MySpace success: Not exactly a viral start

Original author: Nisan Gabbay
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In less than 3 years, MySpace made it into the top five most visited sites in the USA, reaching 48 million unique visitors and 27.4 billion page views in June 2006. The site will probably never come close to the profitability of Google, eBay, or Yahoo, but it has the potential to become new internet platform.

Key success factors
Providing users with great opportunities to control their MySpace pages, more opportunities for self-expression and communication with friends.

There are probably several reasons for the success of MySpace, but this is the main one. MySpace achieved great success thanks to teenagers, they used the site to share photos, communicate with friends and create their own online space. Independent music groups found an audience and the possibility of self-realization on the site. Also, people used MySpace for dating, mostly people aged 21-26, not exactly the audience that uses MySpace now.

It is hard to overestimate the importance of sharing photos on this site. The growing number of digital cameras and camera phones has affected social networks in general, and not just MySpace.

MySpace provided the opportunity to use third-party photo hosting sites such as PhotoBucket and ImageShack. This was probably the second key factor in MySpace’s success regarding Friendster startup.

Quick product adaptation at the request of users, accelerating the development cycle.

What has MySpace really done to create an environment for self-expression? It began with a basic strategy not to affect how users interact with the site. When users started creating interest and community page groups, MySpace adopted this behavior while they did not in Friendster. MySpace monitored user feedback - considering it when developing a product. They added blogs, forums, announcements, comments, IM to MySpace long before Friendster did it. When users began to “hack” their pages to embed photos and graphics from places like PhotoBucket, MySpace did not stop this behavior. They added the ability to add photos and graphics when commenting on pages.

Using a combination of viral tactics, offline advertising, and online partnerships to create an initial community of users.

From the first glance it seems that MySpace was launched, and got the user base using “word of mouth” and viral marketing (these are two slightly different ways of promotion). This is not the case. MySpace used a combination of tactics, including traditional CPA campaigns (pay-per-attraction), which gave a successful result.

MySpace was created by the team that founded ResponseBase, Intermix, with experience in direct e-mail marketing and CPA tactics.
As soon as MySpace acquired the first million users, the virus effect began to work in its purest form. (More on this in the Launch Strategy section.)

Created product and solution that contribute to site performance

The third key success factor in the battle of MySpace and Friendster.
First, MySpace decided not to display friend chains because of the high load on the site when they were dynamically counted.
Friends chains show how users relate to each other. MySpace decided not to introduce this key feature of Friendster - wanting to maintain the high speed of the site.

Secondly, MySpace at the very beginning limited the ability to register. Registration was only possible for users living in the USA, and Friendster was very successful (and remains successful) in the Philippines. Unfortunately, until the moment the attractiveness of the online advertising market in Asia comes, this traffic is more likely a cost center, rather than a profit center. MySpace made the right decision in limiting registrations for these users to gaining a critical mass in the United States. Indeed, why should a startup at the beginning of its activity pay for traffic from users who are not attractive from the point of view of advertisers?

Launch Strategy

The idea to develop MySpace with Intermix came from Chris De Wolfe and Tom Anderson, who appeared on Intermix after the takeover of ResponseBase.
Most ResponseBank teams came from X-drive, so they had experience in both online services and direct marketing. After learning about Friendster’s initial success and with the resources of Intermix / ResponseBank, they decided that they could create worthy competition.
ResponseBank had a database of ~ 100 million e-mail addresses and a number of sites that fell into the target audience of MySpace.

MySpace spent about 3 months. to create a site with similar features on Friendster. Initially, MySpace did not have a strategy focused on independent musical groups, and the creation of a social environment regarding music. It was developed later as a result of observing who began to actively use the site.
Interestingly enough, MySpace did not find success among users for 6-9 months. after the initial launch and promotion. The promotion began with a promise of remuneration for those Intermix employees (~ 250 people) who helped bring their friends to the site. This promotion was somewhat successful, but relatively small. The next step was to use the ResponseBank e-mail address database, which yielded some results, but was generally perceived as a failure.

Then MySpace began to promote the site offline, sponsoring club parties in Los Angeles, as well as music bands. This created a buzz around the site, but most importantly, it attracted micro-offline communities (groups of people) sharing the site. Small communities - groups from 100 to 1000 people - created a greater "viral" effect than attracting individual users to the site.

As soon as the initial audience was formed, MySpace “added fuel to the fire”, intensifying thanks to Intermix's connections and channels. Further collaborative marketing with established Internet brands has led MySpace to success.

Exit analysis

Intermix was acquired by the Fox group for $ 580 million in July 2005, with MySpace as its main asset and acquisition motive. The estimated value of MySpace is the difference between the Fox Group paid $ 580 million and the market value of Intermix (~ $ 100 million) as a public joint stock company, before the success of MySpace. Thus, the cost of MySpace amounted to about $ 500 million. Probably an additional factor that influenced the cost of absorption was Intermix's copyright issue.

MySpace announced plans for $ 20 million in revenue for 2005.
Income received in the second quarter of 2005 ~ $ 6M. means that Fox paid with a 20x multiplier relative to current income. By that time, this was considered an overly large estimate, although in the year of absorption, Myspace began to earn ~ $ 8 million in revenue per month. Therefore, Fox ended the takeover with a multiplier of about 5x relative to future annual revenues, which already represented a more logical estimate.

Having received the mainstream brand and cult status created in the USA, Fox made a very good deal by buying MySpace (especially in light of the latest $ 900 million deal between Fox and Google). The question also arises as to how Yahoo, MSN, AOL and Google skipped MySpace if each of them predicted the growth of MySpace.

So, with what results did VC's and the founders get out of business?

Redpoint Ventures participated in the promotion of MySpace, investing in Intermix. They invested $ 11.5 million for 25% of the capital acquired in February 2005, according to estimates of the company's preliminary value of approximately $ 35 million. By that time, MySpace had already achieved success on the Alexa Top 100 list. Intermix acted wisely by inserting an item in an agreement with Redpoint Ventures on the option to repurchase MySpace shares in the event of a takeover within a year.Under the terms of the agreement, Redpoint received ~ $ 65 million. A great way out for Redpoint means that venture investors do not have to search for the next Big Thing, but simply maneuver and invest in the next big Thing. The venture capital firm that earned the most on MySpace was VantagePoint Venture Partners, which invested in Intermix long before the success of Myspace. As a major shareholder in Intermix, VantagePoint did not invest in the company just because of the success of MySpace, but unwittingly shared the success of MySpace. VantagePoint increased its investment by 9 times, investing $ 15 million and receiving $ 139 million.

So what about the founders, Tom, Chris and the ResponseBase team?
Despite the startup’s unusual ownership structure (MySpace was an Intermix asset), the ResponseBase team was given an option to purchase 1/3 MySpace from Intermix for $ 50,000. Chris and Tom participated in this “round”, and, considering various bonuses and options, suffice it to say that both have become multimillionaires.

Considering the two major web 2.0 successes (by the number of registered users) - Skype and MySpace, it is interesting to note that each of them won during the launch, largely due to the developed partnership with distribution channels. Skype began distribution with Kazaa. Since the founders of Skype also founded Kazaa, they had an easy way to quickly start Skype by advertising through the Kazaa network and Kazaa desktop clients. Despite the fact that Skype and MySpace are inherently “viral” products, they might not have been so widely distributed in such a short period of time without an initial impulse, thanks to well-established channels for distributing information.

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