Myspace: the Online Reality Show

Licensed to: iChapters User

CASE 4

MYSPACE: THE ONLINE REALITY SHOW

In the fall of 2006, Chris DeWolfe found himself step- In the Beginning ping back in time as he stood before a crowd of alums and current students from the Lloyd Greif Center for Chris DeWolfe hails from Portland, Oregon; both Entrepreneurial Studies at the Marshall School of Busi- parents were teachers. So it was a bit of a break from ness of the University of Southern California. He was tradition when he decided to major in business at the there to receive an award as the Alumni Entrepreneur University of Washington. Upon graduation he took of the Year for co-founding the second largest site on a job, but two years into it, he began to have some the Internet, MySpace, the social networking phenom- doubts. enon. But more than that, he was there to remember his roots and to tell an eager audience of entrepreneur I looked to my left and looked to my right and saw hopefuls whatat to watch out for.for. “TechnologyTechnology does not that my colleagues were twenty years older than me, drive demand,”d,” he cautioned the students. “MySpace aandnd it was aalmostlmost likelike lookinglooking into ththehe fuffuture.tuure. And has always takenakkenen a sociologicalsocioologigicac l viewpoint—Howviv ewwpop inint—t How doo I was scscaredcarreed bbecauseecause thatthat wasn’t somethingsomeetthih ng thatth I people do things?hinings? WhWhathaat ddoo thttheyheyy llikeiike too ddo?o?o TThenheh n ththehe wwawantedntedd ttoo do.doo. I wantedwwantted toto createcrc eaatee mymy ownowwn business;buus MySpace teamamm fi guresguru es outoutu howhoww theythhey cancacan enableennaba llee theirtheeiri I wantwantedeed ttoo dod mymy ownoown thing;thhinng; I wantedwannted too iinnovate.nnn users to do whatwhat theythey want.” Asked what he would Frustrated, heh decideddecided to further his educeducationa by have done differently,fferently DeWolfe doesn’t doesn’t miss a beatbeat—“I“I getting an MBA. MBA His friends told him that he h had to would have started it sooner.” He would have expanded have a plan to get into a good business school. He aggressively and hired more developers in the early had to know whether he wanted to be a consultant, days, because “speed to market is important.” an investment banker, or a marketing manager. DeWolfe was looking back at the launch of the Again, DeWolfe sidestepped the traditional route— company he co-founded with Tom Anderson from a “My plan is, I’m going to fi gure out a plan when I new position in that fall of 2006. MySpace had recently get there.” He was accepted into the Marshall School been acquired by Rupert Murdoch’s News Corpora- of Business at the University of Southern California tion (News Corp) as part of a $580 million package (USC), and for the fi rst year he immersed himself in deal for Intermix Media, MySpace’s parent company. the Internet, which in 1995 was just beginning to With the enormous resources of News Corp behind gain some ground as a commercial channel. Netscape it, MySpace was taking on an astounding number of and Yahoo! had gone public and things were getting new projects: a new Google agreement for text ads, a interesting. In the second year of his MBA, he took MySpace records label, a VoIP feature so their users a class in the Lloyd Greif Center for Entrepreneurial could call one another, international sites, and another Studies and was hooked. He knew what he wanted to 20 products in various stages of development in the be—an Internet entrepreneur—that was his passion. pipeline. How did MySpace go from launch in late After graduation, DeWolfe and three of his USC 2003 to online media giant by 2007? Marshall friends took jobs at an Internet data-storage

