Friendster's Identity Search

June 13, 2005 — -- When Taek Kwon takes the reins today as CEO of Friendster, he'll have his work cut out for him in getting the once buzz-worthy company back on the road to profitability.

The social networking Web site was a media industry darling as recently as a year ago, racking up subscribers and page views while being named one of Time magazine's 50 Coolest Web sites in 2004. But more recently, a wave of competition and stagnant U.S. page views have left Friendster searching for an identity that might lure subscribers back.

"Friendster used to be the only game in town, and a lot of people copied off of that success," Kwon said. "The landscape now is that there are a lot more options, which has really changed the competitive landscape."

The Friendster Web site launched in 2003, offering users a place to link up with existing friends, friends of friends, their friends, and so on down the line. The site was billed as a place to make dates, find activity partners, open up business opportunities or whatever other purpose users chose. The concept quickly made Friendster a hip Web destination, and the company now boasts more than 16 million worldwide subscribers.

But analysts say the challenges within the Internet's "social networking" segment have changed dramatically since 2002, when the company was founded. Similar services have sprouted up, fragmenting Friendster's user base as other sites moved quickly to identify specific niche audiences to lure page views.

"There was a lot of investment into this segment that was eerily similar to the late '90s boom. They figured, 'We'll get a big audience and then figure out how to make money later,'" said David Card, media analyst with Jupiter Research. "But they might be realizing that just signing up users is useless."

Weighing the Competition

Competing start-ups have gone in several directions. Some, like linkedup.com, appeal to business networkers while others have morphed into cyber-dating services that charge fees for access to their networks. The current king of the block in terms of viewership is the music-related MySpace.com, which approached 13.5 million unique U.S. page views in April, according to comScore Media Metrix. Comparatively, Friendster had 984,000 unique views in April, down from 1.1 million in April 2004.

MySpace has grown exponentially by catering to a young audience with its music theme and racy user photos. MySpace had fewer unique views than Friendster as recently as May 2004 and has increased views more than tenfold in the past year. Another popular Web networking site, thefacebook.com, quickly built a readership of college students and registered more than 4 million unique page views in April.

"When Friendster launched it wasn't really so much of a service as it was a platform. Now some of the other players have really taken that platform in some different directions, some interesting directions," Kwon said.

The evolution into topic-specific destinations left some Friendster subscribers, and possibly Friendster management, wondering: What, exactly, does Friendster do to differentiate itself?

The Value of Targeted Users

Card said the most direct way to make money from networking was to charge users for access to a very specific group. Without identifying a tangible benefit that users might be willing to pay for, networking has proven to be a hard sell.

"It's always seemed like social networking is a feature rather than a full service or business, because by itself it's sort of an ephemeral thing," Card said. "But some of the other players have been better at branching out and figuring out what their business is."

It's a concept that Kwon and the Friendster board of directors understand. In a way, the company's immediate success may have hindered opportunities to focus more narrowly on one audience. The early explosion in users caused some technical headaches. While Friendster technicians were figuring out how to handle the surge in traffic to millions of users, competitors were developing faster and easier-to-use services and at the same time honing their target audience.

Friendster Director Russell Siegelman said the company was wary of limiting its customer base to only one type of person.

"Some other sites are focused on music or dating or whatever. But is that too narrowing? Do you leave yourself boxed in to one audience?" Siegelman said.

All of Friendster's features are free to users, and currently the site is completely supported by advertising. Siegelman and Kwon said the company might consider charging for premium services in the future. But for now the company is unwilling to commit to one format or one type of revenue stream.

Siegelman also noted that direct comparisons to other sites aren't necessarily appropriate for such a new medium. As the businesses develop, they could diverge even further the way television networks have, making sites like MySpace and Friendster no more comparable than MTV and the History Channel.

"When you talk about so-called 'social networking,' in and of itself I don't think it's a business," he said. "But I think we're in the second or third inning of possibly an extra-inning game."

Friendster Still Non-Committal

That doesn't mean the competitors aren't worth watching. Kwon has drawn confidence from the success of Myspace and thefacebook, noting that their growth suggests a higher potential upside than some failed 1990s dot-coms.

But the company is non-committal on the exact direction that will lead Friendster to big profits, or the exact group to target. Kwon listed music, education and business networking as proven themes for drawing in an audience, and noted that in the future music and video services might be a way to offer users more options.

"We haven't formally made a bet on any of these strategies, but we know that's a decision that needs to be made in short order," Kwon said.

Jupiter's Card agreed that it's too early to categorize Friendster or any of the social networking businesses as winners or losers. The businesses are developing along with their users, and for now their ability to draw in large audiences continues to make them an intriguing business opportunity.

"I haven't given up on them," Card said. "Customer acquisition is usually very expensive for media companies, and they've proven an ability to do that. But they need to decide what other features or services they're going to offer to draw people back and get them to stay there."