Battle of the social-networking sites

The $1 billion copyright lawsuit Viacom filed against Google's YouTube last week was no surprise to a lot of people.

YouTube's active user base busily posted clips from The Colbert Report and other Viacom-owned programming on a daily basis. Various media companies have asked YouTube to remove the content, but the problem wasn't near to being solved. Among those waiting for the copyright shoe to fall were participants in a "war game" held the week before last at the London Business School.

In the war game, students analyzed the business models of four social-networking and community sites: YouTube, MySpace.com, Facebook and Second Life. Each team presented arguments for why its business seemed likely to be the most successful, and a panel of judges scored them. MySpace was found to have the best business model, although it and YouTube were also found to be vulnerable to copyright battles and zealous government regulators.

Leonard Fuld, president of Cambridge, Mass.-based consulting firm Fuld & Co., organized the war game and discussed its conclusions with CNET News.com.

Q: Can you tell me a little bit about this war game--who was involved and why you did it?
Fuld: We've run these war games or strategy games between Harvard and MIT's Business School and at the London Business School for the last two years. We run war games for companies to help them make some critical decisions, strategic decisions. We also conduct war games in which we share the information with the public.

It's very clear that News Corp. is going to want to pump a lot of its own content through MySpace, and it's going to cut all kinds of deals with various media companies.

We generally choose a global subject with a high degree of interest, and this year we chose the virtual communities space because we saw some very high stakes and investments thrown into these companies, and a couple of them are owned by media giants themselves. So Google owns YouTube, and News Corp. owns MySpace. There is also Facebook and Second Life. MySpace is sort of a social-networking giant for the masses. YouTube uses video as its glue to hold the community together. Facebook appeals to the university student community. And in Second Life people can create avatars, and its an economic community where you can buy and sell test markets.

We were stress testing the (business) strategies one against the other to see who is most likely to succeed. The MySpace team won the game by a fairly good margin. They had a much better argument, which is that content is king. It's very clear that News Corp. is going to want to pump a lot of its own content through MySpace...and it's going to cut all kinds of deals with various media companies. The YouTube team also showed that the company is cutting deals with other media companies, and in fact, the BBC was on (the judges) panel. The BBC made a deal with YouTube.

Who came after MySpace?
Fuld: Facebook and YouTube were nearly tied. Facebook had a score of 142, and YouTube had a 140. MySpace came out with a score of 154, and Second Life came in last at 137. So you see that the spread was not all that large. The students representing each team were judged on creativity, accuracy and the foresight in their strategies. The problem with Facebook is that the students that join Facebook eventually graduate, and Facebook is trying to keep them as part of their network as they grow older. MySpace has, in actuality, the oldest group of members; over 50 percent of their membership is over 35.

The fact that YouTube is trying to attract other eyeballs is a great idea, but whether YouTube itself is a viable entity (long term) is not clear.

So you were saying that because of the defection or attrition rate there are questions about the Facebook strategy?
Fuld: They did not convince the audience and the judges that they really had a strategy that was going to grow them enough, at a fast enough rate. And frankly, how are they going to monetize, which is really the big question. MySpace demonstrated that they not only acted as a network, but they act as a conveyer of media of all kinds of content, and they would be a much more powerful force at learning how to monetize. After all, (News Corp. chief) Rupert Murdoch has made a living out of finding ways of conveying all this content in as many different ways as you can possibly imagine, whether it be by satellite dish, newspapers, television programs. The others have not quite found it, and with YouTube there is a lot of free content (some of it posted without permission of the copyright holder) and, as a result, YouTube is under assault by Viacom. This is a lawsuit that is not going to go away anytime soon.

You've said that as "sexy and cool as MySpace and YouTube seem, they are prone to attack." Are they the only two in the group that are subject to copyright lawsuits?
Fuld: Well, out of these four companies we had in the war game, they were the most susceptible. Don't forget it's not just the fragility that they're experiencing through lawsuits, but you also have government protection of its citizens. There are a number of attorneys general that are looking at the MySpaces of the world. It's like a pincer movement. You've got the private sector with lawsuits and the public sector with regulation.

Were there any conclusions arrived at as to whether these companies will survive these threats?
Fuld: Well, you know, the game ended last week, and timing being what it is, it was prior to the Viacom lawsuit being announced. But there are other lawsuits. I think the students were not as fully aware of all the lawsuits pending with these companies. There was a lot of discussion about the need for licensing and for permissions to download content that was copyright-protected. It is not quite as egregious as Napster was, where they were openly saying, "We don't care what the big corporations want; we're part of the free world of the Internet."

Viacom is going to create PR headaches for YouTube, if not the biggest lawsuit it ever faced. It is certainly a major distraction at best, and at worst it could undermine or could help dissolve such entities. The essence of Google is great. It's an advertising machine. The fact that YouTube is trying to attract other eyeballs is a great idea, but whether YouTube itself is a viable entity (in the long term) is not clear.

YouTube still needs to figure out a strategy to truly monetize its site, and that's even before they faced the lawsuit from Viacom.

I know this is an intellectual exercise, but what exactly were the predictions?
Fuld: Well, for predictions this year they made one about Apple going into the social-networking business (via iTunes). In a year's time, I would not be surprised if Apple enters that market. Second Life we believe has a breakout opportunity, but nobody could quite find it yet. Second Life may plateau for a while before it as a virtual community truly breaks out. It's not clear it's going to build on a mega scale like a MySpace. Right now (Second Life) has about 3 million or 4 million users as opposed to MySpace, which has 130 million or so.

Facebook is going to face a growth crisis, and may reach a plateau in the near future simply because it's dealing with a student population. And YouTube still needs to figure out a strategy to truly monetize its site, and that's even before they faced the lawsuit from Viacom.

And past war games have made accurate predictions, right?
Fuld: In 2005 we ran a war game we called the "battle for clicks." It was an MIT-Harvard face-off, and we were looking at search engines: Yahoo, AOL, Microsoft and Google. The team that was assigned to AOL started groaning, but they began to realize that they had a fairly valuable asset in there with 20 million subscribers at the time. Google already had an alliance with AOL to provide the search engine for AOL. Microsoft had a lot of cash in its coffers, and that team decided to do a deal with AOL, form a very strong alliance with an option to buy them. AOL was really happy because it needed to find a trajectory, and Microsoft needed a way to boost its search, and it worked out.

What happened in real life seven months later was that both Google and Microsoft were going after AOL in a big way, because they realized they needed the advertising revenue. After the game was over we asked the Google team, which won the event, if it had any regrets and they said, "Yeah, we let AOL get away, and that was a huge mistake."

We predicted in the game of digital entertainment supremacy last year, which was iPod versus News Corp. versus Microsoft versus Vodafone or Verizon, that Apple would make an iTV entertainment center. That was almost a year before Apple made the announcement and even called it iTV at the time. News Corp. was comprised of a team that came from mergers and acquisitions from finance strategy in marketing. And they said to Apple, Microsoft and Verizon, "We'll play with all of you guys. We're platform neutral." We saw that Verizon felt a bit stuck and was trying to cut some deals. But News Corp. was the winner. It was very clear from that game that News Corp. was going to be victorious in the long run. We also saw that Yahoo's strategy is pretty muddled.

Viacom's lawsuit against YouTube and Google this week seems to validate the conclusion from last week in your war game.
Fuld: These games only look out about a year or a year and a half. But for these companies that are moving at lightening speed, if they can look out a year or so, that's pretty good.