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The South By Southwest Interactive conference could prove a crucial testing ground for Google’s ambitions to compete with Facebook.

The hot rumor now sweeping the hallways of the Austin Convention Center, where the conference has been going since Friday and will continue next week, is that Google will launch a new social network here called Google Circles, sparked by a report in tech blog ReadWriteWeb. The notion is flattering to SXSW’s notoriously self-involved attendees, who fancy themselves the tastemakers and trendsetters of the digital world: How could Google possibly launch its next big thing anywhere else?

But a Google representative has denied plans of a launch, according to Liz Gannes of NetworkEffect.

Here’s what we do know: Google is holding an event for developers at the conference today at 1 p.m. called “The League of Extraordinary Hackers” — again, playing to SXSW attendees’ grandiose sense of self. (Or perhaps, one can hope, poking a bit of fun at it.) Googler Chris Messina, an open-source evangelist who’s well-known and trusted by many influential developers for his previous work on marketing the Firefox Web browser, is in Austin for the event. (We flew in on the same JetBlue flight from San Francisco, in fact.) And it has been widely reported (if never officially confirmed) that Google will be launching a major social networking product (previously known as Google Me and Google +1) this spring.

If Google is to succeed in the social world, it’s true that it will have to woo developers of social apps, who today use mostly Facebook and Twitter to help users find friends online. But the failures of past social products like Google Wave and Google Buzz have hopefully taught Googlers that it’s not about how awesomely extensible a product is by third-party developers — it has to be simple and appealing to ordinary users, as Facebook and Twitter are to hundreds of millions of people. Because ultimately developers of social apps care more about reaching large audiences than being cutting edge.

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