Chase credit cards was an important pioneer. Working with a small New York ad agency called Noise Marketing, it created the Chase +1 card, specially designed for college students and only available to Facebook users. The card was black, because that’s what students said they wanted. It offered something Chase called Karma points, which you could redeem for modest rewards like concert tickets. But unlike most rewards cards, you could accumulate points without spending large amounts. That made sense for students because they typically make only small purchases. Each purchase, no matter how small, garnered twenty points. You also got points for joining Chase’s sponsored group on Facebook, as well as for taking an online course on how to manage your credit. And Chase made its card “social.” You could give your Karma points to your Facebook friends.
A week after the program launched, 34,000 students had already joined the group, and Chase soon issued thousands of cards. The bankers were pleased, and Facebook had taken an important step toward proving that customized advertising could work.
A few months later, Procter & Gamble tried something similar. Its CEO, A. G. Lafley, had begun talking about the need for P&G to get closer to its consumers. After reading about this, Facebook ad salesman Colleran did one of his masterful cold calls to find out if P&G was targeting any of its brands at the college market. It turned out that while P&G’s Crest White Strips teeth-whitening product had never been aimed specifically at college students, company data showed that the strips sold particularly well at Wal-Marts located near campuses. Colleran and P&G marketers came up with a Facebook campaign called Smile State.
Much as Chase and Apple had done, P&G created a sponsored group on Facebook for Crest White Strips. It advertised the Smile State group only to users who were students at one of twenty large state universities located near Wal-Marts. Any student who joined got tickets to an upcoming college-oriented Matthew McConaughey movie called We Are Marshall. In addition, the schools that enrolled the most members in the Crest White Strips group got a concert organized by Def Jam Records. Over 20,000 people joined. To have 20,000 people explicitly expressing affinity for Crest White Strips using their real name is the kind of thing that gives marketers goose bumps. It was a huge win for P&G and for Facebook.
Zuckerberg remained uninterested in advertising that interrupted the Facebook experience and distracted users’ attention, no matter how lucrative it might be. In May 2006, Sprite was relaunched with new packaging and a tongue-in-cheek ad campaign aimed at young people that was meant to be brash and obvious. The soft drink’s ad agency offered to pay $1 million for a banner ad that would turn Facebook’s entire home page green for one day. Zuckerberg didn’t even consider taking the money. Nor was the CEO interested in impressing people to get their business. The first time the top executive of a big San Francisco digital ad agency visited Facebook, he ran into Zuckerberg, who was barefoot and wearing NBA basketball shorts that hung below his knees.
Most advertisers were still uncertain what exactly Facebook was, not to mention how to take advantage of it. But in June the world’s third-largest ad agency declared itself in Facebook’s camp with a dramatic gesture. The Interpublic Group committed to spend $10 million on Facebook ads over the coming year on behalf of its clients. As part of the deal the ad giant also bought half a percent of Facebook’s stock. “Young and tech-savvy consumers are increasingly shunning traditional media vehicles and defining themselves and their community online,” Interpublic CEO Michael Roth said in a statement. He also noted that 65 percent of all U.S. college students by now were maintaining a Facebook profile.
In August, Facebook got another major acknowledgment—this time from a titan of the tech industry. First, MySpace announced a major three-year, $900 million deal with Google to operate a search function inside MySpace and to place advertising there. It was such a large deal that by itself it turned Murdoch’s investment in MySpace profitable. It was the second time a huge MySpace transaction shed reflected glory onto Facebook. The first time—when Murdoch bought it—it had made Facebook look valuable. This time it made Facebook ad inventory look like a gold mine.
COO Van Natta and newly hired Vice President of Business Development Dan Rose, whom Van Natta had hired from Amazon, had already begun talking with the companies with the biggest online display ad operations—Google, Microsoft, and Yahoo. Facebook already had a small deal with Microsoft’s MSN online division to sell ad space.