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Case 4 MYSPACE: THE ONLINE REALITY SHOW 459

company, Xdrive; DeWolfe became the company’s each network could have its own design and user head of sales and marketing. It was in that capacity interface, yet they would all be connected seamlessly that he met one of his future partners, Tom Anderson, to the Internet. The 1980s saw the rapid develop- in 2000. Anderson, a frustrated English major at UC ment of LANs (local area networks), PCs, and work- Berkeley and then fi lm school major, responded to an stations, which contributed to the swift expansion of ad to earn $20 for testing an Xdrive product. Al- the Internet that was now serving a broad base of though Anderson disliked the product immensely, researchers and developers. DeWolfe liked him so much that he offered him a full- In 1991, the fi rst user-friendly interface was de- time job. Xdrive was not a success, however. It was the veloped at the University of Minnesota. Gopher, as it typical dot com company of the day, raising $120 mil- was named after the university’s mascot, quickly lion and spending it foolishly on parties, excess adver- expanded to over 10,000 systems around the world tising, and hiring people it didn’t need. That experience while other universities developed enhancements to told DeWolfe that it was time to start his own com- it, such as a searchable index of gopher menus and a pany, so he and Anderson left the fi rm (in bankruptcy) spider that crawled gopher menus to collect links in 2001 and launched an Internet direct-marketing and place them in the index. But it was the develop- fi rm called Response Base. They sold that business for ment in 1993 of Mosaic, a graphical user interface, several million dollars in late 2002 to eUniverse, a by Marc Andreessen and his team at the National holder of multiple Internet assets. Both joined the Center for Supercomputing Applications that be- company, but just six months later, DeWolfe and An- came the catalyst for the commercial Internet as we derson were asking themselves, “What’s next?” know it today. With the launch of Delphi, the fi rst national commercial online service that offered In- A Brief History of the Internet ternet access to subscribers in 1992, the commercial Internet could not be stopped.stopped. In 1995, the National Althoughgh tthehe Internet ddidn’tidn’t bbecomeecome tthehe ffocusocus ooff ScienceScience FoundationFoundation haltedhalted fundingfunddini g of the Internet consumermerr aattentiontttene tiionn uuntilntntil aaboutboboutt 11995,99995, iitstss hhistoryistooryr aac-c-c backbone,backkboonen , andanand commercialcoc mmercic all networksnettworks lilike AOL and tually ddatesata es bbackacck to AAugustuuggusu t 191962,9622, whwhenene MMIT’sITT’s CompuServeCoC mmpuSeervee wereweere born.boornn. J.C.R. LLickliderici klk ididerr bbeganegegann ddiscussingisscuc ssining whwwhatatt hhee ccacalledllllede ttheheh UntilUnttili 1998,1998, whenwhhen MicrosoftMiM crossooft releasedrelleaas Windows “galacticic network,” a “globally interconnected set 9898 with a full-scale browser incorporated,incorporate Netscape’s of computers,”puters ” which would enable anyone in the browser,browser which was free, free was the most m popular network to access data and programs from any site. browser on the market. At this point, there was no While serving as the fi rst head of the computer stopping the proliferation of Internet sites as more research program at DARPA, he convinced his and more companies tried to fi nd business models colleagues of the signifi cance of his concept. By late that would enable them to make money through this 1966, MIT researcher Lawrence Roberts had cre- exciting new channel. The highly speculative period ated a plan to build the ARPANET and by 1969, between 1995 and 2001 has been called the “dot the fi rst node was installed at UCLA. Within a com bubble,” because stock markets saw their value month, two additional nodes were added at UC explode to unprecedented levels from the growth in Santa Barbara and the University of Utah, and by Internet companies and related sectors only to crash the end of 1969, there were four host computers in the spring of 2000 because these same companies connected on ARPANET. Nevertheless, it took couldn’t deliver business models that made sense or until October 1972 to demonstrate ARPANET’s contributed to realistic valuations. The dot com capability to the public at an international confer- bubble was not a unique event. History has wit- ence and to introduce its newest application, elec- nessed other booms and busts: radio in the 1920s, tronic mail. transistor electronics in the 1950s, and home com- ARPANET was the fi rst of what would become puters in the early 1980s. Some of the more notable many networks linked by an open architecture net- dot com failures were Webvan, the online grocer; working called the Internet. In open architecture Pets.com; and eToys.com.

