Cliff Kurtzman Photo Courtesy EPIZENTRUM

Something truly extraordinary has been happening in the online world over the past two years, but unless you are between the ages of sixteen and twenty-five, you probably don't even know about it. But that won't last much longer.

In late 1998 my friends Joe Andrieu and Christine Harmel introduced me to a web site called sixdegrees.com. You've surely heard of the six degrees of separation concept - where everyone on the planet is supposedly connected to each other through no more than six people. Well, they hadn't quite connected the whole world yet, but there were over a million people participating in sixdegrees.com, and over 900,000 of them were connected in one giant chain by the time I joined. Sixdegrees.com attempted to develop new types of connections among its members to build a rich online community.

I immediately recognized the tremendous potential of sixdegrees.com's business model and that what they were doing offered revolutionary prospects for creating new ways in which people could connect and interact in our society. Nonetheless, sixdegrees.com failed to gain sufficient traction as a business, and shut down in 2001. Sixdegrees.com failed for a number of reasons: 1) web technology was not yet sufficiently mature to support the kind of rich features that were ultimately necessary to make this type of application succeed; 2) they failed to reach a critical mass of users before their money ran out; 3) they failed to recognize what features would be successful in keeping members engaged with the sixdegrees.com brand; 4) they were impacted by a post-April 2000 recession, later further exacerbated by 9/11, and those events struck at the core of their ability to find advertising revenue; and 5) the online advertising industry was not mature enough to provide sufficient advertisers supporting their business model. Of all of these factors, it is most likely the last two that in the end were the largest factors in sixdegrees.com's demise.

After sixdegrees.com, there were many other online social networks launched, both for personal networking and business networking. Ryze and LinkedIn are two of the better known business networking sites. In neither case do I find the business model to be terribly exciting, nor have I found them to actually be useful for productive networking purposes.

By 2002, Internet usage extended deeply into socio-economic circles outside of the professional business world. That year, a new social network site called Friendster was launched by Jonathan Abrams, with some elements similar to the sixdegrees.com model. While the participants on sixdegrees.com seemed to be primarily white-collar business professionals, Friendster had a broad appeal to many other segments of our society. Friendster was COOL, and quickly reached many millions of registered users, each with an individual profile in the system that they could use to meet and network with others. Young adults loved it, and started spending the majority of their free time networking on Friendster. Friendster seemed to have an unbeatable competitive advantage in owning a potentially highly lucrative new market.

But then during the last half of 2003, the unbelievable happened. Friendster completely dropped the ball. While the folks running Friendster were busy negotiating deals with venture capitalists, they stopped listening to their users. The site slowed down under a heavy user load to the point where it became virtually impossible to use and navigate. The management of the company completely failed to understand how to evolve the site to improve it and serve the needs of its user base.

As Friendster withered and ground to a halt, along came MySpace, a social networking company that did virtually everything right. I discovered MySpace almost immediately upon its launch in late 2003, and it was clear that they were attempting to do extraordinary things. While they started out looking pretty much like a Friendster clone, in short time the differences were apparent. Here are some examples of the things that MySpace has done right:

• While the "Space" in MySpace refers to cyberspace rather than outer space, the principals of the company clearly exercised "rocket scientist" type creativity in building their business. They designed their service to maximize the degree of creativity that their users would be able to enjoy in customizing "their space" on the Internet frontier.

• MySpace embraced a love of music and music fandom that its core audience (primarily Generation Y individuals in the 16-25 age range) is strongly passionate about. MySpace's tie in to the world of music has enabled it create a degree of passion amongst its users that is usually reserved for rock bands.

• MySpace designed their business to continually talk to, listen to and solicit feedback from their users.

• MySpace understood that creating a community means more than just getting lots of people to sign up and create profiles. They had to provide the tools to allow them to interact in rich ways while online. They have continually improved their service and added new features and new ways to interact.

• MySpace made a decision not to try to be everything to everyone... MySpace is very coarse, and much of the content on the site would be offensive to many in our society. But from its inception, MySpace decided not to censor any content except for explicit nudity and hate speech. And the "wild wild west" edginess of MySpace is a large part of its appeal to those that love it and spend much of their lives interacting with others through it. While the appeal of MySpace extends to many well beyond its core audience in terms of age, it is also worth noting that there are many for whom MySpace will hold no appeal whatsoever, and it is most certainly not an appropriate place for those under the age of sixteen. If MySpace had tried to be something for everyone, it would most likely have failed to be anything to anyone!

