MySpace Case Study: Not a purely viral start

MySpace Case Study: Not a purely viral start

written by Nisan Gabbay on September 10th, 2006

In less than 3 years time, MySpace has become one of the top 5 most visited sites in the US, racking up 48 million unique visitors and 27.4B page views in June 2006. While it will probably never come close to the profitability of Google, eBay, or Yahoo, it has the potential to be the Internet's next "platform" company. It has made for particularly interesting case study material for leapfrogging early social networking leader, Friendster.

Interviews conducted: I interviewed several people who were close to MySpace in the early days, although no longer with the company. I would consider both of these to be excellent sources. I have also spoken to a number of people in the social networking industry – product managers at competitors, MySpace service providers, etc. I am also a board observer at a company that competes with MySpace.


 

Key success factors

Gave users more control over their MySpace pages, enabling a higher degree of self-expression and communication with friends

While there were many factors that contributed to the MySpace success, if I could pick just one, this would be it. MySpace had its greatest early success with teenagers, and teenagers use the site for sharing pictures, communicating with friends, and creating their best possible "my space" on the web. Having independent music bands anchored on the site for music discovery is a nice complement, but that's not what is driving the voluminous amount of page views. And yes, people do use MySpace for dating and hooking up, but that type of activity is more popular with 21 – 26 year olds, not the audience that made MySpace what it is today.

I also cannot emphasize enough how important the photo sharing aspect is. The growth in digital cameras and camera phones has been driving the utility of all social networking sites, not just MySpace. MySpace allowed users to add more pictures to their MySpace pages through third party services like PhotoBucket and ImageShack. I strongly believe this was a crucial factor in their success relative to Friendster.

Rapidly adapted product to desires of user base through rapid development cycles

So what specifically did MySpace do to enable this great environment for self-expression? It started with a very basic strategy to not have pre-conceived notions about how users wanted to interact with the site. When users started creating group profile pages around interests and associations, MySpace accepted this behavior where Friendster did not. MySpace listened to user feedback and quickly iterated the product with rapid development cycles. MySpace added blogs, comment boards, message boards, IM, long before Friendster was able to upgrade their product given scalability issues. When users began to hack their MySpace pages to embed more photos and graphics from places like PhotoBucket, MySpace did not discourage this behavior. This enabled users to add photos and graphics images into their friends comment boards. The comment boards drive much of the motivation for users to invest time into their MySpace sites.

Used combination of viral tactics, offline advertising, and online distribution partnerships to seed initial MySpace community with users

Public perception seems to be that MySpace launched and instantly grew its user base through word of mouth viral marketing. This was not the case. MySpace used a combination of tactics, including traditional, cost per acquisition (CPA) campaigns through established online brands, which yielded successful results. MySpace was hatched by the former ResponseBase team within Intermix, and thus the team had a strong background in direct e-mail marketing and CPA tactics. Once MySpace had acquired its first few million users, it could then rely on pure viral effects. I have more detail on the MySpace launch in the "Launch Strategy" section, but I thought it was worth highlighting here as well.

Made product and policy decisions to ensure MySpace site performance

A key turning point in the Friendster versus MySpace battle was the well-documented Friendster site performance issues that drove many initial Friendster users away. While Friendster was its own worst enemy in this regard, MySpace did take several well-thought measures to ensure it did not face similar problems. First, MySpace decided not to display "friend chains" on the site. Friend chains – which show how users are connected to one another – cause a heavy computational load when dynamically calculated. MySpace decided against incorporating this key Friendster feature in hopes of keeping site performance high. Second, MySpace limited user registration in the early days to US-based users. Friendster had great success (and still has success) in the Philippines. Unfortunately, until the branded ad market matures in Asia, this traffic is more of a cost center than a revenue center. It was detrimental to Friendster's site performance for US users, whom are much more valuable from an advertising standpoint. MySpace made a good decision to preclude registration from these users until they had critical mass in the US.

