The rise and fall of Friends Reunited

It pioneered the social networking craze in Britain, but Friends Reunited could now be up for sale at a fraction of the price ITV paid for it just three years ago. Nick Clark reports

Friends Reunited was the most popular kid in the class after it kicked off social networking in Britain at the turn of the century. Unfortunately, as it approaches its tenth birthday the site has been losing friends and alienating people, prompting rumours this week that its parent company, ITV, might sell after just three years of ownership.

The site enjoyed a dominant position in the first half of the decade but reacted slowly to the emergence of younger and hipper rivals. It was hamstrung by its revenue model and is accused of not providing enough applications and services to attract new members and keep the existing ones happy.

Ian Maude, an analyst at Enders Analysis, said: “The problem is that the world has moved on. It is bigger issue than just the fee model: the concept of getting in touch with school friends is passé. It was a brilliant idea at a point in time but hasn’t adapted.”

ITV is rumoured to be hawking around for potential buyers as it struggles with issues of its own. It has been hit hard by the downturn in advertising revenues and has been running the slide rule over the assets it could sell to raise cash. Lorna Tilbian, a senior analyst at Numis Securities, said she believed that a disposal of Friends, among other assets, was “probable”.

The broadcaster paid £175m for the site in December 2005 as a cornerstone, along with ITV.com, of its move to the digital age. In 2007, its chief executive, Michael Grade, called the site one of the “great unsung jewels in the crown”. Yet analysts believe that ITV has decided it is no longer part of the “core” portfolio. If true, any sale would probably see ITV take a sizeable hit. Estimates of Friends Reunited’s value have fallen as low as £20m, the same as JP Morgan analysts predicted its earnings for the year.

Friends Reunited was born in a suburban semi in Barnet, North London in July 1999. It was thought up by Julie Pankhurst while on maternity leave as she wondered what had become of her school friends. Her husband Steve and his business partner Jason Porter were looking at potential business ideas with the internet, and the site was launched in the summer of 2000. By the end of the year, the website had 3,000 registered through word of mouth, but the turning point, according to then chief exec-utive Michael Murphy, was a mention by Steve Wright on Radio 2, which sent connections soaring. “People seemed to be driven by nostalgia or maybe curiosity. There certainly seems to be a social need to reconnect with the past,” Mr Murphy said.

The problem was making the idea pay. The Pankhursts initially tried an advertising model, but struggled to generate returns, and changed to charging users a subscription in the spring of 2001. The move failed to discourage its users, and it hit one million members that August. The site started expanding into the workplace, as well as abroad to Australia, South Africa and New Zealand.

Mr Murphy took over after he led a management buy-in of the group in 2003, picking up a 40 per cent stake in the process. He launched a dating service and Genes Reunited, which traces users’ ancestors, as well as expanding into CDs and books. It was riding high and was named by Nielsen ratings as among the 10 most influential sites ever.

At the peak of its popularity, ITV emerged as a suitor. At the time, Mr Murphy said: “When ITV approached us we immediately clicked; they share our values, they are a national institution that is trusted and well loved and, by joining with them, Friends Reunited will become the UK’s eighth most visited site.”

The Pankhursts and Mr Porter left when the group was bought by ITV, then under the stewardship of Charles Allen, and they pocketed a cool £30m each from the sale. The relationship failed to be as successful as either had hoped. “The two companies remained quite independent. ITV found it tough to integrate. They bought it at the peak of Friends’ performance, and since then it has declined, while others have done the social networking thing better,” one industry expert said.

The group has been hit by severe competition in the past few years. Bebo, MySpace and Facebook have all gained huge market share as they play to a younger audience, and crucially they didn’t charge. Eden Zoller, principal analyst at Ovum, said: “Its image has fallen by the wayside. It is not hip and there hasn’t been enough investment in applications and services. You also can’t overstate the importance of Facebook.”

Total social networking user hits was up year on year in the UK last month, but unique visitors on Friends Reunited are down 20 per cent. It has fallen from 2.3 million visitors in January 2008 to 1.8 million, according to comScore. This marks the worst drop of the four largest social networking sites in the UK, and is down from 5 million unique visits three years ago, which could spell further trouble. “As soon as hits decline, advertisers start asking questions,” Mr Maude said.

Part of the problem was the fee structure. Dan Cryan, a senior analyst at Screen Digest, said: “Friends was a site with a subscription model, and sure enough a rival comes along with an advertising model.” It ditched subscriptions and switched to advertising last March, but many feel it is too late. Pulling in ads also depends on more hits and users spending a longer time on the site.

The market expects ITV to reveal its intentions on Friends Reunited either way next month. One industry insider believes there is no official sales process “but the company will listen to offers”, before adding: “There will be some interest out there too.”

Bigger and better: The social network sites that have eclipsed Friends

Facebook

The industry’s 500-pound gorilla. As rivals’ unique hits fell in Britain last year, Facebook’s rose 71 per cent to 21 million. Founded by Mark Zuckerberg in 2004 while at Harvard, Microsoft took a 1.6 per cent stake in 2007, valuing the group at $15bn. One analyst estimated revenues of £20m in the UK.

Bebo

Like Friends Reunited it was founded by a husband-and-wife team in 2005. Bebo, an acronym for blog early, blog often, was bought by AOL for $850m last year. The site attracted 10 million UK users in January, an 11 per cent fall on last year. UK revenues are roughly £15m, said the analyst.

MySpace

The Beverly Hills-based group was set up in 2003 following the success of Friendster in the US. Rupert Murdoch paid $580m for it in 2005. One expert backed its targeted advertising strategy, and estimated revenues of £30m in the UK. Unique users fell 17 per cent to 7.3 million January.

LinkedIn

LinkedIn’s niche is professional networking. It has grown in the UK after a slow start and is going great guns. Unique users almost trebled to 929,000 in the year to January. Last June, a consortium of private equity companies took a 5 per cent stake, valuing the group at $1bn.