Nothing motivates Microsoft like the desire to best Google. A day or so after the MySpace-Google deal was announced, Rose called up Microsoft, knowing the software colossus had battled for the MySpace deal and lost.
Rose immediately got a positive reaction to his inquiry. Yes, the Microsoft executive he spoke to said, he would love to talk about a similar deal with Facebook. “What are you asking for?” he asked. Van Natta and Rose huddled and quickly came up with what they thought would be a juicy deal. They proposed that Microsoft use its ad sales network to represent Facebook’s banner ad inventory and guarantee a certain CPM for every ad it placed. They didn’t even get an argument. “Okay, we’ll be down there tomorrow to iron it out,” said Rose’s eager Microsoft counterpart. It took some work to finalize the details. Says one Microsoft negotiator: “Mark was adamant about preserving the user experience and the layout. It drove our ad people crazy because it made it very hard to deliver standard Internet ad units.”
It was a transformative deal. Facebook now had a large and lucrative new revenue stream. Instantly Microsoft turned 2006 from another money-losing year for Facebook into a highly profitable one. A few months earlier, Viacom’s Wolf had been shown internal projections aiming at $22 million in 2006 revenue, but Facebook ended up at least doubling that. Microsoft’s payments accounted for well over half of company revenue for 2006. For 2007, the Microsoft deal guaranteed Facebook $100 million in revenue.
Perhaps Zuckerberg’s CEO lessons were paying off. He was letting the experienced Van Natta play a role not unlike the one Parker had played earlier—serving as Mr. Outside and building the business, letting Mark focus on improving Facebook’s product. Van Natta was managing bigger and bigger deals with partners like Interpublic and Microsoft. The executive team—purged of some of Robin Reed’s hires—was coalescing. Though her in-house recruiting stint had been extended more than once, by now she was gone. The team didn’t want to admit it, but she had helped the company grow up.
Viacom had abandoned trying to buy Facebook, but his talks with Michael Wolf had taught Zuckerberg a lot about deals and about how the media industry works. That would serve him well in the coming years. And inside the company he seemed more like a leader.
9
2006
“I can’t find out what’s going on with my friends!”
The astonishing success of Facebook’s photos application led to a bout of soul-searching at the company. What was it, Zuckerberg and his colleagues asked themselves, that made photos so successful? Well, one thing was that you could so easily find new photos your friends uploaded. Each person’s profile included a “dashboard page” that showed which photo albums had most recently been updated. It seemed that users wanted to know what was new. Another recent innovation had been to order the list of friends on each user’s home page according to which profiles had been changed the most recently. They called that “timesorting,” and it won raves from users. Each time someone changed their profile picture, it quickly led to an average of twenty-five new page views.
What people did on Facebook was look at other people’s information. They were eager to learn what was new, what had changed, what had happened that they didn’t already know. Studying your friends’ profiles was an obsessive activity, but not a very efficient one. Click through and try to figure out whether anything had changed since the last time you visited. Was he still single? Did this photo mean she’d been to the Caribbean? How come he went to that party and didn’t tell me? Click click click. The information was good—you wanted to know it—but i
t was tedious to find.
So the company’s young leaders came up with the idea to build a page that showed not just the latest photos your friends had added, but all the things that had recently changed on the profiles of your friends. “We started asking, ‘How do we get people the information they most care about?’” says Moskovitz. “We wanted to build a screen that showed everything. So we came up with the idea for the News Feed.”
The new tool they arrived at would help users find the information that most mattered to them at any given moment. That might include everything from which party a friend planned to go to on Friday to updates about the political situation in Tajikistan someone might have posted as a Web link. The point was to make sure you saw what you cared about, whatever it might be. The order in which information would be presented would depend on what you had shown—by your behavior—you liked to look at. Zuckerberg explained it to colleagues: “A squirrel dying in front of your house may be more relevant to your interests right now than people dying in Africa.”