 


 

Launch strategy

 

The idea to develop MySpace from within Intermix came from Chris DeWolfe and Tom Anderson, who came to Intermix through the acquisition of ResponseBase. Much of the ResponseBase team had formerly come from X-drive as well, so they had a background in both online consumer services and direct marketing. After witnessing the initial success of Friendster and having the ResponseBase/Intermix resources at their disposal, they thought they could create a strong competitor. ResponseBase had a database of ~100M e-mail addresses and Intermix had a number of Internet sites heavy with users in the MySpace target demographic.

MySpace took 3 months to build a site with similar features to Friendster, launching at the end of 2003. MySpace did not launch with the strategy that they would target independent music bands and create a social networking site anchored around music. This developed more naturally as a result of who they attracted to the site. Interestingly enough, MySpace did not begin to see user success until 6-9 months after initial launch and promotion. They started promoting MySpace by running a cash prize contest for Intermix employees (~250 of them); asking them to invite friends to use the site. This had some success, but was limited to reaching only a certain size. Next, they made use of the ResponseBase e-mail marketing list, which made some impact, but was largely considered a failure. This was because e-mail marketing does not attract people having loyalties to the site through a pre-existing group of friends or other association. MySpace then began promoting the site offline, sponsoring parties in Los Angeles with clubs, bands, and party promoters. This began to build the buzz around the site, but more importantly attracted micro offline communities (i.e. groups of people) to use the site together. Small community groups of 100 to 1000 people got more of the viral snowball effect going than attracting individual users to the site.

 

Once this initial audience had been established, MySpace than added fuel to the fire by leveraging Intermix's media buying and channel relationships. Affiliate marketing partnerships with already strong Internet properties is what propelled MySpace from initial traction into runaway success. It is unlikely that MySpace would have grown as fast as it did without employing this more traditional marketing tactic.

 


 

 

Exit analysis

Intermix was acquired by Fox for $580M in July 2005, with MySpace being the key driver behind the transaction. I estimated the value of MySpace as the difference between what Fox paid ($580M) and the market cap of Intermix (~$100M) as a publicly traded company prior to the success of MySpace. This would ballpark the value of MySpace at time of acquisition at ~$500M. However, another complicating factor at time of acquisition was the outstanding legal liabilities of Intermix for Internet privacy violations. Having Fox assume these liabilities may have also had a significant impact on the acquisition price.

 

MySpace had a reported $20M revenue plan for 2005, but was on a steep growth curve. Actual revenue in Q2 2005 was ~$6M, meaning that Fox paid a 20X current run rate revenue multiple. At the time, this was considered by most people to be a steep premium valuation, however, within a year of acquisition MySpace was already generating ~$8M in ad revenue per month. Thus, Fox ending up paying about 5X forward revenue at time of acquisition, which was a reasonable price. Given the mainstream brand and cultural impact that MySpace has created in the US since, I think it is fair to say that the purchase price turned out to be a very shrewd move by Fox (especially in light of the recent $900M deal between Fox and Google). It also begs the question as to how Yahoo, MSN, AOL, and Google missed the boat on this one. If anyone could have predicted the growth that MySpace would achieve, shouldn't it have been one of the established Internet powers?

So how did the VCs and founders make out? Bill Burnham has an excellent post on the details here, thus I will only summarize his findings. Redpoint Ventures managed to spinout MySpace from Intermix with an $11.5M investment for a 25% ownership stake in February 2005, equating to a pre-money valuation of ~$35M. MySpace was already a success by that point, firmly established in the Alexa Top 100. (Note: It is interesting to see how dramatically the valuation multiples for Internet properties with traction have changed in the last year and a half. The Redpoint investment valued MySpace at $35M for a top 100 user generated content site. Financings for sites like Facebook, Bebo, YouTube, and Tagged have occurred at much higher valuations since.) Intermix put a smart clause into the Redpoint transaction that allowed Intermix to buyback the MySpace shares if Intermix were to be acquired within one year. Based on the terms, this had the effect of capping Redpoint's return to ~$65M (about a 4X return on $15.5M). A great return for Redpoint and one that shows being a VC isn't necessarily about discovering the next great thing, but rather maneuvering into an investment into the next great thing. The VC firm that most profited from MySpace was VantagePoint Venture Partners, whom had invested in Intermix well before the MySpace success. As a majority shareholder in Intermix, VantagePoint came away with $139M on a $15M investment, for a 9.1X return. VantagePoint did not invest in Intermix because of MySpace, but was a benefactor of MySpace's success.

