Last fall, MySpace looked like a dance club in need of a new DJ.
Its users were spending less time on the social networking site as upstart Facebook Inc. added new members at a breakneck pace and stole the spotlight with splashy interactive features that MySpace lacked.
The final blow came in the form of an investment from Microsoft Corp. that gave Facebook an eye-popping $15-billion valuation. MySpace no longer seemed the jewel it was in 2005, when News Corp. Chairman Rupert Murdoch was hailed as a genius for snapping it up for $580 million.
"Facebook awoke the sleeping giant," said social networking expert Joseph Smarr, an engineer for online address book Plaxo Inc.
So MySpace went to Silicon Valley to get its mojo back. To counter the perception that it was a digital laggard run by Beverly Hills posers without technical chops, it set out to win over the inventive software developers who make the entertaining applications that keep users hanging around.
MySpace was the first to attract these developers with its mass audience, but Facebook had grown popular by allowing them to cash in on features they created, such as Food Fight, which let users throw digital food at each other, and Causes, where they can join social or political campaigns.
MySpace decided to win back these developers by making it easier for them to make money from their viral creations. Now, that campaign is beginning to pay off. Some 1,000 new applications created for MySpace in the last two months by more than 10,000 developers have helped keep MySpace's 117 million global users on the site longer.
This month, some major Internet players -- Yahoo Inc., EBay Inc. and hot start-up Twitter -- backed a MySpace initiative that lets users bring their profiles and network of friends to these sites.
Taking such a high-profile role in the high-tech world could help MySpace in another way: by turning its millions of users into advertising gold.
MySpace already has an edge. It attracts one in four Americans. Some 12% of the time spent online in the U.S. is on its pages. If it were a country, the site's virtual community would rank as the 11th-most-populous nation, after Japan.
But MySpace, like other social networks, has struggled to make money from its online hangout. Its revenue growth, though up 49% per user over last year, fell short of the company's predictions in the most recent quarter, prompting concern among Wall Street investors.
News Corp. President Peter Chernin blames the sluggishness on an excess of online advertising inventory, which has depressed prices, and the challenge of creating a new category of advertising that mines the wealth of data about users and their friends without alienating them. After all, people hang out on social networks to chat with their friends, not to buy products or services.
Even so, MySpace is expected to collect 53% of the estimated $1.4 billion that advertisers will spend this year on social networks in the U.S., according to industry researcher EMarketer Inc.
And MySpace Chief Executive Chris DeWolfe said new initiatives, such as hyper-targeted advertising, show real promise. Chevrolet has already used hyper-targeting to display ads to MySpace's snowboarders. Another ad project in trials focuses on small businesses, allowing a dry cleaner to issue discount coupons to every soccer mom in a five-mile radius.
"We're obviously huge believers in social media," DeWolfe said. "We've been in business for four years. We've pioneered new revenue streams. . . . Now, it's just a function of broadening relationships and leveraging the special capabilities we have."
But analysts such as Bernstein Reseach worry that the cost of adding features and advertising tools is chewing into the profit margin.
MySpace enjoys a unique position among social networks as a technology company incubated under Hollywood's klieg lights. That helped pave the way for the recently announced MySpace Music joint venture with Universal Music Group, Sony BMG Music Entertainment and Warner Music Group. The venture takes the largest online music community and creates a marketplace where people can listen to music for free or buy downloadable tracks, merchandise and concert tickets.
For a market leader with such heft to be overtaken on the buzz meter by an upstart like Facebook was humbling.
Facebook's initiative last May to invite developers to create entertaining features for its users was an instant success: It spawned what has been dubbed "the Facebook economy." Facebook CEO Mark Zuckerberg announced the initiative at a packed event. "Right now, social networks are closed platforms," he said. "Today we are going to end that."