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460 Case Studies

Today many pundits question whether we are working. DeWolfe quickly consulted with his devel- heading into another dot com bubble—the sequel— oper and learned that the system they had built with the recent acquisitions of MySpace and You- couldn’t survive an assault by more than 200 people Tube at extremely high valuations. These social at the same time. Realizing the mistake that had been networking sites depend a good deal on content that made, DeWolfe instructed the developer to build the their users create and on their users’ ability to build site to hold millions of people at the same time. large networks among their friends and associates. Shortly thereafter they were back in business. Growth There are no fees charged to the users, so the sites did not come quickly for this social networking por- rely on advertising revenue and sponsorships and tal; in fact, the company didn’t start to see success often have no proprietary technology. However, if for at least six to nine months. At fi rst they attracted MySpace is the model for the current Internet ven- their users by inviting bands and club owners in Los ture, then we will see more acquisitions by large cor- Angeles to create pages and then invite others to porations instead of IPOs by unprofi table Internet “become their friends.” Because the bands and clubs companies. could use MySpace as their promotional platform, they very willingly invited others onto the site. And The Birth of MySpace everyone came, because MySpace allowed them to do and post what they wanted, whereas rival Ready to start another business, DeWolfe and Friendster made sure that its site did not contain Anderson surveyed the Internet landscape and rec- anything that didn’t fi t its core proposition, which at ognized a “perfect storm” of activities that seemed the time was essentially Internet dating. MySpace to suggest a space to do something that wasn’t being also succeeded in correcting many of the problems done. In late 2002, the term social networking was that users had with Friendster, such as speed of ac- getting somee play due to the emergence of Friendster cess to the site.site. Giving bands an outlet to let users (a dating site),e), TribeTribe (a(a classificlassifi edseds andand locallocal informa-informa- samplesample andand shareshare songs as wellwell asas communicatecoommunniic with tion guide), andandn FacebookFaccebbooo k (social(soccial networkingnenetwt orkiingn forforr thetht e bandsbab ndds waswas thethe sesecretecrett saucesaua cece tthathat ccatalyzed college students).denents). DeWolfeDeWe olfee andandn AndersonAnndere sos n noticednooticeced MySpace’sMySppaca e’s growth.ggroowtht . By 2004,20004, moremorre thantht aan 350,0003 that they wereerer receivingrece eiivvingng a constantcononsstannt streamsttrreamm ofof re-ree- bandsbbandn s andannd solosoolo artists,arrtissts, bothbooth uunknownnnknoownn aandndd famous, quests throughugh their e-mail to joinjoin these networks, hadhad set up pages on the site and invited theirthei friends so they beganan to do some research and quickly de- de to join, join creating a viral effect. effect In September Septembe 2004, termined that these were niche players without a lot R.E.M. became the fi rst band from a major record of potential to become huge. The two had bigger label to stream its latest album on MySpace before its plans in mind, specifi cally a portal that would bring release. all of the niche functions together and let users do The New York Times wrote of MySpace: whatever they do offl ine in a more product way: Even with many users in their 20s MySpace has the express themselves, send out invitations, blog, personality of an online version of a teenager’s discover music, share photos, and play games. bedroom, a place where the walls are papered with DeWolfe’s mantra has always been “once you’ve posters and photographs, the music is loud, and done the research, stop strategizing and jump off grownups are an alien species. the cliff.” So he and Anderson made the leap to start the company. They pitched the idea to eUniverse And that’s just what DeWolfe and Anderson in- and took a seed round of fi nancing for 66 percent of tended. Users are able to customize the look of their their equity. They also purchased the myspace.com pages, add personal photographs, and create a net- domain name from a data-storage company no lon- work of friends who must receive permission before ger in existence. being added to someone’s site. The biggest celebrity It took three months to build the site, and they on MySpace is co-founder Tom Anderson because it launched at the end of 2003. However, the day after is his face that pops up when a new member registers, launch the site blew up—in other words, it stopped so his list of friends was running over 46 million as of

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Case 4 MYSPACE: THE ONLINE REALITY SHOW 461