Two weeks ago, my friend Jay Weintraub and I give a presentation at the AD:TECH Chicago Conference entitled A Crash Course on the Digital Marketing Vendor Landscape. During the course of that presentation, I talked about MySpace along with Intermix, a public company which owned 53% of the stock of MySpace. I mentioned that I thought MySpace was one of the most interesting companies to look at, because the business model had the potential to be every bit as significant in terms of social impact as Yahoo, Amazon, eBay, and Google have been. I felt that MySpace allowed people to connect in fundamentally new ways, and had the ability to change the infrastructure of our society in a truly significant manner. Last week, it was announced that Intermix and MySpace would be acquired by Fox Interactive Media (a subsidiary of Rupert Murdoch's News Corp) for $580 million, adding more than $70 million to Intermix's market capitalization.

Jay wrote an article last week for the publication DM Confidential that discusses the rise of MySpace in more detail. I am pleased to have permission to include Jay's article here for our Apogee readers.

The story of Intermix is one worthy of its close to Hollywood location, a fascinating story both financially and operationally. Founded in April 1999 by UCLA buddies Brad Greenspan and Brett Brewer, they raised $7 million to buy the music retailer CD Universe, and then went public by "reverse merging" into the shell of a defunct company. Being a music etailer did not last long. Selling CDs online makes little profit and leaves no ability for easy growth. Thus, about a year after they purchased CD Universe, the two sold it back to the original owner. What they kept were the network of sites they purchased to drive traffic to CD Universe. This network of approximately 300 sites formed the foundation for Entertainment Universe, aka eUniverse.

Brad Greenspan summarized the early eUniverse business model during an October 2001 interview with TheStreet.com by saying, "The business plan from day one wasn't to be a CD retailer, it was to get public and get access to currency and use it to acquire content and community sites. We felt if we could acquire the right one's, large, loyal audience, we would figure out high-margin items to sell to that audience. We started incubating what's now the eUniverse network on the side as we were running the CD Universe business and finally got it to a level where it was generating advertising revenue and direct marketing revenue." To that end, eUniverse succeeded, although it took them almost two years to have their first profitable quarter.

Like many, eUniverse lost money during the dot-com boom but had refined their business model enough, thanks in part to an emphasis on direct marketing advertisers they succeeded during the dot-com collapse. Before turning things around, they certainly struggled. The company lost $17 million on $4 million dollars for their fiscal year that ended in March 2001. Earlier, in January of that same year, they survived a failed attempted acquisition of L90, a company that saw two of its executive suddenly depart along with an SEC investigation into one of them. eUniverse's fortunes turned a corner in July 2001 as they took in $17 million from an online investment branch of Sony. Interestingly, the deal required they spend $9 million of it though to purchase newsletter publisher Infobeat from the same investment group.

After breaking even for the first time in Q3 of the 2001 calendar year and then again in Q4, eUniverse went from a company doing $4 million in revenues annually to one that earned $33 million in revenues in 2002 with $5.7 million in profit. In the following year, 2003, they saw revenues jump to $65.7 million. All was not rosy in the empire, though, a glint in the armor showing as revenues declined 13% to $57.3 million for their fiscal year 2004. In October of 2003, Brad Greenspan, who at the time was the co-founder, largest shareholder, CEO and Chairman was replaced as CEO. He held on to a board seat until mid December, when he resigned from that position as well, albeit with reservations. His feelings of ill-will towards where the new management was taking the company played itself out in a nasty public battle in which Greenspan urged shareholders to take an alternate direction from that desired by the company's board. In its defense, the board of directors sent out letters to shareholders detailing the history of the company under Greenspan's tenure. In their letters, the board noted that under Greenspan, the company discovered the need to restate the first three quarters' earnings of their fiscal year 2003. eUniverse also became the subject of an informal inquiry by the U.S. Securities and Exchange Commission. And, as a result of the restatement, they had their stock halted from trading, a stop that lasted for almost four months and ultimately lead to their being delisted from NASDAQ. Stockholders sued the company in various class action and derivative lawsuits, all of which directly related to the company needing to raise additional capital to survive. Best of all for bystanders, all of the drama unfolded through publicly available filings, documents that normally put an average person to sleep.

