As Facebook takes off, MySpace strikes back

(Fortune Magazine) -- "Everyone believes all the b.s. press that says MySpace is done for and Facebook has passed us," moans Tom Anderson.

You may know Tom. He's president of MySpace. He may even be your "friend" - he's the first one that all of MySpace's 200 million-plus members got when they signed up. Normally he's low-key, but the subject of that other social-networking site has him a little worked up. "It's just ridiculous!"

MySpace co-founders Chris DeWolfe (left) and Tom Anderson

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"But you can't say that too much," gently interrupts his business partner, Chris DeWolfe, MySpace's CEO. "You sound defensive."

If there's a consensus in technology, it's that the next big thing after Google (Charts, Fortune 500) is social networking. People of all sorts are joining this new kind of website because you really can have more fun online - and sometimes even get more done - when you're doing it with others.

Now there's starting to be real money in the business, as every major consumer advertiser realizes that if you can engage effectively with these newly networked hordes, they become agents of your brand. Last year MySpace was on the lips of every teenager. Now Facebook is growing faster, is usurping the buzz, and thus has Tom Anderson tied into knots.

But defensiveness does not behoove executives who run a division of News Corp. (Charts, Fortune 500), Rupert Murdoch's consummately aggressive company - especially not when that division is the biggest player by far in an explosively expanding business like social networking.

It's easy to dismiss MySpace, with its unruly graphics, clunky navigation, and general sense of chaos. But the masses love it. MySpace is the most trafficked website in the U.S.: It registered 45 billion page views in July, according to comScore Media Metrix. Another research firm, Compete.com, calculates that Americans spend about 12% of all their Internet time there.

And apparently it's not just kids anymore - about half of its members are over 35. Murdoch bought MySpace in 2005 when it had $23 million in revenues; he recently told analysts that in the fiscal year beginning in July, it will take in $800 million, with a profit margin greater than 20%.

Of course, there's no telling whether MySpace's numbers will continue to kick butt. New competitors arise almost every day, and the site continues to be hammered by criticism of its privacy and safety practices. It's impossible to say for sure who's even going to be running the place a year from now: DeWolfe and Anderson are currently renegotiating their News Corp. contracts.

But chances are this operation will be around for a long time. In fact, I'm going to go out on a limb here: MySpace, Rupert Murdoch's four-year-old Internet plaything, may be the template for the media company of the future.

Comparing MySpace and Facebook is inevitable because of their dominance in the business, but their differences are profound.

Facebook is intended to be used only to connect you to the people you already know offline; it's a "utility," to use the preferred label of its founder and CEO, Mark Zuckerberg. Its user interface is clean and tidy, and the whole vibe is efficiency and getting things done.

MySpace, on the other hand, is a mishmash of modern media - rich with music and video and comedy. It's like a rock & roll club - chaotic, loud, and packed. Many user profiles are florid and flamboyant, with flashing text and music that starts playing as soon as you arrive.

"We're focused on helping people express themselves and do the connection and discovery game," says Steve Pearman, one of Anderson's top deputies in designing the service. "If you want pink blinking text on a black background, who am I to say it's wrong?"

At MySpace you can befriend not only anybody but anything. A dog can have a profile, and so can AT&T. This looseness has powerful effects, very different from anything on Facebook. MySpace became the de facto home page for the music industry because its members could befriend bands. Any brand, political candidate, nonprofit, even government, can create a profile and start adding friends.

Hillary Clinton has 135,000 friends, and Barack Obama has 175,000. The recent movie Bratz accumulated 42,000. Victoria's Secret PINK brand has 210,000. Comedian Dane Cook has the most friends of all - more than two million.

It doesn't cost anything to create a profile, although companies like Victoria's Secret pay extra for MySpace's promotional help. To say you are a MySpace friend of Dane Cook or Victoria's Secret is a way of expressing an affinity, one that you are implicitly suggesting your friends might like to share. Abercrombie & Fitch enjoys a 167,000-member group created by a fan without any involvement from the retailer.

