The Social Myth
Given the world dominance of Facebook, is creating a social network now worthless?
Steve Jobs's favorite singer, Bob Dylan, said: "Come writers and critics who prophesy with your pen; And keep your eyes wide, the chance won’t come again; And don’t speak too soon, for the wheel’s still in spin; And there’s no telling who that it’s naming. For the loser now will be later to win, For the times they are a-changing."
The year 2002 put an unpredictable dent into the universe: Canadian programmer Jonathan Abrams, inspired by the success of peer-to-peer music sharing app Napster, started a company called Friendster.
Within a few months, Friendster adopted 3 million users and won recognition as the Godfather of Social Networking. The space began heating up with venture capital. By 2003, Friendster received an acquisition offer for $30M from then-pre-IPO Google. It refused. "Friendster's decision to stay private instead of selling to Google in 2003 is considered one of the biggest blunders of Silicon Valley." 
The employees at a little known company called eUniverse used Friendster heavily. In August 2003, they decided to copy its more popular features. Within 10 days, they prototyped those features into their existing product and re-launched. They changed their product name to "MySpace". eUniverse used its 20 million users and e-mail subscribers to breathe life into Myspace, and move it to the head of the pack of social networking websites. Thus, while Friendster spiraled downwards, MySpace more than quadrupled the size of the Social Network.
MySpace took all the stops out of scaling in 2004. Their brand-recognizable domain name and much infrastructure made competition require either bottomless treasure or ignorance.
The world produced both!
On January 2004, a Google employee named Orkut started the Orkut social network in his 20% innovation time. A month later, on February 4, 2004, Mark Zuckerberg and his college friends had no idea what mayhem they went up against, when they launched little "The Facebook" into Harvard.
By March, Facebook's launch expanded to include Columbia, Stanford and Yale. Orkut gained global foothold in Brazil, India and Iran. The Social Network outside the control of MySpace went both deep and world-wide.
In June, Facebook made advisor Sean Parker -- the inventor of the very Napster that originally inspired Friendster -- its president. Peter Thiel, one of the founders of $1.5B acquisition PayPal, wrote Facebook's first investment check, lending his contrarian faith and financial credibility.
Google went IPO that August 2004 on pro-founder terms. It created hundreds of instant paper millionaires, and virtually guaranteed the tentative survival of Orkut.
These improbable and troubling events meant Cold War for MySpace. In February 2005, MySpace CEO, DeWolfe, met Mark Zuckerberg to tempt him into selling Facebook, but rejected his $75MM asking price.  The glaring historical mistake of Friendster's meltdown in a heated market ate at DeWolfe. Five months later, Rupert Murdoch's News Corp tempted DeWolfe with a $580MM acquisition in a bid against (a slower-moving) Viacom. MySpace accepted the purchase (founders shared 3% of the equity). The Chairman of the Board of Viacom fired its CEO for losing the bidding war. 
The same DeWolfe met Mark Zuckerberg in Fall 2005 and offered $750MM (10 times the asking price) for Facebook. This time, Mark rejected him. The Social Network war kept moving forward, but its winner knew the ending.
At that time, Orkut had a Nazi problem. Hate Groups converged there and proved difficult to monitor and control. In August 2006, Google invested $900MM in MySpace, for a search deal. Microsoft, whose larger bid fell through due to its complexity, set its eyes on Facebook. Facebook rejected a $15B acquisition offer from Microsoft. Instead, in October 2007, the two Harvard-founded companies signed a strategic partnership with $240MM funding participation from Microsoft. 
Facebook gained access to Microsoft's Skype acquisition and its video technology and marketing distribution. Microsoft gained access to the untapped potential of advertising in Facebook. Google made the wrong deal. 
In 2008, Facebook grew at an average monthly rate of 178.38%. MySpace fell behind in Alexa rankings. One of its executives stated that the deal with Google, while a cash windfall, proved to distract the company from Social into Search. In June 2011, MySpace went on auction and sold for $35MM, or 6% of the price News Corp paid for it. By May 2012, Facebook sold IPO shares at a valuation of $104 Billion, largest ever then in human history. Five months later, in October, its user count reached One Billion, or one in six people on Earth.
In June of next year, Google backed a too-little too-late product, Google Plus, managed by a poached Microsoft executive; it shut down Orkut.
Danah Boyd, a senior researcher at Microsoft Research, concluded of social networking websites that MySpace and others were a very peculiar business - one in which companies might serially rise, fall, and disappear, as "Influential peers pull others in on the climb up - and signal to flee when it's time to get out".  But perhaps that human quality goes further back in time:
He who ignores possibilities in others lets them destroy him in time. He who journeys with allies ignorant of the impossible crosses into the land of myth, where mass ritual deems copying his god-like transformation an act of futility.
- Friendster History: Wikipedia
- Stories From The Tell-All MySpace Book
- MySpace Debacle Vindication For Fired Viacom CEO Tom Freston
- Fox: $1 billion Search Deal with Google
- Facebook and Microsoft expand strategic alliance
- Google's Eric Schmidt admits social networking 'mistake'
Amin Ariana is a software entrepreneur in San Francisco.
Readers shared their thoughts on this essay:
I do not know but there was time in simultaneous to MySpace where SkyRock rocked too, I do not know if it is worth mentioning, finances-wise.
PS: I love your writing style.
Thanks Hamza! -- Interesting, I didn't know about them; they seem to focus on a French demographic. Thanks for reading.
Giridhar Raju N M
Thanks Amin, enlightening insight. :)
Giridhar Raju N M
"May 2012, Facebook sold IPO shares at a valuation of $104 Billion, largest ever then in human history. Five months later, in October, its user count reached One Billion"
Just trying to understand the logic in the above statement. That is like $104 for each user, not considering that as many as 2% to 6% of the accounts could be fake, dormant and others. Assuming FB can scale up drastically and get to 2BN users that still would be $52 per user. What is the logic on that investment, what kind of revenues would justify the above valuation? Just curious.
Three high level reasons: (1) Both sides of the deal already know the growth graph, so they can predict that one billion won't be the end of the growth line. Likely it'll penetrate 99% within 7 years. (2) That distribution is essentially unheard of. It makes Facebook a monopoly in P2P message distribution. Monopolies extract more value per user than non-monopolies that have to compete for attention. (3) Every time you "like" a business on Facebook, you've opted in to be advertised to. Businesses, even in older models, pay $20+ for a "warm lead". Opt-in advertising is much more than a warm-lead; it's a warm-always-lead. If you buy a single thing from a business you "liked" on Facebook, your costs are paid off. Everything after that is profit. In Silicon Valley, investors typically project up to 10 years of unrealized performance, and appraise the startup valuation accordingly.
In reality, Facebook is making $5 revenue per user, not $100. But if you account for the 10 years of unrealized value, that's $50. The extra 2x factor can be attributed to a combination of growth trajectory and monopoly position. Conservative investors may find this math crazy, but in the end, free market decides whether the public wants to follow Silicon Valley's lead or not. Zynga is an example of failed speculation. Google is an example of success. The difference between them? Network effect (Monopoly).
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