of an independent future.

Lehman Brothers — seeking a valuation over $300m for a venture that only made $6.3m in revenues last year — talked up the likelihood of a bidding war for Photobucket. But Rupert Murdoch's News Corporation, the parent of Myspace, was always the most likely buyer. And the jostling between the two companies — Myspace's bullying, and Photobucket's public protest — were always part of the negotiations.

What does the deal mean for other startups which have piggybacked on Myspace? On the one hand, it's heartening. For a venture so dependent upon it, Myspace paid a hefty multiple. But Photobucket is the largest of the "widget" makers, ventures which depend on a share of the real estate of larger sites, rather than drawing visitors to their own properties . If even it could not develop an independent advertising business, the prospects of other widget makers are dim.

Photobucket's deal should be cause for celebration for Alex Welch and his partners, and for Trinity Ventures, which invested $10.5m in the company last year. But, for other widget makers, it marks something of a ceiling on their likely exit.

Update: Michael Arrington, quoting "senior" people at Photobucket, says the purchase price was about $250m.

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