In 2005, MySpace’s position as the leading social networking site appeared assured. It was gaining 70,000 new users every day,1 and by 2006 it was the most visited Web site in the United States. Its 80 percent market share in social networking far outstripped its closest rival, Facebook, which remained a distant second at 10 percent.2 In 2008, however, MySpace began to lose users to Facebook and then to Twitter. Its share in social networking dropped to 66 percent in 2008, and to 30 percent in 2009.3

According to a NewsCorp executive who had oversight for the MySpace business, the reason for this sharp drop was that MySpace stopped innovating at a time when it led in the market and had strong momentum, leaving the door open to its competitors. This executive stated: “The thing you see in this space more than anything else is that if you don’t keep innovating and moving forward, you get in trouble. You can’t stop [. . . .] And MySpace stopped.”4

This lesson from MySpace — “if you don’t keep innovating and moving forward, you get in trouble” — is, in my experience, the driving factor behind a majority of the mergers in the technology sector. Production efficiencies are rarely the motivation for high-tech mergers, because high-tech markets typically are characterized by large upfront fixed costs and low marginal costs of production. 5 Some high-tech mergers, of course, also are motivated by anticompetitive reasons. Most, however, are spurred by the need to innovate, as Joseph Schumpeter described long ago...