For much of the trip, however, Zuckerberg was in control of the conversation. Zuckerberg interrogated Wolf about MTV’s business. How did companies like Viacom make their money? How much did MTV charge for advertising? What amount of that was profit? How do you build your audience? Wolf tried to steer the conversation back to how MTV could work with Facebook. He talked about how MTV’s ad sales team could use its access to big advertisers to help sell Facebook ads. And he noted that MTV’s big hits like Laguna Beach and The Hills, watched by millions of teenagers and young adults, were perfect places to promote Facebook. Zuckerberg said he had noticed that during the hours those shows aired, Facebook’s traffic slowed discernably.
During the trip Zuckerberg took to admiring the G5. “This plane is amazing,” he said.
“Maybe you should just sell a piece of the company to us,” Wolf replied. “Then you can have one for yourself.”
Wolf invited him to sit in the jump seat in the cockpit as the powerful corporate jet landed at Westchester. When it pulled up to the private aviation terminal, two cars were waiting. One was Wolf’s corporate black car to drive him into the city. The other was the Zuckerberg family minivan, from which Mark’s parents emerged. They beamed and gave their son a big hug. It was as if he were merely coming home from a semester at college.
• • •
Wolf flew out to Palo Alto again in January 2006 and brought MTV’s head of advertising strategy. Zuckerberg suggested they dine at the Village Pub in Woodside, the same fancy restaurant where he’d had his fateful dinner with Jim Breyer. He brought along Cohler and Van Natta. Wolf had an elaborate PowerPoint presentation showing how the two companies could work together. At the table he suggested a deal in which Viacom would buy a piece of Facebook in conjunction with a big ad partnership. Zuckerberg listened politely, but made it clear that he wouldn’t even contemplate any deal that could involve him losing his absolute control over company decision making.
In early February, Wolf made yet another trip to Palo Alto. He and Zuckerberg were becoming chums, and they took a long walk around the palmy, well-groomed streets. For some reason they stopped by Zuckerberg’s modest one-bedroom apartment. The place was messy, though mostly devoid of furnishings. There was a mattress on the floor with sheets askew, piles of books, a bamboo mat on the floor, and a lamp. Then they headed for dinner at a nearby restaurant. Wolf popped the same question he’d asked on the plane. “Why don’t you just sell to us?” he asked. “You’d be very wealthy.”
“You just saw my apartment,” Zuckerberg replied. “I don’t really need any money. And anyway, I don’t think I’m ever going to have an idea this good again.”
The conversation wove back and forth and Zuckerberg reiterated that he believed Facebook was worth $2 billion and wouldn’t talk about selling it for less. “It wasn’t like ‘I want $2 billion,’” says Wolf. “It was ‘If you pay me $2 billion I don’t want to sell. Thank you.’” Zuckerberg finally said it made more sense for them to just talk about some kind of partnership.
A thwarted Wolf went back to New York and met with McGrath and Freston. They weren’t interested in a partnership. They—and Redstone—wanted very badly to own Facebook. So Freston decided to just make an offer. He sent Zuckerberg a letter proposing Viacom would pay $1.5 billion to buy the two-year-old company. The money was to be paid out 51 percent in cash and the rest over time, depending on how well Facebook’s business performed. It was by far the most significant and concrete offer Facebook had ever received. Zuckerberg didn’t even respond.
A week or so later, Wolf called Zuckerberg and they had a few desultory conversations, to no effect. Wolf met with both Peter Thiel and Jim Breyer, complaining of Zuckerberg’s tepid reaction, but both said they couldn’t do much to intervene. Van Natta, by contrast, confided to Wolf that he himself was trying to convince Zuckerberg to sell.
Meanwhile the Viacom team had heard that Yahoo might be talking to Facebook as well. The elite precincts of media mogulhood are like a small town. It happened that Viacom’s Freston played tennis regularly in Los Angeles with Yahoo CEO Terry Semel. One day on the court Freston tried to sound out Semel to learn whether he was talking to Facebook. He got the impression the answer was yes. The pressure on Viacom increased.
