Is this the end of MySpace?

In its heyday, MySpace made Lily Allen a star and enticed 1 million people a week into cyberspace. But now it's fallen out with the music business. Edward Helmore reports

When MySpace announced deep cutbacks last month Rupert Murdoch's aura of hi-tech visionary abruptly dimmed. No longer would the media patriarch, who bought the pioneering social networking site in 2006, be seen as a septuagenarian new media wizard, widely lauded and celebrated on the cover of Wired. Instead, Murdoch and News Corp have joined the long line of investors who bought smartly into the next big thing only to see it crumble almost as quickly.

More than one-third of MySpace's employees at its headquarters on Wilshire Boulevard in Los Angeles and in offices around the world have been instructed to clear out their desks. The service has been overtaken, in terms of numbers of users and buzz, by Facebook, which now counts nearly twice as many members worldwide. In March, the co-founders Chris DeWolfe and Tom Anderson were eased out, advertising revenue is projected to drop 15 per cent this year, and plans for a Google-style campus have been scrapped. Earlier this month at the annual Allen & Company media bash in Sun Valley, Idaho, Murdoch denied he was considering a sale. "Hell no," he responded.

Still, the mighty MySpace is damaged. Launched in January 2004, it boasted 50 million users just two years later. At its peak, 170,000 new users a day signed up, each posting music, photographs, lists of likes and dislikes, and other digital clues suggestive of sociability and personality. Faster than would seem possible, MySpace became what DeWolfe and Anderson called a "lifestyle choice". MySpace's emphasis on user-generated content signalled that everyone could now become a star. Founded in Santa Monica, the emphasis on performance and self-realisation were distinctly LA. Henceforth, anyone could be discovered online – and some were.

"This generation wants to be known, they want to be famous," DeWolfe told Vanity Fair in early 2006. "MySpace facilitates that. This generation is self-involved, but they're also self-aware." Anderson chipped in: "I think of it as the reality TV of the internet, or like a nightclub." At that time, with no Facebook, no Twitter and no YouTube in view, Murdoch seemed to have the game to himself. MySpace was his nightclub and he was – metaphorically at least – in the VIP section with the champagne flowing. Not only had he craftily outbid octogenarian rival Sumner Redstone with a last-minute $580m (£351m; the sum quickly recouped in what many believe was a highly advantageous, $900m advertising deal with Google) but won it for what many considered a steal. Soon Brad Greenspan, founder of MySpace's parent Intermix, sued, declaring the sale an "eye-popping theft" and arguing that MySpace was on its way to being valued at $20bn.

Scroll forward three years and it's hard to find anyone with anything good to say about MySpace, even though, with 70 million users, it has hardly disappeared. Even accounting for computer users' playground-style propensity for ditching old friends for cooler new ones – goodbye CompuServe, AOL, Netscape, Friendster – could MySpace's hot groove really have cooled so rapidly?

Well, yes, says Murdoch's biographer Michael Wolff: "MySpace, once the killer social networking application, is looking a lot like AOL – bad technology, lower-demo users, no business plan, and no coolness at all. News Corp has run it into the ground." There is growing consensus that MySpace is not simply victim of the migration of capricious social-networkers from one thing to the next. As Facebook overtakes MySpace – Netscape's founder Marc Andreessen predicted this month that it will be "bigger than Google" – and Twitter mounts a challenge to Facebook, critics of Murdoch's social networking service say News Corp's Fox Interactive Media failed to protect or capitalise on the one area that MySpace could virtually claim as its own: independent label music.

Late last year, MySpace, the site that spawned dozens of independent label music heroes including Bright Eyes, Arctic Monkeys and Lily Allen launched the major label-backed MySpace Music service. But, instead of starting with a comprehensive library, only music from the four major labels was offered. Independents refused to license their music, saying they were denied an equity stake and offered lower rates of compensation from aggregated play.

Earlier this month in New York, representatives of the independent label group Merlin joined with AIM, its US counterpart, to discuss what they describe as a major label effort to benefit from their participation without offering much in return. "Merlin is not comfortable with a venture that's substantially owned by our main competitors, who stand to gain from the use of our repertoire without an equivalent opportunity being made available to us," says Charles Caldas, the chief executive of Merlin.