Up until this point, the story of eUniverse, which did receive its necessary funding to stay afloat and who became Intermix in July of 2004, does not sound like a tale of a company that would sell for more money than About.com, Advertising.com, LowerMyBills.com, Interactive Search Holding, Webclients, and even what Microsoft was offering for Claria. While mildly profitable, nothing suggests a valuation greater than content site Neopets who has a similar user base in size but sold for less than a third of the price at $160 million. The answer to the valuation comes with the second part of this article, the rise of MySpace.

Music To Their Ears

During eUniverse's ultimately turbulent fiscal year 2003, they acquired direct marketing focused Response Base, a company run by Chris DeWolfe, who along with the other co-founder of MySpace.com, Tom Anderson, had also worked at XDrive.com. After selling Response Base to eUniverse, Chris and Tom took an undisclosed investment from eUniverse to get MySpace off the ground. eUniverse received 66% of the newly formed company and provided office space and other assistance to the burgeoning unit. The pair bought the myspace.com domain from a defunct online data-storage company with plans to turn it into "a portal around a person's social life."

In their quest to create a better social networking site, the team at MySpace focused on the obvious deficiencies of then reigning champ, Friendster, and that was speed. Users constantly complained about their ability to access the site, and with some help from well-connected employees along with Intermix's media muscle, it didn't take long for frustrated Friendster users to discover and ultimately switch to MySpace. The site really took off when in 2004 they fulfilled one of their initial desires -- creating a site that catered to amateur musicians. Bands had already created profiles on the site, but now they had the ability to upload songs and offer streaming music to fans. That, along with constant feature upgrades focused on user expression propelled MySpace to the top ranks of the web. Today, Myspace has more page views than Google; its 22 million-member base currently increases by 75,000 new users per day, all with no cost of acquisition.

As reported in the LA Times, more than 350,000 of their key profile lever, bands and solo artists, from the unknown to the famous, have set up pages to let people sample and share songs, exchange e-mail with the bands and see tour dates. The site has had such success in this arena that it now has more people coming to it for music than MTV Online. And, in a sign of the profound impact that MySpace has had on the music industry, in September of 2004 R.E.M. became the first band from a major record label to stream a whole album on MySpace before its official release. Several bands followed suit, including the Black Eyed Peas, and three other Interscope artists -- Queens of the Stone Age, Nine Inch Nails and Audioslave. Weezer and Billy Corrigan from Smashing Pumpkins fame also used the platform to share their work prior to its release. Says Billy Corogan, "Now that MySpace is here, bands don't necessarily need a label to be heard."

For Rupert Murdoch, founder and head of News Corp. as well as a self-proclaimed "digital immigrant," MySpace offers exactly what his company needs in order to combat the decline of traditional content delivery. Consumers between the ages of 13 and 34 are increasingly using the web as their medium of choice for all types of information, hitting at the heart of News Corp.'s core businesses. As Rupert Murdoch said in a speech prior to the acquisition, "The threat of losing print advertising dollars to online media is very real. In fact, it's already happening, particularly in classifieds." Owning one of the biggest communities online should help, and it could even mean a competitor to the now famous Craigslist. Additionally, by acquiring MySpace and promising to keep the platform open for other companies to continue to distribute media, News Corp. now has the ultimate market research tool; they can see what users want and adapt quicker than most to changing tastes. That MySpace has massive reach and already successful distribution for music only helps, and suggests that MySpace could soon find itself changing the way other content, such as movies, gets delivered.

Given that MySpace was the main attraction, many wonder why News Corp. paid $580 million for an asset that on paper was worth closer to $125 million. The answer to that comes by looking at Intermix's public filings. The company started with a 66% stake in MySpace, but in February of 2005, Intermix and MySpace took in funding from Redpoint Ventures. The investment company paid $11.5 million for 25% of the networking site, their shares coming from both Intermix and MySpace's existing shareholders. Of the $11.5 million, $4.3 went to Intermix, the original shareholders of MySpace received $3.75 million to take money off the table, with the remaining $5 million being put into the new MySpace, Inc. Post investment, Intermix retained 53% but more importantly, they managed to have written into the agreement a special clause giving them an option to buy out the other stockholders of MySpace based on a valuation of $125.0 million if the Company receives "a bona fide offer by a third party to acquire more than 50% of the stock or assets of Intermix within 12 months of the closing date." Given that the investment closed in February, we are well within that 12-month period. Those at Intermix weren't the only ones who profited from the sale. The deal was particularly kind to the investment community as well. Redpoint Ventures who invested once in eUniverse and in the aforementioned MySpace deal above stands to make $60+ million from an investment of around $15 million. The other significant investor, VantagePoint Partners did almost as well, earning $44 million on a $14 million total investment. Theirs involved a straightforward purchase of $8M in Series C stock and a complex and clever negotiation with the Sony digital investment group, giving VantagePoint at a discounted price, the equity from the $17 million Sony invested in 2001.

