Social slowdown hitting Piczo hard

CNET News.com reporter Caroline McCarthy co-wrote this article.

Life is getting more difficult for social-networking sites.

At the same time Facebook's traffic appears to have reached a plateau, News.com has learned that Piczo, a networking site that caters to teenage girls and was much written about in 2006, has seen layoffs, executive departures, high employee turnover, and a shrinking audience in the past five months.

Three former Piczo employees described a company grappling with the meteoric rise of competitors Facebook and Bebo and internal squabbles over the direction of the 3-year-old start-up. Piczo has also struggled to convince advertisers that social networking is an effective ad vehicle--a tough sales pitch for the entire sector, say insiders.

Parker Ranney, the company's former director of operations who left to join a start-up in January, said Piczo's layoffs were designed to help the San Francisco-based company "restructure so it could put more focus on Europe." But he also said Piczo is working through "an issue of monetization" just like everybody else in social networking.

Jeremy Verba, Piczo's CEO, said two employees were laid off in November. He declined to discuss how many people have left the company since then. Verba said Piczo now has 32 employees. But two sources who wished to remain anonymous because they might have to work with Piczo again said Friday that about 10 additional people left the company soon after the layoffs. The total number of departures equaled about 25 percent of Piczo's then 40-employee staff.

In addition to Ranney, the company's director of technology and vice president of marketing also left to join other companies. Michael Arrington of TechCrunch was first to report on the departure of Piczo's marketing vice president back in November. He wrote then: "Employees generally don't leave hot startups."

Verba said companies often see turnover as they move out of the start-up phase and into a more mature stage of their development. He added that while Piczo is not yet profitable--and declined to specify when it might be--the company has plenty of money in the bank.

Back in 2006, Piczo was a high flyer in social networking. The company was featured in a Wall Street Journal story, was adding 35,000 new registered users per day, and had attracted $18 million in venture funding. Investors included Mangrove Capital Partners Sierra Ventures and Catamount Ventures.

Since then, the company's traffic has continued to slide. According to Comscore, Piczo saw 1.1 million U.S. unique users in August 2006, but last month had 810,000 users. In the United Kingdom, where Piczo is the No. 1 teen networking site, the company has been impacted by the growing popularity of Bebo and Facebook, Verba said.

The British publication, The Times reported Thursday on its Web site that over the past year Piczo has seen the number of visitors from that country decline by 56 percent.

"We were in the United Kingdom early, and certainly as (Bebo and Facebook) came on, that affected us," Verba said. "Our growth started slowing. But it's a time-spent issue. Our users didn't move on to these other sites. What we're seeing is a lot of overlap. What happened is some of our engagement decreased."

Verba said shrinking traffic is occurring at all of the sector's top competitors.

"That's what's going on in the industry," Verba said. "In general, (traffic) has flattened out. It's going to be a natural level that networks settle out at. It has to do with seasonality. It has to do with competition. It has to do with product development."

More than a few tech industry onlookers have been wondering when a downturn in the red-hot social-networking market would set in. A social network relies so heavily on user interaction that even if it experiences a small exodus, that can snowball into something much bigger. The news about Piczo comes amid reports from audience measurement firms that traffic at Facebook, the most-talked-about company in Silicon Valley for almost a year, is on the decline. Users are simply tired of it, some blog pundits have argued, and they won't stay on any one site too long before moving on to the next big thing.

Jonathan Abrams, who founded onetime social-networking leader Friendster in 2002 and left in 2004 amid a company shakeup, doesn't believe the "users are inherently fickle" maxim. If a social network isn't doing its job, then yes, members will leave. "Friendster ended up having technical and management problems for two years," he admitted. "It has very little to do with users just being fickle, because the site just wasn't working for two years."

Rather, Abrams said, inconsistency in a social network's performance or user experience can cause those users to become dissatisfied. Amid instability at Friendster, many users famously left for the then-nascent MySpace.com, now owned by News Corp. "If there had been no alternative whatsoever, I suppose people might've been more patient with a site that was so slow and buggy," he said, "and if the site had been working properly, MySpace might never have grown the way it did."

Friendster wasn't the only buzzworthy social-networking site that faded away. "We wanted to compete with Craigslist," said Mark Pincus, a Friendster investor who founded the personals-like Tribe.net, which caught on in the early part of the decade among the San Francisco Bay Area Burning Man. His mistake, he said, was that he didn't foresee the coming competition in the market. "I thought that there'd be no other social networks besides Friendster."

But the debate over whether Web users are fickle about their social-networking preferences doesn't even matter when a site can't gain the critical mass it wanted. There simply isn't a whole lot of room in the market for newcomers.