Will Microsoft's Spin-off Pack a Wallop?

A crasher wants into the social networking party, and cool features just might get it past the bouncers. But what about the VIP room?

When Wallop was unveiled on Sept. 26, it would have been easy to dismiss the social networking site as yet another instance of Microsoft arriving late to the party. Actually, it's more of a bash, where the guests of honor are MySpace and Facebook—and there's not a lot of room for crashers.

Wallop wants in anyway. Now a standalone company, it was spun off from Microsoft (MSFT) a year ago and has been in the works a full four years. Contrast that with the likes of MySpace (NWS), Facebook, Digg, and others, where ambitious young techies got an idea, threw up a site in a matter of months, and tweak as they go along, based on what people like and don't like. With its Microsoft pedigree, there's been speculation that Wallop doesn't really get what the new Web is all about.

In many ways, Wallop isn't typical Redmond & Co. fare, and that's a good thing. For one thing, it was spun off at a time when giants Yahoo! (YHOO), Viacom (VIA), and News Corp. (NWS) were amassing networking and related sites. "It's a shift in strategy," says Wallop Chief Executive Karl Jacob. "The idea is some of the innovations at Microsoft are best grown and tended to as a separate independent company under an entrepreneurial leader." And not all brands benefit equally from the Microsoft brand. "For this demographic, [Microsoft is] a good brand, but not a MySpace or Facebook kind of a brand," he says.


  Although Microsoft has a board seat and an equity stake in the company, venture capital firms Bay Partners and Norwest Venture Partners have also invested. And the company has shifted its headquarters from Microsoft territory in Redmond, Wash., to San Francisco, mecca of the new, user-generated interactive Web.

The product itself is also atypical of Microsoft's past. The company built dominant franchises like Internet Explorer and Windows by copying good technology developed by a scrappy upstart and then using its heft to outmaneuver the smaller rival (see BusinessWeek.com, 9/13/06, "Can Microsoft Out-Google Google?"). But Wallop is no carbon copy of MySpace or Facebook. It's a rare instance of a truly different and innovative site in social networking, where many sites share the same basic functionality and even look and feel.

For example, even though MySpace and Facebook are very different, their profile pages have a standard Web page layout, with different sections boxed off and stacked atop one another, set apart by headers. Wallop turns all that on its head. It looks more like a desktop than a Web page, and it's entirely based on Flash, Adobe's (ADBE) animation software that makes everything look smoother and glitzier without hogging bandwidth.


 The different sections, such as conversations with friends, your blog, and your pictures, are clustered in the middle of the page around your profile box. There's no survey to fill out of likes, dislikes, birthdays, or whether you plan to have kids. You just write what you want in that box. Instead of listing friends, the site has a radar-like graphic that plots your connections based on how frequently you interact with a person. Says Jacob, it's a more accurate reflection of the real world, where the word "friend" can mean a lot of different things. In fact, Wallop doesn't even use the word "friend," opting for "network" instead.

An even more radical contrast is Wallop's business model. Unlike nearly every other social networking or user-generated content site, it doesn't make money by selling ads. Instead, the site collects small payments for clever, animated applications called "mods." For a fee of, say, 10 cents, you can get a cartoon of an angry bunny created by an independent Flash designer to jump around your page.

Such personalization helped give upstart MySpace an edge over incumbent Friendster (see BusinessWeek.com, 8/22/06, "Friendster: Poised for a Comeback"). At most social networking sites, users spend time writing or cutting and pasting kludgy HTML code. Wallop's executives are betting that teens would rather spend more time choosing and arranging fun things and less time coding. It's no different than paying for a ringtone, to personalize your cell phone, argues Jacob.


  Another break with the social networking set: Wallop's executives are basing their innovations on focus groups and research. Jacob himself has been a tech entrepreneur for some 15 years, so he's hardly the target audience. That's in stark contrast to sites such as Facebook, Digg, and YouTube, which all grew out of a young entrepreneur's desire to make something cool that he and his friends would like.

Of course, differences like that raise the question of how in touch the team is with the target market of 18- to 25-year-olds—and whether that audience wants radical change. Analysts aren't sure. Joe Wilcox of Jupiter Research says the pluses are a different and appealing look and feel. But the downside is that Flash isn't searchable—something his 12-year-old daughter balked at. "The challenge is to make this a place people want to hang out," he says. "They can't import everything they have already built on other sites. If I were the Wallop guys, I'd be looking for ways to help smooth that process."

While it's true that Friendster went from hot to not faster than anyone expected, that was also in the early days of social networking. It wasn't as widespread a phenomenon, and people didn't spend the same kind of time on these sites as they do now. Chipping away at the lead held by MySpace and Facebook won't be so easy.


  During the school year, a full two-thirds of Facebook's audience comes to the site every single day. And even when nearly 1 million users were up in arms about a new feature some users said compromised privacy, the threatened boycott was for just one day. To many industry watchers, that underscored just how integral the site has become in peoples' lives (see BusinessWeek.com, 9/8/06, "Facebook Learns from Its Fumble").

Similarly, hardcore MySpace users have spent countless hours customizing their pages, uploading photos, writing blog postings, and adding friends. Unless there's a compelling reason, it'll be a chore to toss all of that out and start with a new site, even one that's easier to personalize.

The key isn't simply amassing users, but getting "cool" people to come to Wallop, Jacob says. Just like in high school, everyone will want to be where the cool people are. To give an air of exclusivity, the site is invitation-only now, and each person only gets a few invites to dole out to friends. Wallop will be doing some grassroots promotions in cities including Los Angeles and New York to woo trendsetters.

Just like anything else trying to upend the existing social order, Wallop will need more than a glitzy product. It will also need the mysterious forces of buzz and luck as it tries to elbow its way into a social networking party that's already in full swing.

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