Aside from her willingness to be number two, the Harvard connection, the Graham connection, her role developing Google’s ad business, and her experience as a manager, there was an additional thing that Zuckerberg found intriguing about Sandberg. “We spent a lot of time talking about her experience in government,” he says. “In a lot of ways Facebook is more like a government than a traditional company. We have this large community of people, and more than other technology companies we’re really setting policies.” Beacon, of course, was an example of very poor policy setting.
He hired her, and she started at Facebook at the end of March 2008. If Microsoft’s investment proclaimed to the world that Facebook was a formidable economic force, hiring this Internet superstar declared it would be a well-managed one.
For all the vetting and planning, on the day that Sandberg arrived she had some trepidation. What would it really be like working for this twenty-three-year-old day in and day out? On that first day, Sandberg, Zuckerberg, and the so-called M team—the group of eight or so most senior executives—were discussing a ratings system that was going to be used in human resources. The question arose: How does one best set up a ratings system? Sandberg had overseen many ratings systems at Google, so she spoke up. “You always have five categories: two on the top, two on the bottom, and one in the middle,” she said briskly. Someone asked her why. “Well, three is too few, seven is too many, and six is an even number. You need one in the middle to anchor it. Everyone understands five categories,” she asserted. Shortly thereafter the meeting ended. Zuckerberg walked out alongside Sandberg.
“I’m really sorry,” he said.
“For what?”
“Well, I rolled my eyes.”
“I didn’t even notice.”
“Well,” Zuckerberg said, “I’m bringing you in here and I know I need to empower you and make sure everyone knows I believe in you, and I shouldn’t be rolling my eyes.”
She was impressed Zuckerberg would call himself out for such a minor infraction. “I said to myself, ‘This is going to work,’” she recalls. And the candid back-and-forth between them has continued. They meet privately several times a week. For the first few minutes of every Friday’s meeting they give each other direct feedback. Before Sandberg started she told Zuckerberg she wanted regular feedback from him. But he insisted it should go both ways.
From the moment she arrived, Sandberg was the company’s top advertising champion and salesperson. She had immense experience with advertisers from Google and a deep appreciation of the importance and potential of ads on the Net. According to some at Facebook, in her first weeks there was hardly anyone else at the company about whom the same could be said. Despite the Microsoft deal, despite Facebook Ads, despite the clear need to build up revenue as the service burgeoned, there remained a profound corporate ambivalence toward advertising as the means for Facebook to become a real business. That ambivalence was rooted in the CEO, who firmly believed that the product and the user experience comes first. Sandberg had some work to do.
13
Making Money
“What business are we in?”
How would Facebook turn its social success into a lasting, moneymaking business? It was a question that could elicit a surprisingly broad range of answers even among senior executives at Facebook when Sheryl Sandberg arrived. Zuckerberg didn’t have a good answer, though that didn’t bother him much. But Sandberg, who is a very methodical manager, was intent on creating alignment among Facebook’s leadership. She had come to the company to turn it into an advertising powerhouse. She needed all her staff and peers on the M team to work in synch. There was no question in her mind that Facebook represented one of the great advertising environments of all time.
The matter was hardly academic, because Facebook needed the money. It was burning through the $375 million it had raised from Microsoft, Li Ka-shing, and the Samwer brothers faster than anybody had expected. Some of Zuckerberg’s allies in management had already concluded it had been an error not to accept a lower valuation, which would have allowed Facebook to raise a lot more money because so many more investors would have been willing to buy. The company had been hiring quickly and was by now paying about five hundred employees and adding servers to its data centers by the hundreds. Soon Facebook would also have to build new data centers outside the United States to accommodate its international growth. It had built a fancy new cafeteria for employees in a separate building a block or so from its main buildings, with chefs hired from Google and fabulous food—all served free. Plans were afoot to move out of the twelve buildings in which staff was now scattered throughout downtown Palo Alto and move into one big new space.
After Sandberg had been at the company about five weeks, she decided to host a series of meetings to get Facebook’s management to focus on the ad opportunity. Zuckerberg wasn’t going to be around, because he was embarking on a monthlong around-the-world trip, now that he’d completed his search for a number two. He’d wanted to take a break for a while. Now was his chance. He traveled alone, carrying only a backpack, to Berlin, Istanbul, India, and Japan, among other places. In India he made a brief pilgrimage—by dusty local bus—to the ashram high in the Himalayas where Steve Jobs and Baba Ram Dass, among others, have sought enlightenment.