Up to this point, Wolf had taken painstaking measures to keep the Facebook talks secret. Few others at Viacom even knew about them. Freston and McGrath thought one reason Murdoch had been able to swoop in and bag MySpace was that Viacom’s talks with that social network had been too public. But at the end of March, BusinessWeek’s online edition published a story titled “Facebook’s on the Block.” It reported the incomplete fact that the company had turned down $750 million dollars and hoped to get $2 billion. The article didn’t say Viacom had been the bidder, but speculated about its interest. To Wolf and his colleagues, this was embarrassing. They presumed Facebook had leaked the info to elicit additional bids. And sure enough, shortly after the article appeared, Zuckerberg called and said he still wanted to talk.
Then Facebook came close to selling out. Van Natta and Zuckerberg came to New York. Wolf flew back out to Palo Alto. With several Viacom colleagues, Wolf camped out in a Facebook conference room. Zuckerberg, Cohler, and Van Natta would come in, negotiate, then retreat to another nearby conference room. The Viacom team would walk around the block. Back into the conference room. Another tête-á-tête. Mark wanted more cash up front. Viacom wanted guarantees on performance before it would pay the remainder of the $1.5 billion. Van Natta wanted fewer restrictions on the payout. Wolf finally agreed to increase his initial payment to $800 million in cash. But they continued to quibble about the remaining $700 million. Neither side had an investment banker assisting them, as would be routine in most such talks. Wolf knew Zuckerberg well enough to realize that bringing in cold-blooded Wall Street experts would only further spook him.
But Wolf’s bargaining leverage was limited. Viacom’s chief financial officer was leery of paying too much for a company that for all its online presence remained puny in financial terms. Facebook had only seen around $20 million in revenues over its entire history to that point, with effectively no profit whatsoever. It planned on $22 million in revenue for 2006 and $55 million for 2007, executives told Wolf, but the Viacom delegation was skeptical it would reach those numbers. Paying $800 million was really stretching it.
In the end the two sides could not agree on how Facebook would earn its additional $700 million. The Facebook negotiators felt the deal’s terms were too complicated and the payout uncertain. Zuckerberg seemed to be getting cold feet anyway. He was saying things like “Google was smart not to sell early. Look at how well they did.” Wolf responded that Google had hundreds of millions of dollars of profits before it went public, and Facebook had none. But to Zuckerberg, what was more significant was that Facebook had by then become the seventh-most-trafficked site on the Internet, with 5.5 billion page views in February, according to the measurement firm comScore Media Metrix.
As the Viacom deal was petering out, Facebook did some of its own financial maneuvering. It raised more money from venture capitalists, but for this second VC round (known as Series C because it was the company’s third financing), the pre-investment valuation was $500 million, five times the $97 million postinvestment valuation Accel had agreed to eleven months earlier. Premiere venture firm Greylock Partners led the April round, joined by Meritech Capital Partners. In addition, Peter Thiel and Accel Partners each put in more money and added to their Facebook holdings. Altogether Facebook received an infusion of $27.5 million. It significantly relieved the financial pressure and made it considerably easier for Zuckerberg to walk away from Viacom.
Facebook’s success was attracting another sort of attention—from international imitators. Though the company had begun expanding to select elite schools in English-speaking countries outside the United States, it had no presence in Asia and virtually none in Europe. A site called studiVZ (from the German for “student direct
ory”) in Germany now borrowed Facebook’s design, making red the elements that on Facebook were blue. Otherwise it was a pretty shameless imitation. It launched at German universities in October 2005 and was an instant success. By January 2007 it had 1.5 million users and sold to the powerful Holtzbrinck publishing firm. Facebook was so worried that this might preclude its ultimate success in Germany that in late 2007 it came close to buying studiVZ—for about 4 percent of Facebook’s total equity. The prospect of a purchase was made easier, ironically, because the imitation was so complete. That would make integrating the two services much easier. Another imitator, which launched around the same time in China, called Xiaonei, blatantly copied some of Facebook’s software code and even initially included at the bottom of each page “A Mark Zuckerberg Production.” Xiaonei too was a hit, garnering many millions of users.