Pearman describes the way the MySpace experience typically works: "I know you, and I see one of your friends. Look at them - they're friends with this band. The band is doing a show. They're at this awesome club. Here's a guy who also goes to that club and is a Battlestar Galactica fan - maybe he and I should be friends."

As users happily wend their way through this process, they click through screen after screen, every one of them festooned with ads. (On one day this summer, MySpace showered its users with 7.3 billion of them.)

With all that clicking and friending going on, it's no wonder MySpace is becoming an advertising mecca. Also playing into its advertising appeal is the fact that MySpace effectively runs its own mini-Internet in which users all have their own home pages, replete with data about themselves that can be examined and - to use a cherished Net industry term - "monetized."

Google promised in 2006 to pay roughly $250 million a year to show text-based search and keyword-targeted ads across MySpace through mid-2010. MySpace sells most of its banner ads itself, and the company is rolling out new ad-targeting technologies.

The research firm eMarketer calculates that in 2007, MySpace will sell $525 million worth of advertising, 58% of the social-networking industry's total. (Facebook will sell $125 million - less than a quarter as much.) One huge upcoming opportunity, says DeWolfe, is ad-supported MySpace on mobile phones.

MySpace's Beverly Hills offices feel much like those of a studio or a record label, where well-dressed, trendy twenty-somethings queue up for bagels in the cafeteria at 10 A.M. and banter about last night's party or concert. Movie posters line the fuchsia walls in the reception area. In the sofa-filled lounge that substitutes for an executive conference room, a table is covered with magazines: Hollywood Reporter, Variety, and Daily Variety - nothing else. It's probably the only major technology company with valet parking.

What gets MySpace people excited is finding a new band or locking in exclusive online rights to a hot TV show. "Our core competency," says DeWolfe, "is finding the best content out there - from tier-A professional content down to emerging content - licensing it, and bringing it on MySpace."

There are deals with the NBA, NBC (Charts, Fortune 500), and the creators of Thirtysomething to debut a new series on MySpace before it appears on TV. MySpace can make money both by charging content owners for distribution and by finding and promoting its own material.

In fact it actually has a MySpace record label, which signs musicians who bubble up on the service, and will probably establish a similar operation for film and video. The recently relaunched MySpaceTV is the No. 2 video site on the Internet, behind only YouTube. It offers everything from News Corp.-produced clips of The Simpsons to homemade video of your kid's sixth-birthday party. Ford Models paid to include videos promoting its "supermodel of the world" contest. One has been viewed about 72,000 times.

Facebook, meanwhile, has never licensed rights to a single song or video and probably never will. And for the record, its headquarters are on University Avenue in Palo Alto, ground zero for the technology industry, where the parties mostly happen when the employee Ultimate Frisbee team beats Google.

Otherwise people pretty much just work all night, writing software, tweaking features - and giving hardly a thought to MySpace.

Alas, MySpace's Facebook obsession is unrequited. DeWolfe and Anderson insist that Facebook is competition, even as they cite a comScore statistic that 65% of Facebook users also have a MySpace account.

Mark Zuckerberg disagrees. "I've never really considered us competitors," he says. "We've always been trying to do pretty different things, even though we're both in the social-networking space." Anderson is annoyed that Zuckerberg has said the same thing to him on several occasions when they've talked in person or text-messaged on their cellphones. And so it goes.

It's not hard to see why Anderson and DeWolfe see Facebook as a threat. Although Zuckerberg may not be directly attacking MySpace, he's doing a good job of making it easy for other companies to do just that.

In late May, Facebook announced it would open up its site and access to its 41 million members - to software created by anyone, from the largest software companies to dorm-room hackers. That made it, Zuckerberg said, a "platform." There are now more than 4,000 new applications on Facebook - and most of the popular ones replicate features already on MySpace.

