Commentary

How the Mighty Have Fallen: Friendster and MySpace Suck It Up

If anyone needed more proof that social media is volatile and unpredictable, this week should settle the question, as two erstwhile giants of the scene -- Friendster and MySpace -- prepare for humiliating denouements.

Friendster, probably the first widely popular social network back when it launched in 2002, has since basically become a punch-line (literally, after Tina Fey took a swipe at it on "30 Rock" a couple weeks ago). Now Friendster is throwing in the towel in the U.S., announcing that it will delete all user accounts and content on May 1 as it prepares to reinvent itself as an entertainment and gaming site targeting -- wait for it --Facebook users. The site's new owner, a Philippines-based company called Money, says Friendster will focus on Asian markets where it now gets most of its traffic.

Let's take a moment to trace the rise and fall of Friendster. After launching in 2002, Friendster grew quickly to about a million unique visitors per month a year later -- but then stalled out in 2004 due to the rising popularity of MySpace. From 975,000 unique visitors in March 2005, it edged up to 1.2 million unique visitors in September 2005 -- then plunged to 585,000 unique visitors in September 2006. Still, the initial surge fueled some aggressive venture capital investment. All in all it raised $50 million of venture capital backing, including a $13 million round in October 2003 -- around the same time it received a buyout offer from Google to the tune of $30 million, which it turned down. After valuations rose as high as $283 million during the glory days, it was finally sold to Money in December 2009 for just $26.4 million.

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As noted, Friendster was eventually felled by MySpace, which in its time also seemed destined to become the dominant social network. From 1.85 million unique visitors in September 2004, MySpace surged to 21.6 million unique visitors in September 2005 and 55.6 million unique visitors in September 2006.

A year after News Corp. acquired MySpace in July 2005, Fortune opined that "News Corp.'s purchase of MySpace is looking like that rarest of rarities in the media world -- a much-ballyhooed acquisition where it turns out that the buyer underpaid." Fortune quoted News Corp.'s then second-in-command Peter Chernin exulting, "It looks like the best acquisition we've made in a long, long time. MySpace is the single biggest growth opportunity this company has." In March 2006, CNN noted that MySpace "has 66 million members, and about 250,000 new ones sign up each day. That's a mind-boggling growth trajectory for an Internet site that was launched less than three years ago."

But things don't go quite as hoped: MySpace never became a profit center for News Corp., and in fact has always been a drag on its finances. Purchased back in July 2005 for $580 million, MySpace lost $150 million in fiscal 2006, $193 million in 2007, followed by one profitable year (to the tune of $42 million) in 2008, another loss of $212 million in 2009, and yet another loss of $575 million in 2010. Now News Corp. is now planning to sell the loss leader at a remarkable 83% discount, having set the floor price at $100 million. Talk about humiliating: if ever there was an admission of total defeat, this is it.

Of course there's no way to know whether sites which currently dominate social media are vulnerable in the same ways that Friendster and MySpace were -- that's the whole point, and the reason the latest round of bets by venture capitalists may indeed prove justified. The whole marketplace has matured a great deal since just a few years ago, and sites like Facebook, Twitter, and YouTube seem to enjoy the kind of momentum which even MySpace lacked. Still, I think the examples of MySpace and Friendster are useful cautionary tales: never say never!

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