How Facebook learned from MySpace's mistakes

November 19, 2010: 11:37 AM ET

Facebook and MySpace were neck and neck competitors for years, but with yesterday's announcement, Mark Zuckerberg became the clear victor of this round of social. Here's how Facebook did it.

By Kevin Kelleher, contributor

In six fast years, Facebook has grown from startup into a billion dollar enterprise. Estimates for Facebook's revenue range from $1.2 billion to $2 billion this year. Jim Friedland, a Cowan & Co. analyst whose 2010 estimate sees $1.75 billion, is calling for $3.2 billion in 2011. If any further sign of Mark Zuckerberg's dominance in the social space is needed, it came yesterday when MySpace announced it was more or less integrating itself into Facebook's login and social tools. At this moment in time, it's safe to say social networking is Facebook.

Perhaps more impressive, the vast bulk of that money will come from ads sold through its social platform. Only a year or two ago, the notion of social network ads as big business was a fantasy. Twitter was signing up users with no clear business plan in sight. And Facebook was a well-executed site that would never rival Google in size.

Today, Facebook has not only kicked MySpace into relative obscurity, it's now taking on other Internet stars. On Monday, Facebook announced a communications platform combining chat, IM and email – a move many saw aimed squarely at Google (GOOG). Given Google's new warning to users about Facebook's data sharing policies, Facebook's choosing to share data with MySpace (another closed system, in contrast to the openness manner in which Google allows users to export their data) can be viewed as another salvo in its brewing competition with Google. And all this follows the unveiling of Places, a check-in feature that looks an awful lot like Foursquare.

But it's the vanquished MySpace that offers a telling comparison to Facebook and why the latter succeeded when the former did not. After all, MySpace had a serious head start, but never got much traction when it came to selling ads. People just didn't click on them like they did in search engines. At its peak, MySpace brought in close to $800 million in revenue in 2008, the year when Facebook surpassed it in the number of accounts. Facebook, rather famously, has more than 500 million accounts today.

Facebook is succeeding where MySpace largely floundered for two reasons. First, it learned from MySpace's mistakes. Founded a matter of months before Facebook, MySpace found quick success as independent bands used the site to interact with fans. MySpace's recent redesign has returned the site's focus to a music social network, but in 2004, the company chose a different direction: It decided to make its pages whatever users wanted them to be.

In other words, MySpace, like everyone else in 2004, wasn't sure what would make a social network click. So it let its members figure it out, offering them to design their own pages with widgets, songs, videos, and whatever design they pleased. The result was a wasteland of cluttered and annoying pages that were as garish as the self-designed home pages on MySpace's 1.0 predecessor, Geocities.

Facebook, meanwhile, opted for a cleaner, Google-like interface that resonated with a broader audience. The design was predominantly blue and white, and the company rolled out features piecemeal: email, instant messaging and then live feeds of their activities. The platform was unadorned, intuitive, structured to reflect how people were already communicating online – and in contrast to MySpace's anything-goes approach, it was soothingly Spartan.

So while MySpace appealed to the early adopters of social networking sites, Facebook resonated more with a more mainstream audience. At its peak in 2006, MySpace had more than 100 million unique users per month in 2006, a number that has declined to 70 million in 2010, according to News Corp.'s SEC filings (NWS).

MySpace could still have become a big success if it had monetized its smaller membership base. But the company never quite justified the $580 million that News Corp. paid for the company in 2006, nor did it give Rupert Murdoch the strong foothold he'd hoped for on the Web.

MySpace wisely eschewed subscriptions, relying instead on ad revenue. Given the personal data that its users freely shared on their pages – everything from location to favorite movies – it offered advertisers a platform for serving targeted ads. But the problem was, no matter how targeted MySpace's ads could be, few clicked on them.

Click-through rates on MySpace and other social networks were 4 in 10,000 – a fifth of the rate for banner ads on web sites in general.  Search engines were even higher – targeted ads could reach people seeking out information. But the only information anyone seemed to want on MySpace was what their friends were up to. MySpace responded by putting multiple banner ads on pages, making the poorly designed pages even more unbearably cluttered.

Here too, Facebook learned from MySpace's missteps. Users are greeted with a single ad in the right column when they check their news feeds. Many other pages run four ads, but unlike the large, animated banners on MySpace and most other sites, they are a thumbnail-sized image next to text. Users can notify Facebook of ads they find offensive or repetitive (although this will only return more – hopefully better targeted – ads on the next page.)

More importantly, Facebook bided its time, rather than rushing to a clear business model. It learned from mistakes like Beacon – an attempt in 2007 to share members' web activities with their friends without their consent – returning a year later with a watered-down alternative, Facebook Connect, that was still controversial for its approach to privacy but that didn't dent the company's growth rate.

More important, Facebook didn't just collect user data to target ads, it studied how people interacted with their Facebook friends, how companies could design ad campaigns that could allow them to interact with consumers in similar ways, and how some ad campaigns take on a viral appeal.

As MySpace learned, getting people to click on ads isn't easy on social networks. It took Facebook several site redesigns that gradually altered user behavior until they consented to share more private details and even began to treat advertisers like friends. In retrospect, those innovations seem like subtle changes, but their effects have been significant in enhancing Facebook's revenue.

--Part 2 of How Facebook learned from MySpace's mistakes, details how Facebook fixed the 4 in 10,000 ad click through rate and made social advertising pay off.

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