For the past year, News Corp.'s (NWS, news, msgs) flagship Internet property has watched its fortunes steadily fade. Not long ago, MySpace was the dominant player in the online social-media space, but rivals have been stealing away users. Just two months ago the site lost its title as the world's largest social-networking Web site to rival Facebook.
MySpace also experienced a painful loss of revenue in the most recent quarter, and analysts expect more bad news. At this rate, the "place for friends" could soon find itself virtually friendless and barren.
"They are in a really deep hole right now," said Debra Aho Williamson, a senior analyst at eMarketer, an online advertising research firm. "It wasn't a good quarter for MySpace, and what you have seen since then is a snowball effect."
In the past year, Facebook's U.S. audience has grown 97%, to 70.28 million users, while MySpace's U.S. traffic has declined nearly 5%, to 70.24 million users, according to measurement company comScore. (Microsoft, the publisher of MSN Money, owns a small share of Facebook.)
MySpace brought many of its troubles on itself by focusing too much on revenue and alienating its audience. But, though MySpace's decisions may have led users to leave, Facebook made it easy for them to jump ship.
In an interview with TheStreet.com, published this month, News Corp. CEO Rupert Murdoch admitted that he shared some of the blame for letting the site get out of control.
"The business sort of grew out of control and really out of size," said Murdoch. "I blame myself, and it had to be brought back in size."
Mistake No. 1: Clutter
News Corp. had dollar signs in its eyes when it set its sights on MySpace. Murdoch's media empire purchased the popular site for $580 million in 2005 because it wanted to cash in on the growing global market for online advertising, then projected to reach $65 billion by 2010. (A more recent projection for ZenithOptimedia is for about $60 billion.)Under News Corp., MySpace reached profitability in less than two years, mostly through aggressive use of display advertising.
With the ads, however, came clutter and annoyances that sent many users packing. MySpace members were frequently greeted with a landing page wrapped in advertisements. Banner ads urging users to create avatars or obtain credit scores flashed constantly on users' personal pages. At the same time, spammers took advantage of lax privacy controls to flood strangers' inboxes with sales pitches.
"I got rid of my MySpace ages ago, when I got sick of the ads," wrote Jessica in a May 4 response to a New York Times blog titled "Do you know anyone still on MySpace?" Her comment echoed the sentiments of many others.
As users fled, MySpace began making improvements. The company implemented better e-mail controls to cut down on spam and rolled out an improved ad-targeting system in an effort to get users to view marketing messages as useful rather than annoying.
But much of the damage was already done.
MySpace developed a reputation as "the ghetto of the digital landscape," said social-media researcher Danah Boyd, a fellow at Harvard's Berkman Center for Internet and Society and a Microsoft researcher, at an industry conference.
Facebook, meanwhile, garnered a reputation as more sophisticated, due in part to its plain background and smaller ads.
Analysts predict that MySpace will bring in $495 million this year, far less than the $585 million it earned in 2008. In response to the challenging ad market and fall in traffic, MySpace announced last month that it would lay off 30% of its U.S. staff. The company also got a new CEO recently.
Facebook is not flawless
To be sure, Facebook has suffered some of the same criticisms as MySpace. Facebook famously reversed course and apologized after users threatened to boycott the site for social ads that broadcast what users deemed personal information to marketers and others on the site.But Facebook appears to have survived its missteps relatively unscathed.
"Sure they screwed up by parading our life to the whole world," wrote Bethany Noel Smith, a Facebook and MySpace user on a group dedicated to publicly accepting the site's apology. "But . . . we forgive you."
Facebook also added to its privacy controls after its indiscretions. As users were able to better segment their social contacts and control the information various groups could see, Facebook's growth accelerated, said Debbie Frost, Facebook's director of international communications.
Facebook has continued to add privacy controls. On June 24, the company began testing an option that allows users to select who can see individual posts. Users can choose to allow posts to be seen by anyone or just by individual friends or groups of friends.
"Granular privacy controls are fundamental to the site," said Frost, adding that the site would not have seen the growth among older adults without such features. In the past year, Facebook has increased the number of visitors 35 and older more than 23%, according to research firm Hitwise.
MySpace also has privacy controls, though they are somewhat less robust. Users can share information with friends and block individual users from seeing their profiles. But they can't decide which friends see what. MySpace's 35-and-older audience has decreased about 2% in the past year, according to Hitwise.
Mistake No. 2: Too much focus abroad
MySpace's international strategy has also failed to measure up to Facebook's.MySpace opted to expand into international markets both physically and virtually. The company launched country-specific sites in locales where it believed there was both significant user interest and advertising opportunity. It accompanied many launches with the opening of local bureaus charged with customizing the experience for users in new markets and selling ads. In the past three years, the company has established more than 30 country sites.
The strategy expanded MySpace's audience but also its payroll. MySpace has added nearly 52 million international users to its user base, but it has also added the expense of an additional 450 full-time employees.
Facebook took a different tack. The company put its engineers to work developing a tool that would allow users to translate the site into local languages and dialects. After several months of development, the application launched in February 2008. Within six months, the company had 20 languages translated, helping to propel it to the top of the social-network heap worldwide. The company now has 50 languages, an additional 40 languages in the works and 245.72 million users outside the U.S., nearly 194 million more than MySpace.
"Just because you set up bricks and mortar doesn't mean you are going to have a better experience," said Frost, adding that Facebook's strategy was to expand audience quickly and then let advertisers come to it.
This month, MySpace essentially admitted the failings of its strategy. The company decided to lay off two-thirds of its international staff and close at least four of its international offices, including its operation in Brazil, where Google's (GOOG, news, msgs) Orkut is the dominant social network. MySpace's bureaus in London, Berlin and Sydney, Australia, will become its primary regional hubs.
"As we conducted our review of the company, it was clear that internationally, just as in the U.S., MySpace's staffing had become too big and cumbersome to be sustainable in current market conditions," said Owen Van Natta, MySpace's CEO and a former chief operating officer at Facebook, in a statement on the layoffs.
Is there still room for MySpace?
Despite MySpace's struggles, reports of its demise are premature at best and will likely prove shortsighted. The company still has 122 million users worldwide and far more revenue than Facebook.MySpace grabs the lion's share of social-network advertising dollars in the U.S. -- the largest advertising market -- with more than 43% of the $1.2 billion spent destined for its pages, according to eMarketer's latest estimates. Facebook garners just 20% of U.S. social-network ad spending. MySpace also has a home page that its entire audience sees, allowing it to strike six-figure sponsorship deals.
MySpace also has one important thing that Facebook doesn't: partnerships with every major music label and access to News Corp.'s vast video archives. Not only does this content help give MySpace a niche to sustain user interest, but it also helps inflate the price of its ads. Advertisements on professional content pages, such as band Web sites, typically command a significant premium over ads on users' personal pages.
If MySpace is more attentive to its users, and perhaps slightly less so to its bottom line, it may well win back its audience. But it won't be easy.
"The new management has a lot of work to do," said eMarketer's Aho Williamson.