So how did Chris, Tom, and the rest of the ResponseBase team come away financially from the Fox acquisition? Intermix wholly owned MySpace upon it's conception, thus the capital structure of MySpace was not one of a typical start-up. However, I was told that early in its life, the ResponseBase team was given the option to buy 1/3 of MySpace from Intermix/eUniverse for $50,000. In fact, you can see the actual contract here. Chris and Tom did participate in this "round," and via an assortment of stock option grants and bonuses, it is fair to say that they are both multi-millionaires.


 

Food for thought

If the two largest Web 2.0 successes (based on number of registered users) are Skype and MySpace, I think it is interesting to note that each benefited from having a major distribution partnership during launch. As I will highlight in an upcoming Skype case study, Skype got its initial distribution through Kazaa. Since the founders of Skype also founded Kazaa, they had an easy way to jumpstart the Skype service by advertising it through the Kazaa network of desktop clients. While both Skype and MySpace were inherently viral products, they might not have reached such large scale in such a short period of time without that initial impulse function from distribution channels.

 

Furthermore, Web 2.0 entrepreneurs should recognize that they are not just competing with the large, slow-moving giants, but other nimble start-ups with large distribution at their disposal as a primary weapon. Other examples beyond Skype and MySpace, are lesser known successes born out of ad networks. Take for example, Livedigital.com which was launched by online ad network Oversee.net and has quickly grown into a top 5000 Alexa site in less than 9 months. The ad network Blue Lithium is following a similar strategy, planning to launch online community sites by making use of its excess ad inventory. What about newcomers Tagworld and MyYearbook? Their cost per action (CPA) advertisements have been plastered all over MySpace "ecosystem" sites (sites providing graphics and html code to MySpace users). The results of these campaigns have had mixed results, but worth noting that they do exist. While traditional distribution partnerships might be frowned upon in Web 2.0 thinking, MySpace and Skype are both examples that prove distribution partnerships shouldn't be overlooked in Web 2.0 hype.

If a web entrepreneur chooses to go the route of pure viral distribution, then you really need a product with a simple, compelling value proposition that is easy to understand and use. Otherwise, there are other start-up companies out there with access to distribution that can be formidable competitors.

Please leave any comments on the keys to MySpace's success or launch strategy below.

 


 

Reference Articles

Plenty has been written on the success of MySpace. Here are a few references that I found most worthwhile:

 

Danah Boyd's detailed analysis on MySpace versus Friendster – March 2006

 

Great blog post and ensuing discussion on MySpace from a web design perspective by Joshua Porter

 

Here is Robert Scoble's post based on a conversation with MySpace CTO Aber Whitcomb (March 2006)

 

Nick Lewis makes some good points as to what MySpace did to attract the mass consumer here.

 

Interesting perspective offered by Mike Rundle of BusinessLogs: Why Some Startups Stumble And Others Succeed: User Generated Quid Pro Quo

Mike's theory is a sound one, but he doesn't really address what the ROI equation to the user was in the early days when each of these three (MySpace, YouTube, Digg) sites were getting off the ground. Nonetheless, I think this is a good exercise for any Web 2.0 company to really think through the effort versus return for the user ROI equation … or put more simply – how compelling is your user value prop?

 

Techtalk has the most comprehensive collection of articles on the MySpace story in a well organized format. Many of these address the reasons for the site's success.

 

Nice AlwaysOn interview with Ross Levinsohn on Fox's motivation for the MySpace acquisition

 

18 Comments »

  1. I think you are, for the most part, right on the money here. I do have a question though. You say that giving users more control over their pages was the key to MySpace's success.

