[Infowarrior] - For MySpace, Making Friends Was Easy. Big Profit Is Tougher.

[Richard Forno]

April 23, 2006
For MySpace, Making Friends Was Easy. Big Profit Is Tougher.
By SAUL HANSELL
http://www.nytimes.com/2006/04/23/business/yourmoney/23myspace.html?ei=5087%
0A&en=a1a7f5cd0593bf13&ex=1146024000&pagewanted=print

SANTA MONICA, Calif.

ALMOST on a lark, Chris DeWolfe bought the Internet address MySpace.com in
2002, figuring that it might be useful someday. At first, he used the site
to peddle a motorized contraption, made in China and called an E-scooter,
for $99.

Selling products online comes naturally to him. Having jumped into the
Internet business in the early days, Mr. DeWolfe had become a master of the
aggressive forms of online marketing, including e-mail messages and pop-up
advertising. After the Internet bubble burst, he even built a site that let
people download computer cursors in the form of waving flags; the trick was
that they also downloaded software that would monitor their Internet
movements and show them pop-up ads.

Very quickly, however, Mr. DeWolfe's tactics for MySpace changed. He had
noticed the popularity of Friendster, a rapidly growing Web site that let
people communicate with their friends and meet the friends of their friends.
What would happen, he wondered, if he combined this type of social
networking with the sort of personal expression enabled by other sites for
creating Web pages or online journals?

He convinced the executives of eUniverse, the company that had bought his
own marketing firm, ResponseBase, to back his plan. As soon as the site was
reintroduced, in the summer of 2003, Mr. DeWolfe saw it grow quickly with
little marketing. And although his scrappy backer was hungry for cash, he
resisted pressure to flood MySpace with advertising and to turn all of its
members into money.

"Chris came from ResponseBase, and they knew all the direct marketing
tactics to get money out of almost anything," said Brett C. Brewer, the
former president of eUniverse, which was later renamed Intermix Media. "But
I give him credit: from literally the first or second month, he realized
MySpace could be something we really need to protect because user confidence
in the site was paramount."

Now MySpace has a new owner ‹ Rupert Murdoch's News Corporation, which
bought MySpace and Intermix last year for $649 million ‹ and the pressure on
Mr. DeWolfe to find a way to make much more money from MySpace is far
greater.

But the opportunity is greater, too. More than 70 million members have
signed up ‹ more than twice as many as MySpace had when Mr. Murdoch agreed
to buy it ‹ drawn by a simple format that lets users build their own profile
pages and link to the pages of their friends. It has tapped into three
passions of young people: expressing themselves, interacting with friends
and consuming popular culture.

MySpace now displays more pages each month than any other Web site except
Yahoo. More pages, of course, means more room for ads. And, in theory, those
ads can be narrowly focused on each member's personal passions, which they
conveniently display on their profiles. As an added bonus for advertisers,
the music, photos and video clips that members place on their profiles
constitutes a real-time barometer of what is hot.

FOR now, MySpace is charging bargain-basement rates to attract enough
advertisers for the nearly one billion pages it displays each day. The
company will have revenue of about $200 million this year, estimated Richard
Greenfield of Pali Capital, a brokerage firm in New York. That is less than
one-twentieth of Yahoo's revenue.

In buying MySpace, Mr. Murdoch also bought a tantalizing problem: how to
tame a vast sea of fickle and unruly teenagers and college students just
enough to notice advertising or to buy things, yet not make the site so
commercial that he scares off his audience. At the same time, he must
address the real and growing concerns of parents and teachers who see
MySpace as a den of youthful excess and, potentially, as a lure for sexual
predators.

Mr. Murdoch's initial strategy seems to be to do nothing to interfere with
whatever alchemy attracted so many young people to MySpace in the first
place. So he has embraced Mr. DeWolfe, 40, and Tom Anderson, 30, the
company's president and co-founder, and their close-knit management team.
And he is providing them with the cash to reinforce MySpace's shaky computer
system and to hire armies of sales representatives to bring in more money
from the banner ads and sponsored pages that MySpace sells.