Colleagues believe Zuckerberg timed the trip deliberately, to give Sandberg a bit of runway to establish her authority inside the company without his interference. But it is symbolically apt that her meetings about how Facebook could best turn its vast user base into a powerful business occurred with Zuckerberg—he of the ambivalence towards ads—out of town. Never before had executives from across the organization come together to brainstorm on what people in the Internet business peculiarly call “monetization”—how to turn all those Facebook users into money.
The meetings ran from 6 P.M. to 9 P.M., with dinner brought in, once or twice a week. The first one included a small number of the top ad-related leaders of the company: Mike Murphy, who headed ad sales; Chamath Palihapitiya, who was in charge of growth and international; Tim Kendall, who oversaw the online self-service ad business; Dan Rose, who managed the Microsoft ad partnership; Kent Schoen, head of advertising products; Kang-Xing Jin, the engineer responsible for advertising software (and Zuckerberg’s close friend since Harvard days); and Matt Cohler, Zuckerberg’s tousle-haired “consigliere.” On the whiteboard Sandberg wrote, in big letters, “What business are we in?”
These were bull sessions at first, giving everyone a chance to express their views. As they continued, the meetings grew steadily in size. Word spread that you shouldn’t miss these conversations. Pretty soon the entire M team and a larger swath of ad people were making it, a total of fifteen to twenty on a typical evening.
At the time, Facebook’s monetization strategies were varied. Microsoft was selling banner ads, of course, but by the end of 2007, despite the new international deal, Microsoft accounted for less than 25 percent of overall revenue. Facebook wanted that figure down even further, so that it could control its own destiny. The self-service online ads launched at the same time as the disastrous Beacon were now growing rapidly. Facebook also had what it called “sponsored stories”—ads inserted into users’ News Feeds that looked like an alert you’d get from a friend, except that it was from Coca-Cola or another company. Virtual gifts, a fast-growing but still tiny share of revenue, were little graphic icons people paid for. For your friend’s birthday, for example, you could buy a little picture of a cupcake with a candle for a dollar. And finally there was the Facebook Marketplace, a classified ads system, which had only recently debuted to a lukewarm response from users.
On the whiteboard Sandberg listed the options. Facebook could be in the advertising business. It could sell data about its users. It could sell avatars and other virtual goods to those users. Or it could enable transactions and take a small cut, like PayPal. Staffers researched various markets and brought carefully compiled charts to the next meeting, showing the si
ze of each market, its likely growth rate, the big players, and what Facebook could do uniquely well. After weeks of this, at the final meeting Sandberg went deliberately around the room and asked each person what percentage of Facebook’s revenue would ultimately come from each category. Virtually everyone said 70 percent or more would be advertising in some form.
They all knew Zuckerberg only approved projects that fit into his long-range plan for Facebook. “Mark is very focused on the long run,” says one participant in the meetings. “He doesn’t want to waste resources on anything unless it contributes to the long run. If you don’t know what business you’re in, then anything you do to make money is a waste, because it might not last.” While Zuckerberg had been forced by circumstances to accept advertising, he did so only so he could pay the bills. Whenever anyone asked about his priorities, he was unequivocal—growth and continued improvement in the customer experience were more important than monetization. Long-term financial success depended on continued growth, he believed, and even his grand declarations at the Facebook Ads launch just meant the company would start seeking new approaches. And the Beacon fiasco had shaken everyone’s confidence.
In order to articulate a business strategy that would fit solidly and inarguably into Zuckerberg’s long-term frame, the conferees at the Sandberg sessions went further than merely saying ads were it. They arrived at a crucial distinction to clarify and differentiate Facebook’s opportunity. Whereas Google—Sandberg’s corporate alma mater and the undisputed king of Internet advertising up to now—helped people find the things they had already decided they wanted to buy, Facebook would help them decide what they wanted. When you search on something in Google, it presents you an ad that is a response to the words you typed into the search box. Very often it’s relevant to you and that process makes many billions of dollars for Google. But the ads you typically click on there are the ones that respond to what you already know you’re looking for. In advertising-speak, Google’s AdWords search advertising “fulfills demand.”
