Facebook's plan to hook up the worldFacebook's 23 year old CEO Mark Zuckerberg
The company's boy-wonder CEO wants to take social networking out of the dorm room and make it a platform for new businesses, reports David Kirkpatrick in a Fortune exclusive.
By David Kirkpatrick, Fortune senior editor
May 29 2007: 5:29 PM EDT
NEW YORK (Fortune) -- Imagine that when you shopped online for a digital camera, you could see whether anyone you knew already owned it and ask them what they thought. Imagine that when you searched for a concert ticket you could learn if friends were headed to the same show. Or that you knew which sites - or what news stories - people you trust found useful and which they disliked. Or maybe you could find out where all your friends and relatives are, right now (at least those who want to be found).
(This is an expanded version of a story in the June 11, 2007 issue of Fortune.)
This isn't fantasy. Facebook might make it possible, and soon. Yes, the social-networking site college kids spend so much time on - the one you thought was just about hooking up - could turn out to be more important than any of us thought.
In late May, the company's 23-year-old CEO, Mark Zuckerberg, got up in front of several hundred journalists, analysts, and industry leaders in San Francisco at an event the company called F8 (think of it as "fate") to say that Facebook would no longer be just another social-networking site. Instead, he said, it aims to be the place where you can involve your friends in everything you do online. The company has 24 million members (less than half of whom are now in college), and it is adding about 150,000 a day. In effect, Facebook is now offering the opportunity for any company, Internet service, or software maker - anyone at all, really - to build services for its members.
In advance of the announcement, which had Silicon Valley buzzing, Zuckerberg and other executives spoke to Fortune about the strategy. "We want to make Facebook into something of an operating system so you can run full applications," Zuckerberg told me. He said Facebook is becoming a "platform," meaning a software environment where others can create their own services, much the way anyone can write programs for Microsoft's Windows operating system on PCs. Facebook, he explained, is a technology company, not a media one.
Zuckerberg sometimes lapses into jarringly grandiose language, for example when he told me that what Facebook is unveiling would be "the most powerful distribution mechanism that's been created in a generation." He may be crazy, but then again, he is something of a boy wonder. He consults frequently with Microsoft chief software architect Ray Ozzie and counts Washington Post Co. CEO Don Graham as a friend. Microsoft and the Post Co. were among the 65 companies that launched 85 new Facebook applications at F8.
That so many companies jumped aboard right away is a measure of the enthusiasm businesses have for social networking. Facebook's chief operating officer, Owen Van Natta, describes the opportunity this way: "Take anything today on the Internet and overlay a lens that is the people you know and trust." What wouldn't be more useful or enjoyable viewed through that lens? Watching football? Studying the history of Vikings? Shopping? Planning a vacation? Even - perish the thought - online sex? (Don't presume propriety. The only limit, says Zuckerberg, is that applications be legal.)
Take those examples of community-empowered applications at the start of this story. At least two of them aren't even hypothetical. A company called Digg already allows people to share and rate favorite news stories online. Now it is offering a version of its service on Facebook, which could allow it to accumulate users more quickly. And a company called iLike launched a service at F8 that allows members to connect at concerts. Non-Internet brands like Red Bull are developing Facebook applications too.
Today, social networking is fragmented. There are networks for dating, for philanthropy, for pet owners, for parents. But each has its own ways for members to register, describe themselves, communicate, and interact. Facebook aims to make much of that unnecessary. It will provide the underlying services - a platform - and offer access to its prerecruited pool of members. It will retain some online real estate and will still generate the lion's share of its revenue from advertising.
The platform expert has taken notice: Microsoft (Charts, Fortune 500) is Facebook's biggest business partner. Last year it contracted to broker banner ads for Facebook, reportedly guaranteeing a minimum of $100 million per year through 2011. Zuckerberg met with Bill Gates this spring, and two weeks before F8, Ozzie diverted his company jet for a quick Friday 8 a.m. meeting in a conference room at San Francisco Airport. There, Zuckerberg gave his first demonstration of Facebook's platform. (Ozzie is said to be fascinated by Facebook, but he declined to discuss it for this story.) Microsoft's own workplace network within Facebook has 10,000 members. At F8, Microsoft announced tools to make it easy to create links between Windows applications and Facebook's network.
Microsoft's imprimatur is a big first step in transforming a company that until now has been just another social network - albeit a hugely successful one, second only to giant MySpace. Neilsen/NetRatings counted 14 million unique U.S. web visitors to Facebook in April, compared with 57 million at MySpace, though Facebook is growing three times as fast. Both services, along with scores of smaller ones, offer a profile page to compile information about yourself - your sign, your favorite music, your major and class, or your job, and probably your sexual preference. You then "friend," or link to, others via their profiles, and exchange messages, join groups, and engage in a variety of collective activities.