He also gave them multimillion-dollar bonus payments to smooth the feelings
that were ruffled when Intermix was sold, dragging MySpace along with it
against the will of its founders, who received only a small portion of the
sale price.

Still, change is coming. In Beverly Hills, nine miles and worlds away from
MySpace's beachside office, the News Corporation is assembling its
overarching online unit, Fox Interactive Media. Run by Ross Levinsohn, the
longtime manager of FoxSports.com, Fox Interactive Media is stitching
together several Web properties into a big Internet company focused on
youth. The top priority is MySpace.

"We have some very aggressive goals on how to build this thing into a real
contributor to News Corp. financially," Mr. Levinsohn said last month. Mr.
Murdoch, he added, "is focused on that, and he rightfully holds my feet to
the fire."

To expand ad sales, especially to big brands, Mr. Levinsohn plans to
supplement the MySpace staff with a second sales force linked to the Fox TV
sales department. He wants to expand one of Mr. DeWolfe's advertising ideas
‹ turning advertisers into members of the MySpace community, with their own
profiles, like the teenagers' ‹ so that the young people who often spend
hours each day on MySpace can become "friends" with movies, cellphone
companies and even deodorants. Young people can link to the profiles set up
for these goods and services, as they would to real friends, and these
commercial "friends" can even send them messages ‹ ads, really, but of a
whole new kind.

Mr. Levinsohn is also developing plans for MySpace to be paid by some of the
bands and video producers whose songs and short films are woven into its
gaudy profiles like so many electronic stickers on a high-school locker. And
he sees a chance for MySpace to rival eBay and Craigslist as a place where
nearly anything is bought and sold.

Mr. Greenfield, the Pali Capital analyst, says that these moves have
potential ‹ especially if MySpace can convince members to put clips from Fox
movies, television programs and other youth-oriented "content" on their
profile pages. "I don't know how big a business this can be, but it can
clearly be a lot bigger than it is today," he said. "The question is: Can
you take it to the next level by making a business that leverages all the
consumers who are telling you what they want to do?"

Another question is this: Can the News Corporation achieve these goals if
the executives in charge don't agree on how to do so, or even on whether
they want to? Mr. Levinsohn, for example, said he saw opportunity in the one
million bands that have established profiles on MySpace; he said MySpace
could charge bands to promote concerts or to sell their songs directly
through the site.

In an interview the next day, however, Mr. DeWolfe dismissed the idea.
"Music brings a lot of traffic into MySpace," he said, "and it lets us sell
very large sponsorships to those brands that want to reach consumers who are
interested in music. We never thought charging bands was a viable business
model."

Mr. Levinsohn brushed aside the discord, saying it was appropriate for the
people running MySpace to be more concerned at this point about serving
users than making money. And, for now, Mr. DeWolfe and Mr. Anderson say they
are happy working for the News Corporation and Mr. Murdoch, its 75-year-old
chairman and chief executive. "Rupert Murdoch blew me away," Mr. DeWolfe
said. "He really understands what youth is doing today."

BY many accounts, the MySpace culture reflects the style of Mr. DeWolfe, who
has a hard-nosed business approach under a laid-back exterior. "Chris is a
very strong personality," said Geoff Yang, a partner in Redpoint Ventures,
which invested in MySpace last year as part of an effort to separate it from
Intermix; the News Corporation's acquisition of Intermix thwarted that
effort. "He will listen to a lot of ideas, make up his mind and be
laser-focused to get a few of them done."

Mr. DeWolfe, who focuses on business affairs, and Mr. Anderson, who designs
features for the site, have deliberately kept MySpace rudimentary, with an
almost homemade feeling, to give the most flexibility to users. In spirit,
the site reflects its Southern Californian home with all of its
idiosyncratic performers, designers, demicelebrities and other cultural
hustlers, many of whom the founders recruited to be early members. Mr.
DeWolfe, in particular, is a fan of Los Angeles nightlife and has become
something of a public figure himself.