Any talk about Facebook and its platform is a great way to spoil the mood around the MySpace offices. It's that defensiveness again. "MySpace has always been a platform," DeWolfe insists. "We have an open platform." What he means is that MySpace allows small software applications, known as "widgets," to appear on the site.

Another way to sour a conversation with the genial DeWolfe is to talk about privacy. Since MySpace places so few limits on who and what can have a presence on it, the service is notoriously hard to police. Users often operate anonymously.

There has also been the infamous problem of sexual predators. The service has implemented a variety of new privacy protections in the past year, and DeWolfe insists the new protections have made MySpace just as safe as Facebook. But on Facebook, protections are built in as the default, and one can achieve little operating under an assumed name. To get comparable privacy on MySpace requires both vigilance and time. Many members simply don't bother.

If MySpace is increasingly taking on the complexion of a big multinational media company, that's understandable, considering who owns it. Rupert Murdoch has put his stamp on his acquisition, especially by pushing it to go global, which now gives it a distinct advantage over the competition.

Murdoch visits the hipster-filled headquarters at least once a month, peppering DeWolfe with questions about membership numbers and sign-up rates. In early 2006, DeWolfe enthusiastically told him that MySpace was about to open its first international site, in Britain.

"I was so excited about it," says DeWolfe. "And he's like [mimicking a deep slow Australian voice], 'How many more this year?' and I said, 'Maybe a couple more.' Then he said, 'How about 12?' So we ended up opening 14." (See "Bebo's British Invasion")

Anderson has his own Rupert stories: "He called me once and couldn't log in for some reason. I was trying to help him over the phone, saying, 'Type this. Type that. What do you see on your screen?' And he says, 'It says, 'Welcome John.' And I'm like, 'John? Why does it say John?' and he says [affecting his own version of the deep, slightly cranky voice], 'I don't use my real name on MySpace.'"

So how is it really going, Chris and Tom? "That this has worked out so well and we both hope to be around for a long time is, I think, a really unique story," expounds DeWolfe, as Anderson nods. "We're almost at our two-year anniversary with News Corp. and we're probably going to sign up for another two years, and ..."

Wait a minute. Probably? When pressed, he looks sheepish.

"I don't know," he says, glancing nervously at his PR person. He hesitates. "We may stay with the company." MySpace's top two employees have spent several months negotiating a renewal of their two-year contract, and it's not a sure thing. They didn't own much stock in the parent company that News Corp. acquired, so for all their successes they have not had a big Internet payout.

The two have reportedly pushed for a $50 million, two-year pact and encountered resistance. To be fair, there is every sign they are deeply engaged in their work and are unlikely to leave. DeWolfe's hesitation in our interview could merely be a negotiating tactic.

Murdoch, for his part, is clearly trying to leverage his success with MySpace to gain an even bigger role in the Internet ecosystem. He talked to Yahoo (Charts, Fortune 500) earlier this year about getting a big chunk in exchange for a piece of MySpace.

Meanwhile, just about every other company in tech, especially Yahoo and Microsoft (Charts, Fortune 500), desperately wants to get into social networking. And any consumer-facing company in any industry has to figure out if it will partner with a big social-networking firm or try to go it alone. Viacom (Charts), for one, has taken a do-it-yourself approach (see "Viacom's plan to be cool again").

Regardless of how the jockeying plays out, MySpace will probably power on. For one thing, it has some big deals on the horizon, executives say, that could help retrieve some buzz from Facebook.

"It's the first time I feel like we have a real competitor," says Anderson, obviously recovering nicely from his un-Murdochian moment of defensiveness. "It's a good thing overall, because if there was any complacency within the company, now there's someone you can look at and say, 'Hey, we've got to be better.'"

MySpace will get better. Facebook will get better. Players to be named later will get better. The only sure losers in this business will be the consumer Internet companies that pretend it's all just a passing fad.