The Russian Bear Slashes a Social Network

The bubble in social networking has burst, decisively. LiveJournal, the San Francisco-based arm of Sup, a Russian Internet startup, has cut 12 of 28 U.S. employees — and offered them no severance, we're told.

The quirky site, part blog and part social network, is best known for its users' weird obsessions — like the troublesome clique of Harry Potter erotica writers, whose outré tastes ran afoul of LiveJournal's efforts to comply with U.S. child-pornography laws. (Oddly, the site also gained a following in Russia, which led to its acquisition by Sup.) All that adds up to an environment even more distasteful to advertisers than the typical social site.

The company's product managers and engineers were laid off, leaving only a handful of finance and operations workers — which speaks to a website to be left on life support. Matt Berardo, a Yahoo executive hired on last summer, has also left.

The company's Moscow-based management has told employees it blames the "global economic downturn" — the kind of pat excuse every boss is giving for layoffs, even when mismanagement or a bad business plan is really to blame. The brutal, abrupt cuts suggest something different: That Sup founder Andrew Paulson (above), who paid an estimated $30 million for LiveJournal a little over a year ago, has realized his expensive mistake in buying at the top of the bubble. Someone familiar with the company tells us Paulson lost the CEO job last summer to Annelies van den Belt, a former News Corp. executive, and was given the meaningless title of chairman; he's essentially out of the company now.

Executives at Six Apart, the blog-software company which sold LiveJournal to Sup, are happily counting the money in its bank. And they should consider themselves lucky that Vox, the LiveJournal knockoff it started, hasn't been more popular. At this point, having a larger social network in the portfolio would be a drag on the company's value.

LiveJournal, founded by engineer Brad Fitzpatrick in 1999, predated most blogging services and social networks, and anticipated many of their features. (Some of Fitzpatrick's software is vital to the operation of Facebook and other large sites today.) But Fitzpatrick never figured out how to turn it into a business. Instead, he sold it to Six Apart, which didn't have much more luck.

The weakest in the herd are always the first to fall. Facebook and MySpace, so far, have resisted layoffs. A host of also-ran social networks — Hi5, MyYearbook, and other obscurities — could be next. It's only a matter of time before investors reach the same apparent conclusion as Paulson: that there's a lot of fuss in running a social network, but not that much money.