The absence of a comprehensive range of independent label music – music, Caldas says, that helped to establish MySpace – suggests it has lost touch with its core audience in the rush to become commercially viable. "We told them back in October when MySpace Music was launched that we felt they were ignoring their sweet spot – their core constituents. Any service that doesn't have a comprehensive music offering is going to be unattractive to consumers."

Regardless of whether this has contributed to MySpace's decline, Caldas adds, "it certainly doesn't feel right. We're not going to do a deal in a venture that's so unbalanced." Independent music business managers say that, while MySpace is still useful for promotion, other niche sites are more effective for reaching audiences. They complain MySpace has become heavy with ads, throttled with spam and slower to load. Post-Murdoch, some say, the ratings system became easier to manipulate using software or promotion services. And once the record labels saw it as a way to raise revenue, they say the service was effectively forced into a partnership, or risked losing the right to stream music.

"We felt that our artists, who were scrappy and forward-thinking, used MySpace to get themselves noticed and by turn made MySpace a powerful platform," says one New York indie label manager. "Then it became a back-door way for the majors to take a partial equity stake in independent labels." At the Beggars Group, home to British Sea Power, The Fall, Peaches, The Big Pink and The Horrors, the music business/MySpace deal looked like a classic case of corporate thinking, says Simon Wheeler, head of digital strategy at the label. "Considering MySpace was always about independent or unsigned artists using it as a place to display their wares, it seemed very out of keeping. It was a miscalculation – let's just throw this out there and everyone will be happy with what they get. But the music users were looking for was glaringly absent from the service."

Now it's up to new management, led by the chief executive (and former-Facebook executive) Owen Van Natta and News Corp's digital chief Jon Miller, to reform and refocus MySpace. While Murdoch said his blog last week that MySpace needs to be refocused "as an entertainment portal" and described his vision for MySpace as a place where "people are looking for common interests," Van Natta has already said the company is "bloated" and slow and needs to regain drive and agility. But, unless they can get MySpace's mojo back and harness it as a platform to deliver News Corp's vast library of films and TV, analysts believe it will be off-loaded on Redstone's Viacom where there is a naturally fit with MTV. And Redstone is said to be hot for MySpace. In a 2006 interview, he said he felt "humiliated" losing the sale to Murdoch and had fired his chief executive Tom Freston, so to speak, to cleanse his media mogul palette.

But can MySpace reclaim its place online? Unlikely, says Steve Martin, the New York publicist who has worked on the US success of Radiohead, PJ Harvey, and The Strokes. "What happened to MySpace is what happened to everything that becomes a new frontier in music. As soon as it started making these deals it was only a matter of time before artists decided they could ordain themselves through this system. Labels think, 'Well, it worked organically for this band ... Let's make it happen for this one.' But that doesn't work. People develop a better bullshit detector as time goes on."

In Martin's opinion, we're technologically between stations. "I'm sure there's something I haven't even heard of yet that's going to be the next thing." Until the next new platform for music comes along – SoundCloud is widely tipped – MySpace is a still an important component for launching any new band –"one of the boxes you have to tick," says Beggars' Stephen Hallowes – and there are signs that it lives on in some quarters more strongly than ever.

One of the biggest hits of the year so far, the supergroup Chickenfoot, a neo/retro metal outfit featuring the Van Halen veterans Sammy Hagar and Michael Anthony, Red Hot Chili Peppers' drummer Chad Smith and virtuoso guitarist Joe Satriani, relies on MySpace to connect with fans. The band's manager John Carter says MySpace has been a "total asset" to Chickenfoot.

Like most in the business, Carter assumed the band's demographic was in the 35 to 55 range. But information provided by MySpace shows that Chickenfoot had 800,000 unique visitors aged 12 to 25 last month. "It's the only place that will give you feedback about your demographics," Carter says. "We thought we had a 35 to 55 audience but this tells us we've crossed over.

"Somehow we've an attractive proposition," Carter adds, alert to the apparent ironies in the marriage of old school metal and the internet. "They're so old school they're actually breaking through into new ground." For now it's hard to say the same for News Corp, or MySpace.