All this brainstorming took place in the early fall of 2005. Shortly afterward, Adam D’Angelo talked to a new hire, Chris Cox, about building the News Feed. “I saw a glimmer in his eyes,” says Cox. “I could tell that for him it wasn’t about wanting to make money. He said, ‘Look, this is such a broken problem—I can’t find out what’s going on with my friends!’ The Internet could help you answer a million questions, but not the most important one, the one you wake up with every day— ‘How are the people doing that I care about?’”
They set to work on the News Feed. “For the next eight months, it was our labor of love,” says Cox, a tall, laconic, and brainy Stanford grad who had studied computer science, psychology, and linguistics. The idea was audaciously ambitious: to write a set of software algorithms to dissect the information being produced by Facebook’s users, select the actions and profile changes that would be most interesting to their friends, and then present them to those friends in reverse chronological order. Each person’s home page would thus be completely different, depending on who their friends were. “It was the biggest technology challenge the company had ever faced,” says Sean Parker.
The average user of Facebook at that time had about 100 friends. The software would have to watch every action generated by every one of those people. Then, each time you went onto the service, it would rank the activity of all your friends based on the likelihood that you would see it as interesting. That calculation would be based on, among other things, your previous behavior. Perhaps you noted that you were feeling glum or that you were going to the movies, or you uploaded a photo, indicated you like the new Wilco album, or posted a link to a segment of the Daily Show. Facebook’s software would detect this new information and decide whether to send it to your friends, based on what it calculated is likely to interest them. It would infer this based on its observations of your friends’ previous behavior. If they liked hip-hop they might not get the Wilco info. If they never watched videos they might not see the Daily Show link. It would apply such logic to every sort of information and activity on the site. It would repeat this process every fifteen minutes or so. Now multiply all this by 6 million—the number of active users Facebook had at the project’s outset. This was a massive engineering and product design challenge.
The News Feed would be a radical change. “It’s not a new feature, it’s a major product evolution,” said Zuckerberg at the time. It would remake Facebook. It was necessary as a foundation for future innovations he was already thinking about. He evangelized it with conviction to the company’s engineers and product designers, not always successfully. “Many of us were ‘No no no, we hate this!’” says product manager Naomi Gleit.
Though Zuckerberg remained opposed to selling the company, many in his orbit at Facebook felt it was just good business to learn what other potential buyers might pay. Owen Van Natta was expert at ferreting out offers. In the late spring of 2006, following the demise of the Viacom talks, which topped out at $800 million cash, Zuckerberg and the board concluded that if someone bid $1 billion cash for Facebook they would consider it seriously. Zuckerberg agreed partly because he was worried that the failure of the work networks might mean that his baby wasn’t destined to be as big as he’d thought.
Meanwhile, a few towns south, in Sunnyvale, Yahoo’s executives were worried. They saw social networking taking deeper and deeper hold even though they had no position there. CEO Terry Semel was becoming increasingly enamored of Facebook. Chief Operating Officer Dan Rosensweig had become a fan earlier and had gone out of his way to get acquainted with Mark Zuckerberg in 2005. On more than one occasion Rosensweig made it clear that Yahoo would talk about an acquisition if Zuckerberg were interested. He wasn’t.
By June, Yahoo’s executive team unanimously concluded they should buy Facebook. Semel approached Zuckerberg and they began talking. It quickly appeared possible that Yahoo might be willing to pay $1 billion. Semel, Rosensweig, and Yahoo Chief Strategy Officer Toby Coppel embarked on a series of negotiations with Van Natta, Cohler, and Zuckerberg, many of the meetings taking place at Van Natta’s Palo Alto home. (The CEO’s furniture-free one-bedroom apartment wasn’t suitable.)
Zuckerberg didn’t know whether to feel celebratory or defiant. To express a little bit of both he had one of his product managers buy $500 worth of illegal fireworks for an all-company July 4th party. Setting them off in a Palo Alto park led to an awkward but fleeting encounter with the police. The next day Yahoo formalized its offer in a term sheet Semel messengered to Zuckerberg.