Despite his MySpace coup, News Corp.’s Murdoch grew ever more intrigued by Facebook. He and Zuckerberg got to be fairly good friends. The mogul was charmed by the passion of the young CEO, and Zuckerberg liked Murdoch’s big-picture view of how media was changing. Murdoch, almost uniquely among media leaders, had accepted that the Internet was transforming the landscape for all media companies. He considered his purchase of MySpace just one in a series of major moves. But he couldn’t understand why Zuckerberg thought Facebook, which had far fewer users at that point, was worth several times what he’d paid for MySpace. The conversations never got as serious as those with Viacom, but they would gain momentum, then peter off as Zuckerberg’s interest declined.
Zuckerberg was getting a little cocky. Everybody wanted to talk to him. Every company seemed to want to buy Facebook, and everybody seemed to want to use it. And he had noticed another thing—every offer he got for the company was higher than the last. Meanwhile, the service’s growth was steady. If it was going to keep getting bigger, it would keep getting more valuable. He didn’t want to sell anyway, so there was no urgency to any of these conversations.
But Facebook was still burning tons of cash. It couldn’t keep endlessly pulling in investment money to cover its losses, no matter how much contempt Zuckerberg had for ads. Luckily, Google, Microsoft, and Yahoo all wanted to talk about a deal to place display ads on Facebook. Zuckerberg authorized his deputies to begin negotiations. To him it seemed like easy money. He wasn’t going to give them much onscreen real estate anyway.
Facebook was now so successful it was beginning to saturate the college market, operating at thousands of schools. At almost every school it opened, the majority of students became users. Its success at high schools reinforced Zuckerberg’s belief that Facebook had the ability to spread quickly among new groups. What mattered was that the target group needed to include lots of dense, overlapping relationships.
And what was the mother of all such communities? The workplace. Zuckerberg decided to launch what he called work networks. It would be Facebook’s first effort to recruit adults to its service. A work network would be set up at a company the same way Facebook established a closed student network at each university. The default privacy setting was that members of such a community could all see one another’s information. Zuckerberg believed work networks would extend the company’s ubiquity out of the academy into the whole country, and maybe even ultimately the world, or at least to everyone who worked for companies. It was very different from Facebook investor Reid Hoffman’s LinkedIn, which was structured more as a résumé-based network and did not so much emphasize day-to-day communication or workplace social connections.
In May 2006 the work networks debuted, but not much happened. The world barely noticed. Facebook created networks for a number of companies, opening the doors, but few passed through. One exception was the unique workplaces of the U.S. Army, Navy, and Air Force. The intensity of shared experience among young people in the military is apparently much like that in college. Facebook made sense there. But in most of the big companies where Facebook initially set up networks, there was little if any response from employees.
Few in business knew that Facebook was opening up. And Facebook was developing a bad reputation. At almost exactly the same time work networks debuted, the New Yorker published a lengthy profile of Zuckerberg and Facebook, the most in-depth coverage the company had ever received. Author John Cassidy made the site seem like a curiosity, focused a good bit on the Winkelvosses’ lawsuit, and implied that Facebook’s users were antisocial. “Clearly one of the reasons the site is so popular is that it enables users to forgo the exertion that real relationships entail,” he wrote. He also quoted a sociologist who speculated that the main reason Facebook was so popular was “voyeurism and exhibitionism.”
Facebook still seemed to nonusers to be mostly about dating and doing pointless, possibly suspicious things like poking people. Whenever you added a new friend on Facebook back then, a box popped up that asked you how you knew them. One of the options was “we hooked up.” How could this be a service for professionals? And Facebook faced a chicken-and-egg problem. Adults didn’t want to join until other adults were already there.