Among the younger set, e-mail is increasingly passé. Instead, when they want to reach someone they "facebook" them. Groups can emerge for anything. One group of 227,000 at Facebook supports Barack Obama, and for some reason 143,000 - presumably mostly feckless college kids - have joined the group "I Secretly Want To Punch Slow Walking People In The Back Of The Head."
What sets Facebook apart - and makes its new direction possible - has a lot to do with its emergence from the hothouse of undergraduate life. Founded in February 2004 in Zuckerberg's Harvard dorm room, it required students to join using their real name and college e-mail address. So a culture of authentic identity became part of Facebook's DNA. At most other social networks, role-playing, pseudonyms, and anonymity are rampant - "On the Internet nobody knows you're a dog," as the classic New Yorker cartoon put it.
Facebook became not so much a place to meet new people as a tool to lubricate and intensify relationships with the people you already know. And yes, sex has from the start played a big role in Facebook's popularity on campus. It even still has a feature which enables you to "poke" another member - something most people interpret to mean a sexual come-on. I can tell you my Facebook friends aren't using it on this 54-year-old married guy.
The Facebook CEO padded into an interview recently on his 23rd birthday, barefoot, unshaven, wearing a T-shirt and jeans. Zuckerberg couldn't find an eraser for his whiteboard, so he used a knit hat he picked up from the floor. When I failed to notice, he pointed it out to me, attempting to be a helpfully colorful subject of journalism. He seldom does anything but work. For a while he led midnight staff meetings, until COO Van Natta, who has two small children, couldn't stand it anymore.
Zuckerberg uses one term constantly to describe the core value of Facebook: the "social graph." The programmer-turned-CEO says he means this "in the mathematical sense of a series of nodes and connections, with the nodes individuals and the connections the friendships." This is the essential asset that Facebook will now make available to others, he says.
His epiphany about its importance came when Facebook launched a rudimentary photo application in 2005. Though it lacked many features of other online photo sites, it almost immediately garnered the most traffic by far. The reason, he decided, was that Facebook members could quickly learn when friends uploaded new photos, and thus they looked at more of them. He hopes the best new applications by outsiders on the Facebook platform will experience a similar viral popularity.
That same year, Zuckerberg met the Post's Don Graham through the daughter of another Post executive who went to Harvard (as Graham had). "He described Facebook, and I just thought 'Gosh, that's one of the best ideas I've heard,'" says Graham, who, according to Zuckerberg, offered to invest $5 million for 10% of the company. (Graham says he made an offer, but declines to confirm the number.) Zuckerberg decided to take it. But word got out that Facebook was seeking investors.
Jim Breyer of Accel Partners, an investor in major tech companies, heard that Zuckerberg was willing to sell a stake. "We jumped all over it, even though we were told the deal was done," he recalls. He took Zuckerberg to dinner at the classy Village Pub in Woodside, Calif. Breyer ordered a Kistler Pinot Noir, a formidable wine, and suggested Zuckerberg do the same. Instead the CEO ordered a Sprite. He wasn't yet old enough to drink. Breyer said he'd invest $12.7 million for 13% of the company.
Zuckerberg went back to Graham, saying he felt a moral obligation to stick with their original deal. But Zuckerberg says the Post CEO told him he should take Breyer's deal, even though it meant Graham couldn't invest. So Zuckerberg did. Graham still speaks to Zuckerberg frequently and last year asked him to address top managers at the Post. "Success has not spoiled Mark Zuckerberg," says Graham. "He has never once talked to me about the money he can make from Facebook. He just talks all the time about making it better."
Zuckerberg has an unwavering certainty that what Facebook is building is important, even historic. He was the one who was most adamant about Facebook's long-term value over the past year, when there were big offers on the table, reportedly both from Viacom (Charts) and Yahoo (Charts, Fortune 500), which is said to have offered close to a billion dollars. Says Peter Thiel, a board member: "For better or worse the company's not going to be sold any time soon. It will remain a standalone business for a while, because the gap is enormous between what Mark and now the rest of the board thinks the company is worth, and what the outside world thinks."
Last fall, Facebook announced two changes that are critical to its new strategy. First, it introduced News Feed, an automated flow of information into your Facebook home page that told you which friends had new friends and what groups they joined, among other things.
Days later, Facebook made an even bigger announcement. Henceforth, membership would be open to everyone. New members of any age could join regional networks solely based on where they lived. (High school members had been allowed since 2005. Today there are three million.) There was grumbling among the college kids that Facebook would no longer be cool. Similarly, my 14-year-old daughter is appalled that I am a member of Facebook, and refuses to let me friend her, lest her other friends find out via News Feed. No matter, says Matt Cohler, the vice president for strategy who joined the company as employee number five in June 2004: "One of the first things I ever heard Mark say is 'We don't strive to keep it cool. We strive to keep it useful.'"