2006. Of the two founders, Anderson, who came out analytics and e-commerce), and its media network, of music and fi lm, is the most gregarious and creative which consisted of about 30 different websites. At while the quieter DeWolfe manages MySpace’s fi nances the time, MySpace was supporting approximately and keeps a lower profi le. In fact, it was DeWolfe who 18 million unique visitors and was the fastest growing shielded Anderson from much of the turmoil sur- part of Intermix. DeWolfe was very nervous when rounding the later acquisition of MySpace. News Corp’s Rupert Murdoch, the media icon, ap- In July 2004, eUniverse changed its name to In- proached them about an acquisition, because he did termix Media (IMIX) and brought on a new CEO, not want to risk losing the no-rules culture they were Richard Rosenblatt, a successful Internet pioneer known for and become buried in a huge conservative who in 1999 had sold his company iMall for conglomerate; however, they needed the money to $565 million. His challenge was to turn around the support their blistering growth, and their board ap- struggling company, which had gone through an proved the sale. In approximately 18 months from SEC investigation, had its stock halted from trading the time he had become CEO of Intermix, Rosenblatt for nearly four months, had to restate the fi rst three had turned the company around and sold it and its quarters of fi scal year 2003, had been delisted from highly successful subsidiary MySpace for a premium, NASDAQ, and was being sued by its shareholders in $580 million in cash, to News Corp to become part various class-action and derivative lawsuits. All of of its Fox Interactive Media, Inc. Rosenblatt remained these problems cost the company a lot of money, so it a consultant to News Corp to help grow the Intermix was soon clear that the company needed more fund- properties until he launched Demand Media in 2006, ing to support its rapid growth and that of its fastest raised $220 million in investment capital, and bought growing asset, MySpace. This meant talking to ven- back the non-MySpace assets of Intermix Network ture capitalists, most of whom didn’t understand the LLC from News Corp. MySpacece concept,concept, didn’tdidn t know the management Prior to the acquisition,acquisition, Murdoch had assured team, andnd thoughtthought ttheyhey were trying to ddoo too mucmuch.h. DeWolfeDeWolfl e andand AndersonAnderson thatthaat he wouldwouldl not interfere But Redpointdppoio ntnt Ventures,Vene tut rees,s a SiliconSilicconon VValleyalleey fi rm,rm,m diddidi withwiw thh thethe runningrunu ningg ofof MySpace;MySpaca e;e however,howevvere shortly after understandandn the ttechnology–entertainmentecchnnoology––ennteertr aia nmmennt mimmix.x.x. IInn thethe acquisitionaacqquisi itioon ofo IntermixInttermimix in JJulyuuly 2022005,005 News Corp Decemberbere 2004,2000 44,, theytheh y agreedaagreeeded toto investininvev stt $4$4 millionmim lllioi n ini decideddecidded tot movemovve MySpaceMMySpaca e fromfromm itsitts laid-backlaid offi ce a Intermixx Media,Media, Inc.,Inc., for one million shares of ititss block from the beach in Santa MonicaMonic to Beverly commonn stock and a fi ve-yearve year warrant to purchase Hills,Hills where all of News Corp’s Corp’s Internet Intern companies 150,000 shares of common stock at $4/share. With were based. It was at that point that DeWolfe and the ink on that deal still drying, in February 2005, Anderson fi rst realized that they no longer really Redpoint Ventures again invested, this time a total of owned MySpace. They soon found that other things $11.5 million for a minority stake of 25 percent in had changed as well. Decisions took a lot longer now the newly formed independent subsidiary of Inter- with all the big corporate processes and the culture mix, MySpace, Inc. As of February 2005, Intermix was not as casual. The upside, though, was that held a 53 percent equity interest in MySpace, Inc. MySpace had signifi cantly more resources at its dis- DeWolfe served as chief executive offi cer for a three- posal to launch multiple projects and products year term that ended in October 2007. simultaneously. DeWolfe believes that MySpace is at the nascent stage of where it can potentially go. As the number The Acquisition of Intermix two Internet site in terms of page views, the duo and MySpace needs to make sure that they continue to listen to the market, not the experts, and not “follow the pack.” In 2005, a number of large media companies began DeWolfe attributes the success of MySpace to several approaching Richard Rosenblatt, CEO of Intermix factors: (1) an experienced management team that and chairman of MySpace, about acquiring Intermix had worked together for 8 years; (2) great timing on and its three main assets: MySpace, Alena (marketing the launch of the site, with social networking taking

