Status Update: Facebook LOL as Germany's StudiVZ Loses Ground

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The subject is sensitive because it relates to data privacy, a major concern in Germany. Surprisingly enough, it poses a bigger problem for StudiVZ than Facebook, even though Facebook treats user data far more nonchalantly. The American company, unlike VZ, links user profiles to Google searches, and Facebook founder Mark Zuckerberg even said recently that data privacy is old news.

Zuckerberg, 26, is the most prominent face of social networks, which makes him a hero for the industry and users -- an image that rubs off on his product. Holtzbrinck lacks a comparable celebrity figure.

The publishing house probably greatly overvalued StudiVZ when it decided in 2007 that it was worth €85 million ($105 million). The group had high hopes for its new acquisition, but so far it has had little use for the online medium. StudiVZ's most promising phase, when the network exploded in popularity, was already four years ago.

Involved from the Beginning

Kolja Hebenstreit, 26, is sitting in his office in Berlin's fashionable Mitte district. He was one of StudiVZ's very first users, as well as a friend of the founders and one of the company's first investors. Hebenstreit was there at the student party where the concept of StudiVZ was born. It was in the summer of 2005, in Pittsburg, and the prettiest girls at the party were members of Facebook, which was still young at the time. Three young men then developed a similar network in Germany, and StudiVZ went online that winter. Hebenstreit sold his shares when Holtzbrinck acquired the network in 2007.

"The product hasn't really been developed any further," says Hebenstreit. He points out that many improvements to the service were simply replicating other networks' existing functionality.

Holtzbrinck retains StudiVZ the way luxury brands maintain expensive boutiques on the world's poshest shopping streets: Even though the business isn't profitable, it's good for the company's image. Holtzbrinck hopes that the well-known name will rub off on the publishing house's other digital investments. For example, the shopping portal Brands4Friends, which is partly owned by Holtzbrinck, was also popularized through VZ.

"Of course, VZ isn't supposed to be a subsidized business. If you constantly burn through money, you lose your room for maneuver," says Holtzbrinck Digital CEO Michael Brockhaus. Meanwhile, the VZ networks aren't even doing that badly in financial terms. In some months, they bring in an estimated €1.8 million in revenues, which, according to company officials, means that they "break even on a monthly basis."

The Fight against Facebook

But does the company even stand a realistic chance of winning the fight against Facebook, at least in Germany, in the long term? The Holtzbrinck executives are no longer sure that it does. Nevertheless, say company sources, it is very difficult to make it clear to employees in Berlin that VZ can no longer compete with Facebook on equal terms, or that trying to keep up with the market leader is even worth the effort anymore.

"Facebook sets the technical standards and, in doing so, exerts pressure on the industry," says Brockhaus. "Ultimately, however, this isn't directed at us but at Google." Indeed, Facebook has already entered a new and larger arena.

Facebook is expanding into the entire Internet, and more and more websites are integrating Facebook's "Like" button. When a user visits a website and presses this button, the recommendation automatically appears in the user's Facebook news feed. Friends of the user can then see which content he or she recommended. This may be a dream scenario for advertisers, but it also sets off alarm bells for privacy groups, who consider it problematic that Facebook knows which users visited which websites and when.

Meanwhile, the VZ group lacks the partnerships and developers it needs to even hope to keep up in this battle of the Internet titans -- not to mention the necessary millions.

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• Part 1: Facebook LOL as Germany's StudiVZ Loses Ground
• Part 2: Data Privacy Concerns