Perhaps Facebook only worked for students after all. Maybe adults didn’t need this kind of service, many Facebook executives worried. The mood around the office darkened. Even though growth was continuing strongly among college and high school kids, if adults didn’t want to join Facebook then perhaps something was wrong with Zuckerberg’s theories. He was disappointed and befuddled. This was a major setback. Maybe the world wasn’t becoming more transparent as quickly as he had thought. “It was the most wrong he’d ever been at Facebook,” says Cohler, “and the first time he’d ever been wrong in a big way.”
Zuckerberg had other big changes in mind, but if adults weren’t going to respond to Facebook some of the changes would fail. As summer began, Facebook’s board debated how serious the problem might be. David Sze, who had spearheaded Greylock’s recent investment in Facebook and was an official board observer, found himself having to reassure its members. At one meeting Moskovitz, who also attended as an observer, quizzed Sze about whether he regretted investing, given the unexpected difficulties with work networks. At that moment Sze was more optimistic than Facebook’s otherwise chronically upbeat board.
That summer of 2006, for the third year, the company rented a Facebook house, occupied mostly by recent arrivals in Palo Alto. One of Facebook’s lawyers argued that a company house was too great a legal liability, but Zuckerberg overruled him. The CEO decided the company should pay half the rent because anyone should be able to come by and use the pool. In fact the pool was only used sparingly, since its heater was broken and the water was always around 100 degrees.
Zuckerberg kept a room for himself in the house to use on weekends but the rest of the time lived separately in his own apartment. He had split up with the Berkeley undergraduate he’d been dating and reunited with his old girlfriend, Priscilla Chan, who he had met while in line for the bathroom at a Harvard party. She had graduated with his original Harvard class of 2006. Instead of a diploma, Zuckerberg had a company worth over $500 million and with almost a hundred employees. After some negotiation, Zuckerberg arrived at a deal with an insistent Chan: while they wouldn’t live together they would spend a minimum of 100 minutes of time alone each week and have at least one date, which would not be either at his apartment or at Facebook.
But the company retained a collegiate air. Employees called another nearby house “the frat house.” Nine people lived in its four bedrooms, many of them recently arrived Harvard-trained programmers. In the window were three big Greek letters that had originally decorated the first Facebook office on Emerson Street—Tau Phi Beta—for The Face Book.
It’s not hard to understand why the lawyer had concerns. The dining room was turned over to Beirut beer-pong tournaments, but one resident, Chris Putnam, was only nineteen. As a sophomore at Georgia Southern University, he successfully hacked his way into the company’s servers and made two thousand Facebook profiles look like they were on MySpace.
He inserted a note in the code saying he didn’t intend any harm. The episode impressed Zuckerberg and Moskovitz so much that they hired him.
At the frat house employee recreation could also be more productive. “People would just come over and code, or party and watch Lost,” reports programmer Dave Fetterman. “We could still fit everyone in the company into the house for a party. At night we’d have beers, watch TV, think up new ideas and just start coding them right there, either in someone’s room or out in the yard. Mark or Dustin would show up. They were usually the first ones to open up their laptops.” The programmers would sometimes combine partying and working at what they called “push parties.” They’d load new software onto the site and “push” it live from right there at the frat house.
Big advertisers were beginning to experiment cautiously with Facebook. This wasn’t just little record companies advertising Gwen Stefani songs anymore. The giants of marketing now were getting interested in Facebook. But it was a different environment than they were used to. The company’s still-small group of ad salespeople pushed clients to craft messages and offerings unique to the service, in keeping with Zuckerberg’s near contempt for traditional advertising. (When he hired new ad sales boss Mike Murphy in March 2006, Zuckerberg told him, “I don’t hate all advertising. I just hate advertising that stinks.”) Even COO Van Natta, a hard-charging industry veteran, had swallowed hard and accepted Zuckerberg’s dictate that advertising should always be useful for the user. Though his mandate was revenue, he had taken to saying things like “We almost shouldn’t be making money off of it if it isn’t adding value.”
The Facebook Effect Page 20