Friendster provided the quintessential story of a hot company that rose quickly and fell even quicker. At one point, Friendster seemed set to dominate the social networking market.

Then two upstarts, MySpace and Facebook, left it battered and bruised. While the company still exists, the chances that it will ever recapture its past glory seem, to some observers, slim to none.

Is MySpace set for a similar fall? Yesterday, it laid off 30% of its staff as its business comes under pressure. MySpace has two primary problems:

  • Advertising revenue is declining and its blockbuster advertising deal with Google is set to expire. That deal provided MySpace with a hefty chunk of revenue. There’s only one problem: it hasn’t been a good deal for Google and there’s almost no chance that it will be renewed on similar terms, meaning MySpace will lose quite a bit of revenue in one fell swoop.
  • Facebook continues its rise as the world’s dominant social network. It overtook MySpace in US traffic for the first time last month according to comScore. That’s a significant problem as MySpace at one point had a significant lead in the US.

For MySpace, both of these things are symptoms of fundamental problems:

  • Without the Google deal (which in retrospect Google clearly paid far too much for), MySpace doesn’t currently have the revenue to sustainably support its size. Even after layoffs, MySpace will have 1,000 employees.
  • While Facebook was winning over the hearts and minds of users around the world and building interesting things, MySpace largely failed to innovate.

The question now is whether MySpace can recapture its footing. MySpace’s press release has the subtitle “Return to Start-Up Culture a Focus for Company Moving Forward“. And Jon Miller, News Corp.’s digital head, stated:

MySpace grew too big considering the realities of today’s marketplace. This restructuring will help MySpace operate much more effectively both
structurally and financially moving forward.

Unfortunately, turning the MySpace ship around may be easier said than done, especially since the competition doesn’t look like it will take a breather anytime soon. With the Facebook brand rising and the MySpace brand falling upon hard times, it may be increasingly hard for MySpace to convince both users and advertisers alike that MySpace is the property it once was.

But we shouldn’t count MySpace out. News Corp. has significant resources and although things don’t look good, MySpace still has substantial traffic and greater revenue than Facebook. All that counts for something and likely buys MySpace’s new CEO, Owen Van Natta, the former Facebook COO, a little bit of time to try to steer the ship in a new direction.

And we also shouldn’t assume that Facebook will excel forever. While traffic isn’t a problem and reports are that Facebook is growing revenue at a healthy clip, Facebook hasn’t found its billion-dollar business model and will still need to solve the profitability problem sooner than later. Like MySpace, it has a significant staff and overhead.

One thing is for sure: the mighty do fall in the world of social networking and when they do, they fall fast.

Photo credit: Oxfam America via Flickr.