From the perspective of the CEO and allies like Moskovitz, this development was jarring. Moskovitz, like Zuckerberg, had no real interest in selling. “The way it was pitched to me,” he recalls, “was ‘It would be irresponsible not to figure out what our valuation is. We’re not trying to sell the company.’ And that quickly snowballed into, ‘Okay, now there are term sheets and we’re going to have to pretend to talk.’”
Board member Breyer saw it differently. This was potentially a major opportunity for a lucrative “exit,” to use the term VCs use when they make a lot of money. If the deal went through, Accel would make more than ten times its investment in just fourteen months. “I was calling for board meetings, calling for discussion,” Breyer remembers. “I said, ‘We have to document this, and go through a process where we talk about the pros and cons. You can’t just dismiss this out of hand. We have a lot of employees who we’re representing. This is real money to them.’” Of the company’s young leaders, he says, “Once the offer came in, even though that had been our number, they didn’t want to do it. Mark was definitely feeling at that point that he didn’t want to sell. So there was absolutely tension.”
At one board meeting, Zuckerberg lost his patience. “Hey Jim, we can’t sell it if I don’t want to sell it,” he said bluntly.
“I know that, Mark,” replied a piqued Breyer. “But we said our number was $1 billion. Let’s go through the analysis.”
Breyer was by no means the only person lobbying for a sale. Again, there were two camps, and it was mostly older employees versus younger ones. The relatively older Van Natta and Cohler (in their early thirties and late twenties respectively) both wanted to sell. Sean Parker, still a major shareholder, was allied with Zuckerberg and Moskovitz. He thought Facebook was just getting started. Peter Thiel, older but very sympathetic toward Zuckerberg, spent hours talking with the CEO about whether it made sense to sell. Thiel wanted Zuckerberg to consider it, but remained deferential to the founder. “In the end Peter was willing to support me,” recalls Zuckerberg. “Jim pushed a bit harder. Pretty much everyone else wanted to sell the company.”
Moskovitz, Zuckerberg’s longest-standing partner, was one of the few others firmly opposed to selling. “I was sure the product would suffer in a big way if Yahoo bought us,” Moskovitz says of that time. “And Sean was telling me that ninety percent of all mergers end in failure.” He and Zuckerberg were also closely following the out
come of Google’s acquisition in early May of Dodgeball, a company that used cell phones to help you track the physical location of your friends. “We saw that Dodgeball was going to shit,” says Moskovitz. “And Google was the mecca of start-ups. If an acquisition there was going to fail I didn’t feel great about going to a company that was known for being kind of behind the times.”
Zuckerberg was certain that Yahoo’s bid, impressive as it was, would be seen as way too low if the News Feed succeeded as he hoped it would. The launch was planned in less than two months, when the new school year began. And Facebook was also planning at almost the same time to make another dramatic change—it was going to open itself up so that anyone could join. No longer would it be necessary to be affiliated with a college, high school, or workplace network. This open registration came to be called “open reg.” Unlike work networks, it wasn’t simply taking the college model and applying it in a new market. It was a wholesale shift—declaring that Facebook ought to be for everyone. The company didn’t drop its old structure. It still slotted every user into a network. But if you weren’t in a school or a workplace, you could just join the network for your city. This would be the true test of Facebook’s broader appeal beyond students.
Cohler and Breyer were both worried that the failure of work networks might mean that open reg would bomb as well, and that Facebook would never go beyond the student market. “We were saturated in college,” says Cohler. “We were saturating in high school. MySpace was very strong in the twenty-something demographic. And Mark had what felt at the time like a blind belief that large-scale adoption of the product by adults was just going to work. He had always been right about those things and many of us had been wrong, up until the work networks.”
The Facebook Effect Page 21