In December 2005, ITV purchased social networking pioneer Friends Reunited for £120m plus an earn-out of £55m. At the time, Friends Reunited had 46m registered users, an impressive number that made the husband-and-wife creation one of the largest social networks in the world.

As competing social networks like Bebo and Facebook gained prominence, Friends Reunited stuck to a subscription model. And despite losses in users and traffic, the service pulled in £22m in 2007, making up a hefty chunk of ITV’s online revenue.

In April 2008, ITV decided to kill the subscription model and make Friends Reunited ad supported as part of a plan to triple its online revenue to £150m by 2010. That turned out to be a very bad move as the global economic crisis that was just around the corner has led to massive advertiser cutbacks. Friends Reunited is now pulling in less than before.

Given Friends Reunited’s decline under ITV, it’s no surprise that multiple reports have surfaced indicating that ITV is shopping Friends Reunited to potential buyers. According to a Telegraph source, a sale isfirmly on the agenda“.

I think ITV’s experience with Friends Reunited demonstrates several things:

  • First mover advantage doesn’t guarantee long-term success. For all of the virtues of first mover advantage, being first doesn’t mean that you’re going to last. Just look at Friendster in the United States. Obviously ITV bought Friends Reunited in part because it was a pioneer but it probably believed incorrectly that this made Friends Reunited a more defensible property than it actually was.
  • Big acquisitions are hard to make work. ITV bought Friends Reunited before social networking peaked but that didn’t guarantee that it took advantage of the ensuing social networking megatrend. The reality is that big companies are often not very good at taking rapidly growing small companies and making them more successful. Most of the time, big companies overestimate the level of success they’ll be able to achieve and actually hamper their ability to compete and grow.
  • You can’t always compete with upstarts, but if you decide to, you have to be quick. ITV had two choices when it came to dealing with free social networks that were eclipsing Friends Reunited in popularity: take them on or remain content with the revenue from its subscription model. If it wanted to take them on, dropping its paid subscription model in April 2008 was a huge mistake. It should have dropped it ages ago and focused on building out its free social network to be competitive with the Bebos and Facebooks of the world. It didn’t, it was slow and it lost out.

Obviously it’s hard to see somebody paying a premium for Friends Reunited at this point and given that ITV reportedly just paid the founders their £55m earn-out in the past few weeks, it’s likely that ITV is going to take a loss on this deal.