First of two parts.

CHICAGO -- What do you do for an encore after you sold Rupert Murdoch on the idea of buying an exploding online lounge called MySpace?

Fox Interactive Media president Ross Levinsohn knows what his next move is. Social networking, he assures, was just the beginning.

"We are creating new tools and jumping-off places to embrace this community of nearly 100 million MySpace profilers who love talking to each other," he said.

That's an understatement. Fox Interactive Media is in the midst of a massive push to harness the power of MySpace and its other Web-based businesses to redefine online advertising and marketing, e-commerce, digital video-on-demand, blogging, instant messaging, classified advertising and other interactive services in a user-friendly way that is poised to add hundreds of millions of dollars to News Corp.'s revenue base by the end of next year. Leading the charge is Levinsohn, a former football player and journalist who served stints at SportsLine, Alta Vista and HBO before being handpicked early last year by News Corp. chairman and CEO Murdoch to run FIM.

"It's so not about social networking anymore. It's about what is next," Levinsohn said in an interview at the FIM think tank located near the 20th Century Fox studio lot.

What's next for FIM is leveraging MySpace's online community and communication into a peer recommendations framework for leads on everything and anything: the best children's playgrounds in Los Angeles to the best concert seats in Madison Square Garden to the best steakhouse in Dallas. Such peer recommendations provide a gentle seaway into targeted, fine-tuned behavioral marketing for national and local advertisers wanting to reach MySpace's 15- to 34-year-old core user.

News Corp.'s challenge is to utilize that viral marketing and communications to develop a host of next-generation media services in-house so as to keep the lion's share of the revenue they will generate. Most significantly, FIM is developing refined advertising tracking, pricing and sales tools that will cater to every new-media platform and device, and quantify the collective reach of content and services reaching consumers anywhere, anytime. If FIM can remain in control of the advertising and marketing experience, generating 80% of FIM's revenue and 30% of News Corp.'s overall revenue, it won't have to share as much of that money with the likes of Google.

For the past six months, News Corp. and FIM have been locked in talks with Google (the leading contender) as well as Microsoft, Ask.com and Yahoo! about partnering to provide more advanced paid search services. Google's stable of advertising-related support, including its newest online checkout service, could provide MySpace with turnkey support in search, commerce and advertising.

"We have no interest in partnering with Google or anyone else on either advertising in general or e-commerce. Those are things we are going to do ourselves," News Corp. president and chief operating officer Peter Chernin said. "The only thing we are talking about is whether we partner with somebody on search, and mostly on the sponsored links side of search."

"The trade-off is whether we can get such a good deal with someone like Google or Microsoft that we get the majority of the economic benefits," Chernin said. "I don't think we'd have any trouble getting an 85⁄15 (revenue) split. Could we get a 90⁄10 split? If the split is so strong, there is no reason to do it ourselves. We are going through that analysis right now, and we believe we have an incredibly valuable piece of leverage in that we are the single largest unaligned Internet traffic, we are a very valuable piece to such companies. If there is no killer deal, then we do it ourselves."

Successfully harnessing the user experience and social network's unbridled power will partly hinge on how effectively FIM can develop vertical miniportals for topics and interests that cut across MySpace users as well as developing an ecosystem of third-party platforms and devices like the wireless Helio phone and the push-button access it offers to MySpace. Chernin believes that cell phones will be the most critical global distribution platform for News Corp. content.

Sports and games soon will join the music, comedy, film and blog gathering places that are a springboard for less overt, viral advertising. They will be powered by Fox's branded entertainment, sports and news assets also created for the core demographic the company calls "Generation Fox."

"If you start creating social categories, and they are limitless," Levinsohn said. "Then social networking becomes a great resource."

Little wonder, then, why a search and advertising powerhouse like Google wants a piece of the action given that MySpace generates more than 8.5% of all Google's traffic and 5% of all general Internet searches, according to Hitwise. The billion-dollar question nagging at News Corp. executives is how to enter an alliance with the likes of Google and not lose control.

"If we could just get searching within MySpace better, we'd probably add several million dollars to our revenue line," said an executive close to the situation.