    Does this mean you believe Facebook not allowing much control is limiting their success or is it just in a whole different ballgame?

    Thanks for the always interesting analysis.

    Comment by nick macey — September 10, 2006 @ 1:10 pm

  2. Hi Nick,

    Thanks for the comment and I think your question is an interesting one. I believe that MySpace and Facebook are a different ballgame. MySpace appealed more to teens in high school and therefore serves a different need than Facebook. MySpace's slightly younger demographic has much more time to spend, is more interested in being popular, and wants to be recognized as cool amongst their peer group. This fuels the desire to have the best MySpace page, and hence, the desire to customize their pages. Facebook is really a directory service at its core , a place to find information about fellow college students and campus activity. Would Facebook be more successful if they gave users more control over their pages? Hard to say, but my guess is that this is not a critical feature for this age group.

    Comment by Nisan Gabbay — September 10, 2006 @ 1:24 pm

  3. Hey Nisan:

    Please can you elaborate on the following in more detail: "Affiliate marketing partnerships with already strong Internet properties is what propelled MySpace from initial traction into runaway success."

    Thanks – Jonathan.

    Comment by Jonathan Marcus — September 11, 2006 @ 12:47 pm

  4. Hi Jonathan,

    Thanks for picking up on my purposefully vague statement :) I cannot give more specifics here because I was told these off the record so to speak. However, the idea is to get a pre-existing Internet company to support your launch by marketing the new service to their member base. This can be done through a variety of online ad formats, usually with payment done on a per action basis (user registration to the new service for example). Sorry I cannot give more specific details.

    Thanks – Nisan.

    Comment by Nisan Gabbay — September 11, 2006 @ 3:08 pm

  5. Hi Nisan,

    That's a very interesting analysis of MySpace. But I've always wondered why Friendster failed. MySpace's success may be because of various factors that you'd described, but it will be great, if you could shed more light on the failure of Friendster. It is very surprising to see a company that is backed by KPCB failing because of scalability and development issues.

    -Balaji

    Comment by Balaji S Krishnan — September 11, 2006 @ 3:10 pm

  6. Hi Balaji,

    Danah Boyd has a pretty candid analysis of what went wrong at Friendster. I have linked to her article in the "Reference Articles" section above.

    I believe that Friendster either didn't recognize the true value of the service to users and/or couldn't execute due to the technology issues. Once you saw the relationships between friends, there really wasn't much more to do on the site. Friendster couldn't roll out new features because the site architecture wouldn't support it. They got caught between optimizing a poor architecture versus rebuilding the service from the ground up. They took too long with the bandaid approach.

    I think the main culprit from the product perspective was that they didn't support photo sharing in the way that users preferred. MySpace, as well as sites like Piczo and Bebo grew because they were providing more photo sharing capacity and flexibility to display photos. Friendster also didn't support groups to the extent that MySpace did.

    Hopefully we can get someone who was involved with Friendster to comment?

    Comment by Nisan Gabbay — September 11, 2006 @ 3:36 pm

  7. Hi Nisan, great post. It's a subject on my mind.

    I am trying to build Zapr which launched last month. I'm working with tech and management who do not have the same experiences and appreciation I have for what makes a consumer product grow. It's always tough in a product that isn't proven yet. Hindsight is (relatively) easy.

    I was very close to the Skype/Kazaa deal. I ran marketing and business development teams for Kazaa when the Skype guys contacted us and said they wanted a deal. Initially we were "what is Skype???" but we pretty quickly picked up that it was cool and going to be big.

    So now that I'm on the other foot, and without a good friend like Kazaa nor a million dollars to pay for a per-install program I'm stuck with the grass roots work which MySpace started with.

    The great thing about Zapr is that it's output is a URL which makes it easy to integrate. But ease doesn't make a surity. What do you offer if you don't offer money or a strong past? Maybe value add and maybe a unique user base. We're working on both, with (curiously) a MySpace tool and maybe a Skype plug in. More work to do….