"Chris has become this living persona of MySpace," said Mr. Brewer, who
recalled a trip to Aspen, Colo., with Mr. Anderson and Mr. DeWolfe last
December. "Chris is wearing an awesome leather jacket, some sort of designer
shirt, with his hair all over the place. He has this whole rock-star
persona. And you hear people going: 'Psst, psst. That's the MySpace guy.' "

When he is not basking in the MySpace spotlight himself, Mr. DeWolfe has
begun using it to promote music events around the country. MySpace members
can become "friends" with a profile for "MySpace Secret Shows," for
instance, and they will receive tips about free concerts ‹ sponsored by
companies like Tower Records ‹ in their hometowns.

On a recent Friday in Manhattan, several hundred people trekked through
drizzling rain to the Tower Records store in the East Village for free
tickets to a concert by Franz Ferdinand, the Scottish postpunk band, at the
Hammerstein Ballroom.

Heather Candella, a college student from Sloatsburg, N.Y., was among those
at the show. She said the shows were "a really good idea because it's kind
of a secret kind of thing ‹ it's not so commercial."

She added that MySpace had become a main way to stay in touch with her
friends. While she does not use the site to meet people, it has become part
of the dating ritual. "When you meet someone, the question is not 'What's
your number?' " she said. "It's 'What's your MySpace?' "

By checking out a guy's profile, she said, "you can actually get a feeling
for who they are."

MySpace users pepper their profiles with their own photographs, musings and
poetry, and with their favorite music and video clips. That maximizes the
individuality of each profile but turns the typical media-company business
model upside down, which is one reason that it is so hard for the News
Corporation to use the audience to sell ads or to promote its own
programming. The best way to get, say, a television show in front of the
MySpace audience is not to cut a deal with a programming czar at a Hollywood
restaurant, but to win the hearts, one by one, of thousands of members who
will display the show to all of their friends.

"We can't look at this as a media property," said Peter Chernin, the News
Corporation's president. "This is a site programmed by its users."

For that reason, MySpace is only gingerly pushing users into other Fox
properties. Right now, Fox's relationship to MySpace is not explicit,
although Fox movies and television shows are frequent advertisers.
Ultimately, the News Corporation will make it easy for MySpace members to
put clips from its television programs and trailers for its movies on their
profile pages. But there will be nothing to stop them from using material
from other companies.

Mr. Levinsohn calls MySpace the antiportal. "It's not about a central hub,
because that's not where things are going," he said. "The under-30 set wants
choice. It's not about one destination; it's about 65 million."

Indeed, rather than squeeze all its Internet ambitions into MySpace, Fox
Interactive is assembling a network of Web sites, including IGN, a
collection of sites focused on video games, and Scout, which runs Web sites
for about 200 local sports teams. The News Corporation is also developing a
portal devoted to entertainment, drawing from its Fox network programs, the
Page Six gossip column of The New York Post and show-business reporters at
the 35 local television stations it owns, Mr. Levinsohn said.

AT MySpace, the first challenge is to raise advertising rates. Because its
supply of pages so greatly outstrips demand from advertisers, it has offered
deep discounts. Indeed, the average rate paid for advertising is a bit over
a dime for 1,000 impressions, Mr. Levinsohn said, far lower than rates at
major competitors. "If we can raise that by 10 cents, think of the upside,"
he said.

One way to coax more money from advertisers is to build special sections ‹
areas devoted to music and independent filmmakers ‹ that provide a neutral
home to advertisers that want MySpace's youthful audience but don't want
their ads associated with the risqué content of some members' profiles.

A sign of that challenge is seen in Mr. Levinsohn's effort to expand the use
of text ads ‹ the rapidly growing format pioneered by search engines. He has
been running tests with Yahoo, Google and several smaller ad providers and
has sought proposals from them for longer-term deals.

The answer he received was a shock. Not one of them, not even the mighty
Google, was sure that it could provide enough advertisements to fill all the
pages that MySpace displays each day, Mr. Levinsohn said. The search
companies did not want to dilute their networks with so many ads for MySpace
users, whom they said were not the best prospects for most marketing because
they use MySpace for socializing, not buying.

