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The Failure of Friendster

In 2002, Jonathan Abrams thought that he was in the right place at the right time.With seed money raised from a wealthy Silicon Valley investor, the thirty-something engineer was developing a social networking site. The site, which debuted in March 2003, was called Friendster. It enabled people to post their profiles online, to link up with friends online, and introduce their friends to each other. Abrams’s motivation for starting Friendster was that he wanted to meet girls, and he thought that a social networking site would be a pretty cool way to do it. The site soon became one of the hot Internet properties of 2003. By the fall of 2003, Friendster had signed up over 3 million users. Publications including Time, Esquire, Vanity Fair, and U.S. Weekly were writing about Friendster before anybody had ever heard of MySpace. By November 2003, Friendster had attracted significant investment from a clutch of high-profile venture capitalists (VCs), including the legendary John Dorr, perhaps the most successful venture capitalist in the history of Silicon Valley, who took a seat on Friendster’s board. Dorr was joined by several other high-profile board members. The buzz around Friendster led to a bid from another fast-growing VC-funded Silicon Valley start-up, Google, which wanted to buy the company for $30 million. The board, populated by venture capitalists like Dorr who were all looking for the next big thing, urged Abrams not to sell. It wasn’t hard; Abrams thought Friendster would be worth much more in a short time, and he said no to Google. Three short years later, Abrams probably regrets that decision. Had he taken the Google offer, which was in stock, he would be worth about $1.5 billion today. Instead, Abrams is no longer at Friendster, and the pioneering social networking site has been totally eclipsed by rivals like My- Space, Facebook, and Flickr. In September 2006, Friendster had just 1 million registered users; MySpace, which went live a year after Friendster, had 55.9 million! One of Friendster’s problems was that the site was soon overwhelmed by rapid growth.With 3 million users, it could take as long as forty seconds for pages to download. Another was the lack of new features on Friendster: while MySpace was rapidly introducing new features like blogs and tools that people could use to jazz up their profiles, Friendster stood still. Part of the problem was that new tools and features would only slow down Friendster even more. As for why Friendster was so slow, in part that was due to Friendster’s closed system. Users at Friendster could only view the profiles of those on a relatively short chain of acquaintances. In contrast, MySpace uses an open system where anybody can look at anybody else’s profile—which is much simpler to execute. In addition, MySpace, which organized users around favorite bands, tapped into a much more energetic demographic: those in their teens and early twenties. Friendster’s users, meanwhile, were somewhat older. Other observers wonder about management problems at Friendster. The high-powered board was apparently preoccupied with big strategic issues and spent little time talking about the mundane technological problems that stymied the company’s growth. There was also a revolving door for CEOs. The board felt Abrams was out of his depth, and quickly replaced him in March 2004 with one of their own, Tim Koogle, the former CEO of Yahoo. Koogle, always a caretaker CEO, stepped down after three months to be replaced by Scott Sassa, a former TV executive, who lasted just a year before being replaced by Taek Kwan, who lasted all of six months. By 2006, Friendster was on its fifth CEO, Kent Lindstrom. The board considered shutting Friendster down, but in early 2006, they decided to keep the company afloat and injected $3.1 million into the enterprise. This was followed by an additional $10 million of venture capital funding in August 2006. Partly fueling this new investment is a feeling that while Friendster may be down, it is not yet out. Early on, Friendster filed about a dozen patent applications covering various aspects of social networking. By mid-2006, the U.S. Patent Office was starting to grant some of these patents, and Lindstrom was clearly wondering whether they could be used to extract royalties from rivals. The first patent to be granted covers “a method and apparatus for calculating and displaying and acting upon relationships in a social network.” As for Friendster’s service, it has been repositioned as a service for twenty-five to forty–year-olds who cannot spend hours every day online.29

Case Discussion Questions

1. Friendster was the first mover in the social networking space. Could it have become the dominant enterprise? In retrospect, what might the company have done differently?

2. What first-mover disadvantages did Friendster fall victim to?

3. Why did second-mover MySpace grow so much more rapidly than Friendster?

4. How might the revolving door of CEOs have hurt the young company?

5. What is the outlook for Friendster now? Do you think it is possible for the company to regain momentum? How?

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