Business-to-business partnerships have barely gotten off the ground, ranging from an investment in the Simply Hired classifieds Web site, to the outright acquisition of the sing-along Web site Ksolo.com, to RottonTomatoes.com entertainment interface, to distributing the teen music and fashion magazine Nylon online. FIM still has nearly $1 billion in spending money to buy or invest in businesses that would be strategically important content, advertising or support services.

At present, plans are being formulated to provide MySpace users improved instant message, Voice over Internet Protocol and possibly e-mail through alliances with telephone companies and other service providers, sources said. The popular America's Sports Blog on FoxSports.com has been the impetus for giving MySpace users their own tools to blog with. There also is intensified focus on streaming video in response to the ramping 35,000 user-generated video uploads daily to MySpace.

"We're spending a lot of time on the importance of video, which is a differentiator for us," Levinsohn said. However, some industry analysts said MySpace runs the risk of falling behind YouTube and other popular peer file-sharing and social Web sites already making advanced use of user-generated and commercial video.

The prospects for generating revenue and profits are just as limitless. Murdoch said FIM will post at least $350 million in revenue this year, up from $47 million last year, and at least $500 million in 2007. Some analysts, who expect MySpace revenue to top $1 billion by decade's end, say the site will turn profitable this year with about $13 million, and that could increase to $50 million in profits in 2007.

Even the revenue of those other FIM Web sites such as the video game-centric IGN and sports-themed Scout are growing annually by at least 30% and attract about 29 million unique users. Since acquiring MySpace nine months ago, its user base and revenue have more than tripled, and News Corp. makes a profit on every registered friend.

Rolling out customized versions of MySpace in nearly a dozen countries this year, including Japan, where Softbank will be a partner, could dwarf all of those numbers. Analysts generally are now qualifying their FIM and MySpace financial estimates by saying there could be lots of "hidden value." "As News Corp. further integrates MySpace and secures it s long-term viability, there could be meaningful upside to our forecast and valuation," UBS analyst Aryeh Bourkoff said.

"We already have 4 million in the U.K., the second-largest market, without any marketing. It's just a matter of speed. We can't go fast enough," Levinsohn said.

The serendipity and abstract expressionism of MySpace -- Levinsohn said it reminds him of a Jackson Pollock painting -- so far has been able to translate universally. "In many ways, that is the Internet. You throw things up there and see what works. That is why MySpace, Google and YouTube come from nowhere," Levinsohn said. "That's why a Silicon Valley blogger can have more traffic than Time magazine."

That same quality can make it difficult to win over advertisers, which is why FIM is hard at work developing a new set of cogent tools to track, price and sell ads across all of its and News Corp.'s media platforms and devices. It is the infrastructure designed to increase revenue per page and pay view. Destination pages on movies, books and comedians that are gradually being introduced to MySpace have been readily embraced by such display sponsors as Sierra Mist, Cingular and Aquafina. It is easier to place ads on the MySpace home page and its 20 million views. In June, MySpace was second only to Yahoo! Mail in capturing 17% of online display ad impressions, according to Nielsen//NetRatings AdRelevance.

Some display sponsorship ads are fetching 10 times the advertising rates that FIM anticipated. Some branded advertising area rates are three to five times greater than what was expected, sources said.

MySpace, the second-largest site on the Internet, more than quadrupled its sales team to 55 people this year. It received a $20 million infusion from News Corp. to beef up infrastructure and servers and has doubled its annual operating budget to about $40 million, sources said.

News Corp. executives decline to discuss most FIM or MySpace financial particulars, which are still lumped into the "other" line on the company ledger.

Pali Capital analyst Richard Greenfield estimates that the "other" revenue that includes the company's Web sites like MySpace and FIM will top $1.4 billion in fiscal 2006, up about 25% from last year, and will become News Corp.'s fastest-growing segment in fiscal 2007.

About 80% of MySpace revenue will continue to be generated by advertising, with the remainder coming from subscriptions, fees and transactions. Much of it is driven by MySpace's unique viral word-of-mouth user communications. The most effective evidence was the 1.6 million MySpace users who had embraced the specially created Web site profile for Fox's "X-Men: The Last Stand" before it opened in theaters.

