House of cards

I'm having this weird feeling of déjà vu. There's been so much hype surrounding companies like Twitter, Facebook and MySpace. Everyone's raving about these companies, and yet none of them are making any money.

No, wait! This isn't déjà vu. It actually did happen before--in the five years or so leading up to 2001. Remember the dot-com bubble? The bubble peaked around March 2000 before it burst. Remember companies like Webvan, Pets.com. Kozmo.com and eToys.com? If you don't, you may want to refresh your memory by reading this CNET.com article about the "Top 10 dot-com flops."

Back in the day, these companies were spending money crazy-style. Venture capitalists were throwing money at these dot-com startups crazy-style. College kids were becoming rich crazy-style by launching a start-up and taking these companies public. Stock prices were soaring crazy-style even though most of the dot-coms had no proven business models and no way of actually making money. Still, some people did make money by selling off over-valued stock at just the right time. But most people lost money and lots of it.

I remember when I was covering the dot-coms for a magazine that has since (you guessed it) folded, sources kept telling me that traditional business models didn't apply. Since when does making money not apply? If a company can't make money through the primary business that it conducts, it's not going to be around very long. It's just that simple.

Now fast forward to today and the same thing is happening all over again. I've been thinking this for some time, but what made me write about it now is the big news that the social networking site MySpace announced that it would be laying off 400 employees, or nearly 30 percent of its staff, according to The New York Times.

The Times reports that, in a statement, Owen Van Natta, a former Facebook executive who became chief executive of MySpace in April, said: “Simply put, our staffing levels were bloated and hindered our ability to be an efficient and nimble team-oriented company. I understand these changes are painful for many. They are also necessary for the long-term health and culture of MySpace. Our intent is to return to an environment of innovation that is centered on our user and our product.”

A short time after Van Natta was hired, News Corporation, which reportedly acquired MySpace for $580 million in 2005, announced the expansion of MySpace’s management team with two new executive hires. On April 27, News Corporation said that effective immediately Michael Jones would be MySpace's chief operating officer and Jason Hirschhorn, its chief product officer. Both report to Van Natta. I guess bloating is OK as long as it's at the top.

I wouldn't expect MySpace to bounce back after such deep cuts to its workforce. Don't be surprised if other social networking companies follow with similar announcements of cuts. At this point, investors have to be getting tired of throwing more and more cash at these companies. They aren't doing charity work! You can't help but wonder, could MySpace's announcement signal the beginning of the end for social networking companies?