Interpreting the MySpace layoffs

Tuesday, Fox subsidiary MySpace announced it was laying off 420 of its 1,420 employees. It’s hard to tell from outside what this means, and it’s in fact likely that today even the most knowledgeable insiders can’t say for sure what the future brings.

Here are four possible explanations.

1. MySpace was fat, dumb and happy. This sentence appeared in dozens of news accounts:

“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 statement.

Van Natta was only hired in April and previously was a top exec at Facebook. Perhaps Van Natta was right: late last year, the larger Facebook had an estimated 700 employees (according to Reuters via Wikipedia).

2. Fox has botched the acquisition. MySpace was once dominant, but being a subsidiary of big old media has not helped MySpace cope with increasing competition from its Web 2.0 rivals (especially Facebook). Fox Interactive Media (the division created four years ago to manage all the parent company’s new media efforts) is also in trouble and facing its own layoffs.

3. MySpace is in trouble. Its subscriber base is flat, while Facebook has been rapidly growing. Facebook took #1 worldwide last year, and passed MySpace in the US last month. Meanwhile, Twitter is also gaining on MySpace.

Network effects business rewards those who get ahead, and right now it’s hard to see how MySpace will dislodge Facebook. Is it consigned to be a permanent #2 (or even 2nd tier) ala Yahoo or HP workstations or Sony Ericsson or Motorola cell phones

On the other hand, MySpace could find a nice way to segment its audience to meet needs not being met by Facebook. The latter has found some clever ways to apply its technology, and so far LinkedIn has a distinct (even if overlapping) value proposition with Facebook. Apple has found its niche PC business to be a profitable one, and has used it to support its market leading music distribution system. (MySpace is the only one of the big 3 with a full-fledged media company behind it).

4. It’s symptomatic of broader Web 2.0 problems. A chronic problem for Web 2.0 companies (like many Web 1.0 companies) has been winning users but not revenues. MySpace was among a list of 11 Web 2.0 companies that CNET last year predicted were facing trouble. (The forecast troubles also included Twitter but not Facebook).

My crystal ball doesn’t say whether MySpace can turn it around, or whether these troubles extend to Facebook and Twitter. Right now, I feel like the Web 1.0 skeptics did in 1999: which would have caused me to reject spectacular failures like Webvan and Pets.com, but also (apparently) lasting companies like Google and Amazon.