Fortune Magazine
Fast Forward
Is Xfire the next MySpace?
If you're a gamer, you already know about the networking site. If you're an investor, you should.
By David Kirkpatrick, FORTUNE senior editor

NEW YORK (FORTUNE) - "If you make the product cool and people love it, it will spread like crazy and you can monetize it later." Talk like that is often ridiculed, especially by those shaken when the dotcom bubble burst.

But if a company really understands its customers, it's hard to beat such a formula. Google (Research) comes to mind, or Hotmail, or Amazon (Research). Or Xfire. The speaker in this instance was that company's CEO, Mike Cassidy.

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If you're a male online gamer aged 18-34, chances are you've already heard of Xfire. Otherwise, you probably haven't. But this tiny San Francisco company could be the next MySpace, or more relevantly, IGN, the online gaming site bought by News Corp. (Research) last year for $650 million.

Xfire's main purpose is to make it easy to play games online with your friends. "We're a combination of a social networking and community site with a media and ad buying site, all designed around gaming," says Cassidy. One of its great virtues as a business is that it has little value for someone unless their friends also use it. The average user convinces five friends to join the first month. That's what we call a viral business model. It's free. As Cassidy says, the whole thing is "monetized" with advertising.

Xfire, which only launched in January 2004, has three million passionate customers who use its PC software an astonishing average of 88 hours a month, according to Cassidy. More amazing facts: almost 300,000 new users join each month, and for two years the service has sustained a 2 percent-plus growth rate -- weekly. Its users -- in 100 countries (a slight majority are in the United States) -- are online for 200 million minutes every day.

The reason for the growth can probably be found in a core philosophy that puts users first. Cassidy's co-founder was a legendary gamer who goes by Thresh -- real name Dennis Fong. He was world champion for both Doom and Quake in his younger days. Fong once won a Ferrari with his Doom-playing skills.

Now, at the ripe old age of 27, he's retired. But being of the gaming world, Fong helped insure Xfire was, too. And it plans to stay that way. Says Cassidy: "We start every board meeting saying our focus will be 80 percent user acquisition and 20 percent revenue generation."

The user-first, money-later formula appears to be working. Last quarter, only 15 months after it sold its first ad, the company went into the black, Cassidy says. Advertisers include Pepsi's Mountain Dew, Dodge, Unilever's Axe deodorant, Schick, Gillette, plus game-related companies like Electronic Arts, Activision and Intel.

A hefty software client resides on a user's hard-drive, but when they're playing games users just see a small window that controls their instant messaging -- either voice or text -- with other players. They might be talking simultaneously with 10 partners on a joint online quest, or just IMing with a buddy playing a different game. The client is designed not to interfere with the gaming experience, which is typically full-screen and full-attention. The software can be made translucent, for example, so it doesn't obscure an unexpected missile that might be coming toward you.

A small banner ad -- just one -- sits in the client. The company's average click-through rate now is .9 percent, not bad for such a banner. What's more, many of those clicks don't go straight to the web, but rather to information and entertainment stored right on a user's computer. Fox and Universal download game and movie trailers -- as large as 300 megabytes of data -- so Xfire users can watch in high-definition full screen.

The company also has extensive information about users so it can target ads -- for instance offering a discount to someone who it knows has viewed a game trailer. Ad revenues rose 300 percent last quarter over the previous one, though dollars remain small. Total company revenue is apparently still in the single-digit millions.

Behind Xfire are a savvy lot -- Cassidy himself has both undergrad and graduate engineering degrees from MIT and attended Harvard Business School. He previously founded and headed Direct Hit, a search engine bought by Ask Jeeves for about $500 million. The first financiers for Xfire were the VCs who arguably know most about viral businesses -- Draper Fisher Jurvetson. They were also early investors in both Hotmail and Skype.

The company's aims to expand onto other platforms, including console games -- it is working on something for the PlayStation 3 -- and cellphones. With an estimated 110 million gamers worldwide, growth may not slow anytime soon. Meanwhile, for all his user-centered philosophy, Cassidy is thinking more these days about ads. You can detect a bit of that business school education: "If you believe in efficient markets there will be a shift in ad dollars away from TV toward gamers."

Cool product -- check. Spreading like crazy -- check. The time to monetize has probably arrived. Top of page

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