Mr. Levinsohn says he also hopes to raise ad rates by collecting more user
data so advertisers can find the most promising prospects. To use the site,
people need to provide their age, location and sex, and often volunteer
their sexual orientation and personal interests. Some of that information is
already being used to select ads to display. Soon, the site will track when
users visit profile pages and other sections devoted to topics of interest
to advertisers. People who put information about sports cars in their
profiles or who frequent MySpace message boards about hot-rodding, for
example, would be shown ads for car parts, even while reading messages from
friends.

The bigger opportunity, however, is not so much selling banner ads, but
finding ways to integrate advertisers into the site's web of relationships.
Wendy's Old Fashioned Hamburgers, for example, created a profile for the
animated square hamburger character from its television campaign. About
100,000 people signed up to be "friends" with the square.

Fox officials wonder whether this sort of commerce, built on relationships,
can be extended to small businesses. A Ford dealership in, say, Indiana
could create a profile, said Mark A. Jung, the chief operating officer of
Fox Interactive. The profiles themselves, he said, would probably be free,
but MySpace would sell enhancements to help businesses attract customers and
complete transactions, Mr. Jung said.

Yet here is another place that executives at Fox and MySpace don't see eye
to eye. Mr. DeWolfe discounted the idea of people creating profile pages for
small businesses. "If it was a really commercial profile ‹ the gas station
down the street ‹ no one is going to sign up to be one of their friends," he
said. "There is nothing interesting about it."

For now, Mr. DeWolfe said, he has more down-to-earth plans. With the News
Corporation's help, he is opening an office in London to coordinate
MySpace's expansion in Europe. He is cutting deals to let members connect to
MySpace over cellphones.

The News Corporation, he said, is helping MySpace achieve his goals sooner
than it could on its own. So far this year, MySpace has spent $20 million of
the News Corporation's money, in part to nearly double its staff of 250.
About one-third of its employees focus on customer service and,
increasingly, on responding to parents' concerns about what teenagers do on
the site and what else they can see there. In the last six months, there has
been a torrent of letters from schools to parents ‹ as well as newspaper
articles ‹ about the glorification of drinking, drug use and sex on many
MySpace profiles.

MySpace has long had rules that forbid anyone under 14 to join and that ban
pornographic images and hate speech. Beyond those, however, the site is very
open to frank discussion, provocative images and links to all sorts of
activities. It didn't stop Playboy magazine, for example, from creating a
profile page on its site to recruit members to pose in the magazine. Nor
does it object to Jenna Jameson, the pornographic film star, maintaining a
profile with links to her hard-core Web site.

Ms. Jameson "is more than a porn star," Mr. Anderson said. "She is an author
and a celebrity and has been on Oprah." He added that "if we had a site that
was 'My name is so-and-so and this is my porn site,' we would delete that."

Mr. Levinsohn, Mr. DeWolfe and others at the News Corporation say the site
has no more or fewer problems than any other community on the Internet, and
their primary response to parents' concern is a campaign to educate users
about safe surfing techniques. "There are a couple of basic safety tips that
can make MySpace safe for anyone over 14," Mr. DeWolfe said. "Just like you
tell kids not to get in the car with strangers and to look both ways before
you cross the street."

A sign that MySpace can play a role in some of the most distressing
experiences of growing up came last week, when five teenage boys were
arrested in Riverton, Kan. Law enforcement and school officials there said
that the group planned to go on a shooting spree at their high school but
were stopped after one of them discussed the plot on MySpace.

IN some ways, MySpace has assumed the role America Online held a decade ago
when it introduced e-mail services and Internet chat to the masses. But
AOL's example is a cautionary one. For many reasons, largely its failure to
keep up with trends, AOL lost its place in the social lives of young people.

Mr. DeWolfe argues that MySpace won't suffer that fate because, in just two
years, it has already become so entrenched in so many lives. "People are
truly invested in the site," he said. "All their friends are on it. They
spent months building their profiles. And so the cost of switching is too
high. If we keep building the features they want, they will stay on the
site."

If he is right, MySpace will be more than just a trendy toy to be discarded
like last year's E-scooter.