As speculation and chatter increases, the question of whether Google ends up buying Facebook is turning out to be one of the big questions of 2007. My bet is that there is already an offer on the table, and that Facebook is seriously considering it. I’m also willing to bet that Facebook will file an S-1, even if they want to get acquired, and going public/IPO is not their primary intention… an often-used tactic to increase price/valuation at the 11th hour of negotiations (assuming, of course, their financials are good and their bankers are optimistic about the market).

But if Google is going to go for it, the main issue they need to analyze carefully is not price or valuation (given their purchases of YouTube and Doubleclick, we all know Google is willing to pay whatever it takes to do a deal). Instead, they will need to resolve the strategic conflict that an acquisition of Facebook will pose on their $900 million agreement with Rupert Murdoch’s MySpace. Which, by the way, has yet to be formally executed, as I understand.

Now let’s remember, the key reason that Google offered such a rich deal to MySpace actually had little to do with social networking, per se. Rather, what drove the value of the deal was the fact that MySpace was increasingly a source of downstream traffic to, the search engine. At the time, MySpace was responsible for almost 11% of Google’s search traffic.

But if Google ends up owning Facebook, what happens to the Google/MySpace deal? Is there language in the agreement that would prevent Google from making such a move? Much to my surprise, there is no such non-compete clause… so it seems Google is free to go directly into competition with MySpace (Orkut notwithstanding) without violating any terms of the contract.

So will Murdoch just sit idly by and do nothing? Not likely. Under such circumstances, there’s a good chance that Murdoch will find a way to back out of his Google agreement. Moreover, he’s likely to follow such a move with another countermove that awards MySpace’s search traffic to a Google competitor. It’s possible that such a scenario was a part of the recent overture by Murdoch to merge MySpace for 25% of Yahoo! (e.g. the promise of MySpace’s search traffic being diverted to Yahoo! could potentially have a material impact on search market share and monetization).

A year ago, I had written that Google woulda, coulda, shoulda bought MySpace when it had the chance. How interesting a twist of fate if Google ends up buying Facebook instead, and applies the knowledge it has gained dealing with MySpace to the benefit of Facebook.

At the same time, such realignment in the industry could force Murdoch & MySpace to get into bed with Yahoo! And if that happens, Yahoo! might end up being in the cat-bird’s seat (without having to give up 25% of itself in a merger). After all, even though Facebook has been getting all the buzz lately, MySpace’s enormous traffic and ad inventory could end up bolstering the monetization potential of Yahoo’s Panama to new heights. At the end, it could end up being a win for all parties concerned.