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462 Case Studies

off and advertising revenues returning to Internet Sources: “A Brief History of the Internet.” Internet Society, companies; (3) features on the site that were compel- http://www.isoc.org, accessed May 29, 2007; Interview ling to their users—they provided a solution that with Chris DeWolfe, Alumni Entrepreneur of the Year made sense and that users couldn’t fi nd on other Event, November 2006, University of Southern sites; and (4) the use of infl uencers from entertain- California; “Dot-Com Bubble, Part II? Why It’s So Hard to Value Social Networking Sites.” Knowledge@wharton, ment to drive interest in the site. As long as DeWolfe http:// knowledge.wharton.upenn.edu, accessed Octo- and Anderson remain with the company, the intent is ber 4, 2006; Sellers, P. (2006). “MySpace Cowboys.” to make sure that users control the site and users dic- Fortune (September 4): 67; “Interview with Richard tate the features that MySpace offers. That philoso- Rosenblatt, Intermix and MySpace.” Socal Tech (Janu- phy often presents problems, with the less desirable ary 30, 2006), http://www.socaltech.com; Williams, A. elements of society easily setting up shop in MySpace (August 28, 2005). “Do You MySpace?” New York Times, and preying on other users. “We take safety very seri- http://www.nytimes.com; Weintraub, J. (July 25, 2005). ously and we make huge investments in it,” asserts “A, B, C, D, eUniverse.” DM Confi dential, http://www DeWolfe. Monitoring the site while still giving users .adastro.com; “Entry Material Agreement, Other Events, freedom is a real balancing act, but it has to happen Financial Statements and Exhibits.” Form 8-K for Inter- for MySpace to be able to attract national advertisers mix Media, Inc., published February 17, 2005; Exhibit 99.1, eUniverse Issues Open Letter to eUniverse Stock- like Coca-Cola and Procter & Gamble, who will not holders, January 7, 2004, http://sec.edgar-online.com. risk their brands by having them associated with off- color or inappropriate content. These “sponsors” Discussion Questions supply signifi cant revenue for a company that de- pends primarily on ads in its business model. In De- 1. How did DeWolfe and Anderson recognize the cember 2006, with the resources of News Corp at its opportunity for MySpace? disposal, MySpaceySpace went mobile on a grand scale with 2.2. What mistakes were made with Xdrive thatt ulti- a service thatat enablesenables CingularCingular WireWirelessless subscriberssubscribers matelymatelyy mademade MySpace go moremoro e smoothly?smmoothhlly to use manyy ofo thetheh socialsococial networkingnetwworkik ngng featuresfeatuures off 3.3 HHowoow ddididd MMySpaceySy paacce differentiatedifffeereenttiatee itselfitsellf frfrom the MySpace on theirthheir cellcelll phonesphphonneess forforr a $2.99$2..99 perperer monthmonntth coccompetition?ompm eetittionn? premium. ThisThih s waswaw s a waywaw y to diversifydiiverrsisifyy itsitss businessbussini esess 44. S Shouldhoould DeWolfeDeD Wolffe andaand AndersonAnded rsonn havehavve givenggivve up so model and againgain meet one of the requested needs of mmuchuch equity (66%)(66%) in thethe beginningbeginning to eUniverse?e U its users. WWas there h an alternative l i strategy available? il bl In the spring of 2007, with their contract end 5. Evaluate the acquisition of MySpace as part of the date looming in October, DeWolfe and Anderson Intermix package. Would you have made that were again faced with the question, “What’s next?” decision? Why or why not?

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