Why did MySpace succeed, especially in an area where many have entered, including Internet juggernaut Google? As Business Week suggests, "the answer is, partly, a matter of geography. It emerged from the L.A. music and club scene, drawing on Anderson and DeWolfe's friends for early support. It wasn't concocted by Silicon Valley tech types or New York bankers. It was born in a city that's geared toward media and entertainment, not technology or finance. And like other great exports from Southern California -- such as Hollywood and surfboards -- MySpace tapped into the country's psyche."

Business Week elaborates on MySpace's success by saying that where other sites tried to be "useful, sensible, and safe," MySpace focused on being exciting and fun. They attracted lots of models and musicians, people who naturally attract a following in addition to one's circle of friends. MySpace also leveraged technology to the fullest, implementing features, such as blogs, before many rivals did. Their key to technology development, though, has been to insure that it focuses on the main appeal of the site -- allowing users to easily customize their own pages so that they can let their personalities "shine through." A user of MySpace explains by saying that the site did an exceptional job at creating an environment that the average American youth wants to become a part of. Not only does it encourage individualism, but it also offers the ability to group with similarly minded peers. As a sign of the site's cultural impact, look no further than one user's experience of being asked at bars "Can I add you to my friends list on MySpace?" compared to the traditional "Can I get your phone number?"

Few could have predicted the success of MySpace, and even fewer would have imagined it selling for more than About.com did. The acquisition shows that Murdoch, while a digital immigrant, has a company that understands if not the potential for the net, its power and the continued role it will play for the distribution of news and entertainment. It also gives MySpace a fighting chance against Yahoo and MSN, both of whom have taken accelerated steps into the social network space. Finally, this deal shows us that perhaps those who said content is king when it came to valuation, should revise their comments. A platform for user-generated content that can attract and retain users and help an offline media company realize the potential online is king. Many in our space make more than $70 million in annual revenues and $5 million in profit, but even the best hasn't sold for close to what Intermix/Myspace did. Something for us to think about.

This past November, MySpace CEO Chris DeWolfe told me he was working to build a brand that would be in the same class as MTV. With Fox's help, he will now have an opportunity to do just that.

Just last week, Barry Diller's IAC/InterActiveCorp completed its purchase of Web search service Ask Jeeves Inc. in exchange for shares worth $2.32 billion. It is my impression that Fox made a much better deal. The structure of Intermix's one-year option to buy out the portion of MySpace which they didn't own, based on a valuation of only $125 million, left Intermix in a position where they were undoubtedly highly motivated to find an acquirer before their option expired. So while I'm not surprised that MySpace got acquired, I am surprised that it wasn't Yahoo!, Google, IAC/InterActive Corp. or Microsoft that acquired them. Yet one should also keep in mind that the deal with News Corp won't close for several months, and it is still well within the realm of possibility that yet another party will step forward with a better offer for Intermix. (It is also perhaps worth nothing that during 2004, IAC/Interactive Corp. did purchase Mark Jeffrey's ZeroDegrees networking site for an undisclosed sum, but by March of 2005 they were reportedly struggling with the acquisition and seeking to sell it.)

After grinding to a halt in 2003, Friendster has gone through several new CEOs and is now trying to make a return to relevance and popularity, but I don't think their prospects are very strong, nor are those of dozens of other Friendster and MySpace clones that have sprung up over the past two years. Nearly everyone that actively used Friendster jumped ship over to MySpace and is happy there. Friendster had its chance, and they blew it. They act now like a company that is really trying very hard to be cool, while MySpace actually IS cool. There is a big difference.

For my part, in October of 2003, I started using MySpace as a platform for a series of experiments in using an online social network to build new types of communities. While MySpace was doing a tremendous job creating the social networking infrastructure itself, little attention was being paid to developing the content and communications that would allow those using that infrastructure to use it more productively and beneficially. It seemed kind of like the idea of inventing television, but not having any coherent programming to watch on it. Out of those experiments, a new venture, MyCityRocks, was born in 2005, and my and ADASTRO's role in helping get that company launched and established has been one of the most exciting journeys of my career. You can read more about that adventure using this link to MyCityRocks.

Marketing to the MySpace Generation & The Economics of Social Networking.

Enjoy!