A Site Stickier than a Barroom Floor
Tiny MySpace made a business out of social networking by giving its music-loving crowd reason to come back.
By Kevin Kelleher

(Business 2.0) – Of the scores of social-networking websites born since Friendster's triumphal launch in 2002, name one that's in the black. Stumped? Insiders say that not only is privately held, Santa Monica-based MySpace profitable, but it's the biggest moneymaker of them all so far. With more than 14 million members, the site, built on the backs of indie bands and the fans who love them, has an audience even larger than Friendster's. MySpace is coming on strong, signing up users at a rate of 65,000 per day and, according to research firm ThinkEquity, on pace to reel in more than $20 million in ad sales this year from the likes of Nike, Procter & Gamble, and Sony. Not too shabby for a company less than two years old. Here's how MySpace found the money in social networking.

Giving the Party a Purpose

The typical social network enjoys exponential growth reminiscent of a Ponzi scheme. But if there's nothing to do at the site after signing up, members stop returning. "Social networking is a valuable piece of lots of potential services," says David Hornik, a venture capitalist at August Capital. "It can't be a stand-alone service.

Most of MySpace's members sign up for one reason: to be plugged into the indie music scene around the country. Co-founders Chris DeWolfe and Tom Anderson, longtime indie buffs, began promoting their site in 2003 by paying nightly visits to L.A. music clubs. Musicians started signing up for free MySpace homepages where they could post tour dates, songs, and lyrics; fans signed up for their own pages to link to favorite bands and friends and spread the word.

More than 247,000 bands belong to MySpace today, including major acts like Beck, Black-Eyed Peas, and Queens of the Stone Age. "If it weren't for MySpace," says Mark Houlihan of L.A. indie rock band Jupiter Sunrise, "my band and a lot of others would be stuck in that cliché that you need a label to bring you fans. That's changed."

Turning Members Into Magnets

When you sign up at MySpace, the first "friend" you meet is the affable Anderson. "Feel free to tell me what features you want to see on MySpace," he writes, "and if I think it's cool, we'll do it!" Five thousand such requests come to Anderson daily. In return, he supplies members with more features than can be found at any other social-networking site. That personal touch counts: More than the mass audience at Friendster, MySpace members are creative fanatics who put painstaking effort into their webpages. Band pages are often professionally designed and loaded with audio, video, and blogs--keeping users on the site longer (93 minutes vs. 36 at Friendster, according to Nielsen/NetRatings) and driving traffic. In March, MySpace logged 5.34 billion pageviews, according to ComScore Media Metrix, compared with just 169 million at Friendster, making MySpace the third-biggest online ad server, behind only Yahoo and MSN. All that premium content costs MySpace (whose staff numbers 80) next to nothing to produce.

Leveraging the Hard-to-Reach

Perhaps MySpace's biggest advantage is that it hits one of advertising's most coveted demographics: 16- to 34-year-old hipsters, who make up 65 percent of its user base. This group generally shuns TV advertising, DeWolfe says, and "doesn't want a brand shoved down its throats. They want to interact with a brand on their own terms, like they do with bands or their friends."

So MySpace tries to segment its audience to major advertisers in a way that stresses the site's indie roots. Last year, when Fox Broadcasting called MySpace, interested in promoting its young-adult drama The O.C., MySpace set up a sponsored page that had the look and feel of an indie site. Within a month, more than 50,000 MySpace users had linked their pages to it. Then came Procter & Gamble, buying sponsorship on singer Hilary Duff's MySpace site to promote its deodorant for young women, Secret Sparkle. "We wondered if the MySpace crowd would see us the way they do pop-up ads--as an annoying presence," says Michelle Vaeth, a P&G communications director. "But nearly two-thirds said they liked Secret Sparkle that much more after seeing us affiliated with Hilary Duff on MySpace."

That's music to DeWolfe's ears, because the more he can deliver targeted ads, the higher MySpace can hike its ad rates, which still rank at the low end of the scale--between $3 and $6 per 1,000 impressions, according to ThinkEquity analyst John Tinker. That's significantly more than what MySpace was charging last year (which explains why sales are relatively low, given the audience size), but still cheap compared with the $25 rates at sites like Yahoo and MSN. If DeWolfe has his way, the bargains won't last for long. -- KEVIN KELLEHER