Opening up the rolls gave an immediate boost to membership. Facebook is growing spectacularly in places like Canada, the U.K., Australia, South Africa, Norway, Lebanon, and Egypt. Work networks are exploding, with 14,000 at IBM (Charts, Fortune 500), 10,000 at Ernst & Young, 8,100 at the BBC, and 6,300 at General Electric (Charts, Fortune 500). The U.S. Army network has 43,000 members.
But it is News Feed that gives Facebook its viral power. "News Feed brought interesting things to people's attention quicker, so they looked at more content," Zuckerberg says. Now, as businesses build applications and users install them, their friends will automatically be notified.
The early applications appearing on Facebook suggest that many companies see the huge potential of such a system. Prosper.com, a site that enables people to lend each other money at negotiated interest rates, launched a Facebook version. Max Levchin, who co-founded PayPal, is CEO of Slide, which is putting its slide-show service on the new platform. "These guys are creating the opportunity to build Adobes and Electronic Arts and Intuits that live within Facebook," he says.
Levchin says Facebook has dramatically simplified the process of starting certain kinds of companies. For instance, it's often said that no-one can compete with eBay (Charts, Fortune 500) because the hurdle of matching its existing community of buyers and sellers is too great. So why not, he asks, create the next eBay on top of Facebook?
The Washington Post Co. started working on its own Facebook application in late April, the morning after Don Graham took Zuckerberg as his guest to the White House Correspondents' Dinner. "It's a strategic issue for us to reach out to the very webby younger audience," says Caroline Little, CEO of Washingtonpost.Newsweek Interactive. Product development boss Rob Curley worried at first that the Post on Facebook might seem like "Pat Boone rapping," but found that almost all his developers are huge Facebook users, so they summoned up the right spirit. At F8 The Post launched a "political compass," which asks you to answer a set of questions so it can exactly locate you on the political spectrum. Then you can compare that result with your friends, people in the Washington network or the people at your office.
Before F8 Facebook hosted six applications of its own, which appeared on the left of a member's screen - Photos, Notes, Groups, Events, Posted Items, and Markeplace (a new classifieds service). It intends to continue developing its own applications even as it welcomes those from others, though executives insist their own will get no special treatment. At F8 the big news is the introduction of Facebook video. The impressive application will provide higher-quality video than YouTube, but will be used mostly for communicating among friends. Among other features, it will enable you to upload video from your camera phone and have it automatically placed on your profile.
Breyer says Facebook is profitable. Reports put total projected company revenue for 2007 at about $150 million. Strategy boss Cohler explains how the company will benefit from the platform: "First, we get additional usage and page views, and we can put ads towards that. But in addition, users will be telling us more about themselves by using a richer site, and we can use that information to serve them a more relevant experience, both in advertising and other ways." As for the developers themselves, Facebook will impose no limitations on how they make money. Says Zuckerberg: "They can sell sponsorships, they can have ads, they can sell things, they can link off to another site - we are just agnostic."
It's not all rosy for business, though. You think we've had transparency on the Internet so far? The ramifications for marketers could be frightening if someone builds tools that enable Facebook users to get more efficient at communicating among themselves about products and services they use. It could become just as easy to learn if someone you know was overcharged by a credit card as to find out what concerts they are attending. Up until now most online sources of product information have been unreliable. But if it's your friend telling you not to buy that shampoo, you're likely to listen. And the most revolutionary Facebook applications could very likely emerge not from the company's carefully picked launch partners but from some dorm room - like the one where it all began.
There's no certainty the strategy will work. Users could be turned off by a sense of increased commercialism inside Facebook. The viral processes the company expects will promote new applications could break down if users are receiving too many messages about the activities of their friends. The service itself may not be able to handle the increased traffic. Competing social network platforms could emerge from any number of companies including Google (Charts, Fortune 500), Microsoft, MySpace, or an even more fleet-footed startup. However, executives at several Internet service companies I spoke to, including Levchin of Slide and CEO Kevin Rose of Digg, said that MySpace seems to have neither a welcoming attitude towards partners nor the technology chops to mimick Facebook anytime soon.
At Facebook, the sky seems very blue. Says investor Thiel: "Everything we see from the inside tells us this could be an extraordinarily valuable business, on the scale of a Yahoo or eBay or even a Google." Adds co-founder and VP of Engineering Dustin Moskovitz: "I have a note on my account that says Facebook will saturate the world population by 2010. It's not a joke." And Zuckerberg: "We're on a trajectory to be pretty universal soon if we can keep our growth going."
OK, maybe instead they'll just sell to Microsoft. But in the meantime, you may very well start using Facebook yourself.
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http://money.cnn.com/2007/05/24/technology/facebook.fortune/index.htm
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