"If you can create just a little bit of structure without interfering with the unique features of MySpace, there are lots of new possibilities. So for the most part we have left it alone and given them bigger canvasses and more tools. Our job is continue to be on the leading edge of how advertisers market and how consumers participate," Levinsohn said.

That is why he has established FIM Labs: a stealth group of smart, talented engineers "who just get at it" and pursue new ideas, create companies and identify those to invest in or acquire. The new group is headed by FIM technology chief Adam Bain. Research includes daily online focus groups with MySpace members who are eager to be part of the creation process.

MySpace accidentally launched an alpha instant messenger this year, which drew 18,000 downloads in an hour before it was shut down and returned to the drawing board. The beta version was released six months later. At the other end of the downloading spectrum, Fox Broadcasting's hit "American Idol" finale prompted 200,000 related downloads in a week, 60% of which came in the three days leading up to the May 24 finale.

Levinsohn said he is committed to the advertising-supported model for online content. "We're trying to build an industry here, and the fastest way to shut the industry down is to charge people for it. You've got to get them to experiment with it. We're in that mode today with video," he said.

It's too soon to know the future of paid content downloads on MySpace, having recently launched its first offering: $1.99 downloads of the Fox series "24," sponsored by Burger King. However, paid search represents a considerable revenue-generating opportunity for MySpace and a search partner.

"I think everything you see people doing today with the video downloads and online today is 100% experiment. I think three to five years from now it will look nothing like what you are seeing today. The next wave will be how everyone explores the ad platforms versus pay-for-downloads. And the consumers will dictate a lot of it," Levinsohn said. "The value that creators of content are sitting on is the future of the Internet. You have wireless, Internet, WiFi, WiMax, VOD platforms, and God knows what's going to come next. You have to feed the beast with content, and you don't necessarily have to own all of it."

For now, the most vexing challenge News Corp. and FIM have struggled with since acquiring MySpace is keeping inappropriate material and users off the younger-skewing Web site. It's an endeavor that so far has cost millions of dollars in effort and staff, which continuously monitors MySpace pages.

"Any place you are aggregating huge audiences where they can interact, you have to be sensitive. Unfortunately, we're the big target now," he said, referring to the significant investment News Corp. has made to keep sexual predators and risque material off MySpace, which adds on average 270,000 registered users every day and had 45.8 million unique visitors in June, according to Nielsen//NetRatings.

"We did not have a line item for safety and security when we bought MySpace. But I get up every morning and I look at my 31⁄2-year-old daughter and I know that I can affect what she is going to see in five years, and so it's really important. It becomes a personal issue for a guy like me," Levinsohn said.

Levinsohn draws on his gridiron experience to keep on his toes and anticipate the next play, to stay a step ahead of the pack and offer users a better experience. He also appreciates how fast and far technology has come to empower consumers. He uses his personal MySpace profile page as a petri dish, where he saves widgets from interesting Web sites, notes different applications and throws out ideas. He is constantly pouring through the Internet for the next big thing.

That kind of intense research and genuine interest helped News Corp. to snatch IGN, MySpace and other Intermix Media properties out from under rival bidder Viacom last year. Levinsohn has been the driver behind News Corp.'s nearly $2 billion investment in social networking, gaming, sports and other interactive media acquisitions. Scout has been a perfectly matched Web site compliment to Fox's regional sports networks. The karaoke-oriented Ksolo.com is a good Web match for "American Idol." IGN, the dominant games download site, is becoming a vital online watering hole for the gaming creative community. News Corp. may raise its profile in that world even more by acquiring a major games developer.

IGN and MySpace "provide us with windows into trends, and we see the data in various categories before anyone else, which gives us a competitive edge," Levinsohn said. "The billion-dollar question is how do we continue to put the consumer in charge without compromising. If we can enable a consumer to be more invested without compromising our initial asset, then we're one of the winners," he said.

So what will FIM and MySpace look like a year from now?

"All our focus is around monetizing what we have. We have to build internal technology better to understand how to better target those opportunities to consumers. We'll have the platform done within the new fiscal year," Levinsohn said, with utter confidence. "Rupert and Peter are fearless. This is a once-in-a-lifetime opportunity. We're getting it done yesterday."

Coming Wednesday: A look at how News Corp. is adapting its traditional businesses to new digital paradigms.