Hey, Come To This Site Often?

The first thing Brian Carley does when he gets into his Manhattan office is
log onto MySpace.com, a Web site where millions of people have created their own
home pages featuring photos, music, and more. The 27-year-old Internet designer
and musician sips his coffee and spends about 30 minutes browsing the site.
Carley spends about an hour a day on MySpace - more than he does watching TV.
"It's kind of like watching a train wreck," he says. "You can't
look away."

Thanks to its addictive appeal, MySpace has become one of the hottest
properties on the Web. Only 20 months old, it already has 14 mn unique visitors
a month, according to market researcher comScore Media Metrix. That makes it far
and away the most popular of what are known as social-networking Web sites.
Friendster, started three years ago and at one time the clear leader, has a mere
1 mn unique monthly visitors. "We're crushing it," says MySpace
Chief Executive Chris DeWolfe, 39.

The draw? It started with music. DeWolfe's co-founder is president Tom
Anderson, a 29-year-old musician and entrepreneur, and from the beginning the
site has catered to musicians. Bands can create home pages, with photos, tour
dates, and as many as four songs-all for free. Fans and friends found that
MySpace offered loads of options that other sites lacked. Now, MySpace has
become something akin to the hottest bar in town, teeming with musicians and
models.

Fine Balance

The question is whether DeWolfe and Anderson can turn all of this cachet
into cash. Hot bars, after all, come and go. Crowds can leave just as quickly as
they arrive. Complicating matters, there's rising competition from other
startups like Thefacebook, a college-focused site that just raised $13 mn in
venture money, and giants Yahoo!, Microsoft, and America Online, all of which
are moving into social networking. MySpace is trying to fend off rivals and
scoop up ad revenues, all while keeping its sense of cool. It's a fine
balancing act, but the founders make no secret of their ambitions. "From
the very start, we set out to create the next major portal, the next major
destination on the Web," DeWolfe says.

Whichever company wins, it's clear that social networking is becoming a
cultural phenomenon. It's evolving into a new form of media, part
entertainment and part communications.

Advertisers are taking note. One powerful draw is that MySpace is chock full
of 16- to 34-year-old consumers, one of the most sought-after and elusive
demographic segments. Target and Procter & Gamble have run ad campaigns on
the site. NBC's new comedy show, The Office, made its debut on MySpace. And
Interscope Geffen A&M Records has launched new albums from Nine Inch Nails,
Beck, and Queens of the Stone Age on the site. "They were the biggest
debuts in each band's history," says Courtney Holt, director for new
media at the record label. "We take MySpace very seriously."

So effective is the site at connecting with fans that some musicians think
MySpace and sites like it could change the dynamics of their industry. Record
labels have been essential because they know how to market and promote their
artists. But these days, why should bands bother with the middleman? They can
post their tour dates on MySpace, put up music samples, and correspond via
e-mail directly with fans.

The big portals want in on the action-and they have strengths MySpace
lacks. Yahoo, which has 176 mn active registered users, is testing a
social-networking site called Yahoo! 360 that it plans to debut this fall.
Microsoft's MSN launched a similar site, dubbed Spaces, in April-and signed
up 10 million users in a matter of weeks. MSN's strategy is to offer people
e-mail, instant messaging, and social networking all in one place. "We saw
how quickly Friendster was eclipsed by MySpace," says Troy Young,
vice-president of interactive strategy at Organic, an online advertising and
marketing firm. "Now MySpace will face competition from Microsoft, which
can roll all sorts of tools into social networking."

MySpace certainly can't match Microsoft or Yahoo for cash. The upstart
recently raised $5 mn from venture firm Redpoint Ventures. Yet it may be
stretched if it needs to put substantial amounts of money into acquisitions or
product development. Intermix Media, a publicly traded tech company, owns just
over 50% of the company. But Intermix is unlikely to be able to issue debt or
equity because New York Attorney General Eliot Spitzer is suing the company for
allegedly installing software for pop-up advertisements onto people's
computers without their knowledge. MySpace, which won't discuss its
financials, could go public itself or sell out to a larger company if it needs
capital.

User Friendly

MySpace's future may not depend on major capital investments. It has
flourished because it gives members plenty of tools to customize their Web
sites. That has allowed its users' personalities to come through. Friendster,
with its smiley-face logo, has focused on fostering safety and trust. MySpace
lets members post loads of photos, music videos, blogs, and links to thousands
of other people.

MySpace's future ultimately rides on intangibles that transcend technology
and focus groups. "The world is all about energy. If you can generate
energy, it will ultimately translate into money," Corgan says. Yahoo and
MSN may struggle to generate that kind of energy as they roll out their
social-networking sites. Because it's little MySpace that's throwing the
hottest party on the Net. At least for now.

By Steve Rosenbush in New York, in businessWeek. Copyright 2005 by The McGraw-Hill Companies, Inc