Behind MySpace cutbacks, a quandary over online ads

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If social-media websites are all about sharing, the social-media industry is all about winner-take-all.

Today's winner is Facebook. Tomorrow, maybe Twitter. MySpace, which once dominated the industry, announced Tuesday that it was laying off nearly 30 percent of its workforce – about 420 people.

“Simply put, our staffing levels were bloated and hindered our ability to be an efficient and nimble team-oriented company,” MySpace CEO Owen Van Natta said in a memo to staff.

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Left unsaid was the huge problem facing all media: The diffusion of ad revenue among so many technological platforms and channels that it's hard for any media business to sustain itself.

MySpace's dilemma

If anybody was poised to succeed in this digital melee, it should have been MySpace. Last year, it made some $585 million in US ad revenues, by one estimate, far more than Facebook's estimated $210 million.

But MySpace's ads have been turning off subscribers. The Conference Board reported Tuesday that Facebook is used by in 78 percent of online households, while MySpace has only 42 percent,

Nielsen neatly summed up the problem in a March report (.pdf):

The industry is faced with a real ‘Catch-22’ situation. Part of Facebook’s extraordinary subscriber growth is due to a clean design with little advertising clutter; consequently, the audience growth hasn’t been accompanied by a similar surge in advertising revenue. On the other hand, MySpace’s more customizable entertainment and content-oriented offering – carrying more advertising – has been more successful at attracting advertising revenue, yet MySpace’s audience is flattening. The industry will be watching very closely at which one of these fundamental differences in strategy will prove the most successful in attracting advertising revenue in 2009.

A search for revenue

MySpace's announced job cuts are the first attempt to answer that question. Perhaps a streamlined MySpace will bounce back with its other ad-revenue strategies. (Its $900-million deal with Google ends next year). Or maybe Facebook or even Twitter might figure out its revenue strategy.

Someone will have to come up with a way to circumvent the disconnect between users who want free content – and no ads.

Even in cyberspace, there's no free lunch.
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