    With regard to Balaji's point about the difference between Friendster and MySpace. I agree with you that it was the lack of openness which lead to Friendsters demise. It was a service. You could only go in there and do specific things. You couldn't really build anything. You couldn't play.

    Play leads to two things. 1. More time spent, more time invested. This builds the strength of the relationship with the site. 2. It builds page views, which builds the business.

    With regard to Facebook, arguably a success in it's own right, I think that it could have been more open, but really it's success came down to it's focus. It is successful for what it is not, as much as for what it is.

    My 2.0 cents.

    Here is an entry by Om about desktops. I don't think they are dead. They are just changing.
    http://software.gigaom.com/2006/09/10/are-desktop-apps-dead/

    Comment by Mick Liubinskas — September 11, 2006 @ 3:37 pm

  8. Agreed, great article. How do you feel about friendsters patent on Social Computer Social Networks.

    http://www.uspto.gov/web/patents/patog/week26/OG/html/1307-4/US07069308-20060627.html

    Are they going to pull a "Research In Motion" on Myspace?

    Comment by Todd Allen — September 11, 2006 @ 9:31 pm

  9. Appreciate the response.

    "This can be done through a variety of online ad formats, usually with payment done on a per action basis (user registration to the new service for example)."

    Seems like you are referring to the ad network / lead generation / arbitrage companies such as Adteractive, NetBlue and Fastclick, which would really surprise me.

    Anyway, great site!
    Thanks – Jonathan.
    Programming, IAC / InterActiveCorp.

    Comment by Jonathan Marcus — September 12, 2006 @ 8:43 pm

  10. Nisan:

    Excellent read. One other thing to note is the origins of the "MySpace.com" domain name. MySpace was formerly a Xdrive'ish site and the domain/assets were accquired by ResponseBase. Ultimately the domain was decided to be used for the social domain site that is "MySpace" after going through various names.

    CPA deals depending on what networks you run on tend to bring in poor traffic. The incentive for publishers is to signup as many users as possible so most not all will write scripts that will inject the advertisers sites with false profiles because its in their best interest to show signups (so they can get paid). This results in higher numbers of signups on the advertisers sites but ends up contaminating the userbase with fake profiles.

    For companies like Oversee which control traffic through multiple channels this is a extremely cost effective way to launch any new initiative with minimal cost and seed a community quickly with users.

    Comment by Duc Chau — September 13, 2006 @ 7:28 am

  11. […] According to Trent Lapinski's expose, MySpace was started by a company that specialized in spamming people. In fact, they didn't get their start by being purely viral. Oh, that's how they grow now, but they got started by spamming people. Trent seems to be obsessed with calling MySpace Spam 2.0, but even a less spam-obsessed source, Startup Review, has reached similar conclusions. I wondered then if any viral service can grow in a purely viral fashion, or must they all get some sort of jumpstart? I think jumpstarts are needed, but nowadays MySpace itself can fill that role; for example, 70% of YouTube's traffic reportedly originates from MySpace. My point is, between MySpace and the blogosphere, there is no excuse to spam anyone anymore since a layer of machinery for getting the word out has already been built. Lastly, Trent writes that once Chris and Tom had figured out that they wanted to compete with Friendster, they got MySpace 1.0 built in just 10 days. Spam or no spam, that's a lesson every startup can learn from. […]

    Pingback by Phoenomi – Surfing the Longtail » Blog Archive » What you may not know about MySpace — September 13, 2006 @ 9:06 pm

  12. Hi Nisan,
    I am probably one of your younger readers and i truly appreciate your perspective on all these companies. Only if i had access to this blog when i was taking my entrepreneurship class…hahha This article really peaked my interest because my friend recently started a social networking type site and i was recruited to join the team. My question is in regard to the social networking industry as a whole. I noticed that facebook has been getting valuations of anything from $600M to $1B. But most recently, closer to the $600M figure and this makes me wonder, did facebook miss the boat when they turned down the $800M offer? Also, are VCs still willing to fund these types of companies? Any feedback and knowledge would be appreciated.
    Keep up the good Work!

