Why Facebook is succeeding where Myspace has failed

avatar By: IS
Date posted: 07.30.2010 (3:49 am) | Write a Comment  (10 Comments)

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Some people wonder why Facebook has not done its IPO earlier and while I personally wish it was a public company that could be traded, I certainly understand the company’s resistance to postpone that day as much as possible. Why? Because public companies tend to shift to a short term focus and while there are some exceptions, I think Facebook will be much better off in the long term if it can push back that day.

A perfect example

A few years ago, MySpace was the king of social internet and dominated everyone else by very far. It had millions of users and was flying high above any other possible competition. Then, the company decided to cash in. It wasn’t done through an IPO but the result was very similar. It was acquired by News Corp for $580 million in July 2005! From that moment on, things have been very different at MySpace as the focus for its new owner was no longer on growth and improving the website, at least it was not the primary objective. Instead, it became about News Corp proving that the acquisition had been profitable. The new focus of the company was on getting advertising (its sole revenue generator). And to an extent, it did work as MySpace inked a deal with Google where it was guaranteed $900 million for advertising exclusivity. So I guess News Corp has shown that the acquisition had been profitable.

Facebook using another model

While Facebook was just a tought in those days, it has maintained one single focus since starting; improving every day. That has helped the company gain users and easily overtake MySpace as the leader in the Social web reaching what is now over 500 million users over the world far beyond what MySpace owners could even dream of getting. How has it done so? It has focused almost all of its energy on making the user experience better by allowing developers to work on apps, adding available features and by making it easier for businesses and other users to reach out. Facebook does face some competition from companies like Twitter and LinkedIn but generally, Facebook has been improving and users are remaining loyal.

So where is the growth at MySpace?

Wonder what happens to growth when you focus entirely on revenues without improving the end product? I guess it would be predictable but MySpace still wanted to give it a try. In a world where double digit growth is almost necessary, MySpace is losing users very fast. In May 2010, MySpace had 109 million users, down 13% from a year ago. It’s amazing really. And because of that, News Corp decided to cut 30% of the payroll and take down the value of MySpace in its most recent financial statements. Looks like MySpace users are becomming more rare every day and once that tendancy has started, it can be very difficult to revert.

Life as a News Corp Unit

When you are part of a huge corporation like News Corp, you become a unit… ONE unit. You get limited time to present your performance. Just try going into News Corp’s investor website. If you are looking for MySpace, you will look through each of the main segments and not find MySpace. Then you can go into the “Others” page and from there, look inside the United States Other Businesses. There, you will find MySpace. It is a tiny part of an empire. So if you can imagine how things go… here is what I imagine.

-The CEO of MySpace must get an hour or so per quarter or per year to discuss what is happening at MySpace. As you can imagine, in one hour, they probably do not discuss much besides financials. It is probably among the lines of:

-What were your revenues?
-What were your costs?
-How could you increase your profitability?
-What are your projections for next year?
-What additional resources do you need?
-Etc, etc, etc

Then, if there are a few minutes left, they might get into what MySpace hopes to become. But don’t think that News Corp is spending much time worrying about investing into a better user experience, reinvesting to accelerate growth, etc. It is about financials. That works for most businesses but it wasn’t the ideal plan for a company in an exploding market like MySpace was.

Was it a failed acquisition for News Corp?

The most surprising part of all of this is that this might not be seen as a failure by News Corp management. If they were able to make a 20-30% return. In the more recent technology sector, returns of 20-30% are certainly great successes. It all depends on what the objective was when they purchased the website. We wrote about investments in domains & websites recently and I would certainly think that MySpace is smart enough to know that simply keeping the website live is not good enough and that like any other business, you do need to improve. It is impossible to keep the status quo in any business. If you are not improving, you are losing ground. And that is what has been happening to MySpace for years now…

What could have been …

Examples like this are perfect to illustrate the downfalls of short term management. While MySpace might be very happy about the return on its $580 million investment, it could have been so much more. With Facebook now valued at close to $30 billion, that could have been. Mark Zuckerberg has lots of flaws that come with his brilliant mind. But the best decision he has made so far is keeping Facebook private and only accept money from long term, patient investors that are not waiting to question every move when the quarterly reports are released. It certainly makes me think about statements such as those from Michael Dell when he said he was considering taking Dell (DELL) private. While the temptation to cash in is always difficult to resist, the reward can be so much more satisfying.

More on this topic (What's this?)
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Read more on Facebook, News Corporation at Wikinvest
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10 Comments

  1. Comment by Sam — July 31, 2010 @ 6:02 pm
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    I agree with you, IS. Facebook just keeps on making changes, and they just keep improving. Personally, I love playing Facebook games. I think that’s one of the reasons Facebook is such a big hit — the games! Farmville, anyone? :)

  2. Comment by IS — August 1, 2010 @ 7:44 am
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    @Sam – Yes, not sure if it is exaggerated but I read this week that 40% of Facebook users play games, that is amazing!

  3. Pingback by Carnival of Money Stories #65 — August 2, 2010 @ 3:28 pm
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    [...] Speculator presents Why Facebook is succeeding where Myspace has failed posted at Intelligent [...]

  4. Comment by Zavi — August 5, 2010 @ 10:26 am
  5. Comment by Zavi — August 5, 2010 @ 10:43 am
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    Humm about the link, it’s a French site… and I noticed that there are duplicate pictures… that’s fake hehehe

  6. Comment by IS — August 5, 2010 @ 7:03 pm
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    Haha thanks Zavi!

  7. avatar

    [...] Speculator presents Why Facebook is succeeding where Myspace has failed posted at Intelligent Speculator, saying, “Facebook is now the leading social networking [...]

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    [...] that will do well over the long term. It’s not always about short term profits and gains. MySpace was the exact opposite example. After being purchased by News Corp, it stopped building long term [...]

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    [...] fan of the way that NewsCorp has managed MySpace and have already written about the reasons why the company was failing. Saying that it’s because of the competition is a major overstatement in my opinion. There [...]

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