MySpace Case Study: Not a purely viral start

MySpace Case Study: Not a purely viral start

written by Nisan Gabbay, posted 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, which was launched by online ad network 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

Updated 11/20/06: Former eUniverse/Intermix CEO Brad Greenspan's perspective on how MySpace got started.  This is a very interesting read about the drama that unfolded at MySpace.  My main takeaway from the article was how they leveraged their dating property (CupidJunction) to launch MySpace.

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.


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