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Friday, July 9, 2010

The Decline of MySpace

There’s a report that MySpace may begin charging for music. It’s the kiss of death, I think. Hardly any websites that charge to stream music have been successful. Websites that allow users to “buy” a song, like the iTunes store or Amazon or even Walmart, are doing much better. But how many of those websites do we need?

In truth, MySpace is a has-been. MySpace was the #1 social networking site only four years ago. It introduced many people to social networking. But better mousetraps like Facebook and Twitter quickly dethroned MySpace, which has lost its buzz and much of its advertising revenue.

Rupert Murdoch, who is no virgin when it comes to building a media empire, bought MySpace for $400 million at its peak. He learned an expensive lesson. It doesn’t cost a lot of money to construct and deploy a new social networking site. Nor does it cost a lot of money to publicize one by means of viral marketing. In MBA language, barriers to entry are low and differentiation is low. Users tend not to be loyal; they’ll quickly move to a new social network, even if it requires reentering a network of friends.

The multiplicity of photo-sharing websites makes the same point.

For the investor, social networks are a risky proposition. An economy of scale is required to make a social network profitable – but by the time an economy of scale is attained, the network may be near the end of its run. The alternative is to mimic Google by diversifying. That’s what Facebook is doing, albeit clumsily. Will they succeed? Time will tell, but the odds are against them. The next Facebook is just around the corner.

After 10 years it's clear that popularity on the Internet is transient. I hear some of you asking, What about YouTube? Hasn’t it been popular for a long time? Yes it has, but YouTube was a quirk. Everybody talks about user-generated content, but the ugly reality is that YouTube was launched by pirated Hollywood content. YouTube’s founders sold the company in 2006. It’s no coincidence that Hollywood had begun enforcing its legal rights by then. I doubt that another company will be launched in this manner.