    -w

    Comment by Wilson — September 19, 2006 @ 4:46 pm

  13. Hi Wilson,

    I am glad you are enjoying Startup Review.

    Regarding the Facebook question, it is typical for a VC round to be done at a valuation slighlty lower than the acquisition offer price. This is meant to compensate for the risk the investor is taking that a higher acquisition offer may not materialize in the future. Thus, Facebook turning down an offer of $750M and doing a VC round at $550M should not be viewed as "missing the boat". Facebook management is taking a calculated risk that they can increase the exit valuation above the $750M mark. Whether that was a good decision remains to be seen.

    In terms of funding for social networking companies, it is hard to generalize. However, there have been several, nearly direct competitors to MySpace that have been funded by top tier VC firms since the MySpace success was firmly established. Most of these companies had significant user traction or experienced management teams.

    Without knowing more about your specific case, I would guess that VC funding is not a viable option for your friends start-up at the current time. The company would need to show user traction first. This just means that the company will likely rely on angel money or friends and family for funding. Thus, the company will likely have a year or so to show success, or it will likely close down.

    If you join the team at this early stage, be sure to try to get enough equity to compensate for the risk if you are not going to be paid a market salary.

    Good luck,
    Nisan

    Comment by Nisan Gabbay — September 19, 2006 @ 5:18 pm

  14. […] I recently drafted a business plan for a site called MVPspot.com (contact me if you want to know more)- I have a lot of vested interest in this project because it deals so heavily in niched social networking. While in my planning and research mode i stumbled upon an article on StartUp-review.com talks about the true science behind launching such a project and it is no walk in the park and not all just viral or organic as many would think. Very interesting read to say the least. I learned a lot while creating this plan and here are some of those lessons: […]

    Pingback by VIABUZZ » Blog Archive » Another .COM — September 20, 2006 @ 12:04 pm

  15. Hey Nisan,
    Thanks for the advice and thanks for correcting my numbers that were slightly off. Looking forward to the rest of your reviews.

    -w

    Comment by Wilson — September 21, 2006 @ 2:28 am

  16. Thanks for great article.

    Am I correct in thinking the following?

    After the stage of getting the Intermix employees to invite their friends, trying to attract individuals to the site (via a direct email campaign) didn't work.

    But having got a load of small offline communities to join, trying to attract solo individuals to the site (via CPA campaigns) was hugely successful.

    If this is true, firstly I think its really surprising because everyone I have ever met who uses MySpace says they started because of friend(s) who were already on the site.

    Secondly, do you think its the case that the people who signed up through CPA campaigns use MySpace in a different way to those who joined on friends' recommendations… i.e. more communicating with strangers etc?

    Comment by Will — October 17, 2006 @ 2:57 am

  17. Hi Will,

    Your thinking is correct and well summarized – thanks for contributing.

    The question that you pose is an interesting one. Do users acquired via word of mouth act differently than those acquired through advertising? It is hard to generalize, but the answer is probably yes. Early adopters tend to set the feel of the company and brand. They likely have different use patterns. For MySpace in particular, I think newer users are probably more likely to browse around, while the initial users were more active in getting friends onto the site.

    Another question is when to use advertising to attract users. For a social service, I think you need some level of community before attempting CPA or PR to drive in more users. Otherwise these new users will not know how to interact with the service.

    Comment by Nisan Gabbay — October 17, 2006 @ 11:08 am

  18. […] In my opinion, the critical point is the execution of the idea – not the idea itself. At least when it comes to comparing "top sites" of any sort. There were plenty of video options before YouTube, there were social networks before MySpace and so forth. The interesting point is not that their idea was fresh out of the box, but that they tweaked so successfully into becoming a success. Take a look at Startup Reviews study on MySpace for a few good pointers on why it exploded, and others didn't. […]

    Pingback by Good Old Trend » Blog Archive » When it comes to success, execution beats innovation — November 1, 2006 @ 12:30 am

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