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.

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.

)*Lily Allen is one of many artists that has benefited from MySpace's star-making power.

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 US$580m (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.

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