Updated with second response from Photobucket

photobucket1.bmpPhotobucket, the popular photo storing service, recently unveiled new advertising features — as it reportedly seeks to sell itself for hundreds of millions of dollars.

However, MySpace, pissed off by the new features, and perhaps a bit perturbed by the Palo Alto, Ca./Denver-based Photobucket’s momentum (see our post here), has shut down links by MySpace users to their videos and slideshows hosted at Photobucket.

This isn’t the first time MySpace has shut down links from other services, but the latest move poses a major problem for Photobucket — which is still dependent on MySpace for much of its traffic. Fewer links mean less advertising, and frustrated users — who may decide to use photos and videos from elsewhere. Last night, Photobucket launched a PR offensive, posting about the flap on its blog. Hundreds, if not thousands, of users have responded in comments, with their ire directed mainly at MySpace.

Photobucket is the loser in this battle, because it is more dependent on MySpace than vice versa. We’ve requested comment from Photobucket, but haven’t heard back. Before this latest action, we spoke with Tom Cole, a partner at Trinity Ventures, and a Photobucket investor and board member. He stressed the importance of the latest advertising offerings at Photobucket. These include contests — where high school Photobucket users compete to create the best mashups using photos and vidoes of Mandy Moore and her “Extraordinary” track — and sponsorships by Spiderman and Disney of things like Peter Pan slideshows surrounded in frames filled with Peter Pan people. All of these have been popular and potentially could generate good revenue for Photobucket.

MySpace has responded with a statement saying that the new slideshow features violate its terms of service (see vague references in section eight). The statement:

…Photobucket recently began running an ad-sponsored slideshow and encouraged users to post these ads in bulletins and profiles throughout the community. We spoke to the company about their actions, but they refused to respect our community’s terms and we had no choice but to disable their service.

Update: To be clear, the problem is not actual advertising within video, so much as the branding efforts discussed above, such as the Spiderman sponsorship. See more here in Adweek. By the way, we’re hearing rumors that Photobucket and MySpace’s parent, FIM, have been in talks about FIM possibly acquiring Photobucket. We haven’t confirmed those rumors. It is only a step further, then, to speculate that this tango is related: By showing Photobucket is so dependent on MySpace, FIM scares off other potential suitors, and thus reduces the purchase price of Photobucket — nice for MySpace.

Also, here is Photobucket’s latest response:

Photobucket was not contacted by MySpace about this issue. Photobucket is continually identifying new ways for brands to reach, and engage with their audiences. One of the ways we can do this is by allowing our users to combine their own content with that of brands to create personalized slideshows and videos. Some of our users choose to share their slideshows with friends on blogs and social networks, of which MySpace is obviously one. This content is not clickable and does not generate revenue for Photobucket – only the branded content and environments on Photobucket do that. In addition, MySpace is claiming that some of these slideshows contravene its terms of service. However, it has decided to block the posting of user-generated videos from Photobucket, not slideshows.

Brands have a lot of great content available that users want to share with their friends and networks. It’s a trend which is only going to increase, and we think it’s good for the brands, for the users and for social networks to provide ways to create and share that compelling content. Limiting users’ ability to do so would seem to be contrary to MySpace’s mission and certainly to ours.