Facebook’s, by contrast, would generate demand, the group concluded. That’s what the brand advertising that has long dominated television does, and that’s where most ad dollars are spent. A brand ad is intended to implant a new idea into your brain—hey, you should want to spend money on this thing. But such ads have never worked well on Google. You may find a Canon camera via a Google search ad if you type the keywords “digital camera” in the search field, but the company has never found a good way to convince you that you should want a digital camera. (Google’s efforts to find such methods are what have led it to emphasize, for example, its Gmail service, in which its software watches words in your emails and displays messages it thinks you might respond to.)
For all Google’s success, it operates almost entirely within a relatively small sector of the overall advertising industry. Only 20 percent—at most—of the world’s $600 billion in annual advertising spending is spent on ads aimed at people who already know what they want, Sandberg’s researchers discovered. The remaining 80 percent, or $480 billion a year, was up for grabs as more and more ad spending shifted to the Internet.
The long-term prospects for advertising on Facebook looked bright to this group. The Internet is pulling consumers away from TV, newspapers, and magazines. And Facebook is taking a disproportionate amount of that Internet time. It is now where Net users spend the most online time by far in the United States and most other countries. That, says advertising marketer Dan Rose, combined with Facebook’s unparalleled ability to target ads based on information about its users, should enable it to attract more and more demand-generation advertising as time goes on. Says Rose: “There is an imbalance between where the dollars are spent and where the audience is spending its time. Those dollars are going to move online over the next ten years.” Rose was so effective in the sessions that afterward Sandberg gave him the new title of vice president for business development and monetization.
Sandberg’s eight or so business-model sessions concluded just as Zuckerberg was returning from his round-the-world vacation. He was impressed with the group’s conclusions. “Now Mark understands that we have a business model and this is the long-run thing,” says one top ad executive. “So now he’s willing to invest.”
Zuckerberg explained his ideas about ads on Facebook in detail. At a subsequent off-site meeting on monetization, he told the group what made Facebook different from other websites was its ability to help users have two-way dialogues with one another or with advertisers. “The basic idea is that ads should be content,” he says now. “They need to be essentially just organic information that people are producing on the site. A lot of the information people produce is inherently commercial. And if you look at someone’s profile, almost all the fields that define them are in some way commercial—music, movies, books, products, games. It’s a part of our identity as people that we like something, but it also has commercial value.”
From these discussions with Zuckerberg emerged something Facebook calls the “engagement ad.” It is a modest-looking message from an advertiser on users’ home pages that invites them to do something right on the page. It might ask you to comment on a video in hopes that friends will be drawn into the conversation. It might be a product giveaway. Starbucks has offered coupons for free cups of coffee. It might enable you to engage in a dialogue with friends right there on the ad. Or it might enable you to click on the ad to instantly become a fan of a product’s Facebook page.
Soon engagement ads replaced the sponsored story as the main product sold by Facebook’s advertising salespeople. Sponsored stories are not, in Zuckerberg’s terms, “organic information that people are producing on the site.” The new engagement ads became a big hit. In the first year alone they generated close to a hundred million dollars of revenue. Facebook charges at least $5 per thousand views for these ads. With 400 million users viewing their home page many times a month, those dollars can add up. Moreover, once an advertiser establishes some sort of connection with a user it gets a tremendous amount of what Facebook calls “derivative value.” Executives say that once a brand makes a connection with a consumer that leads to an average of about 200 free additional “impressions”—occasions when people on Facebook see information about that brand.
“We will never again sell banner ads,” says Rose. “Engagement ads leverage the power of the Internet to enable the marketer to have a dialogue with the audience. That’s very different from traditional banner ads on the Web. Those do what advertisers have done on TV and in print for fifty years—intentionally disrupt the experience you are having.” Meanwhile, Microsoft continued to sell such banners for Facebook. They generated about $50 million in 2009, but the deal ended in early 2010, with Microsoft getting more involved in Facebook search in exchange.
But while the company has put great energy into developing and refining engagement ads and carefully managing its relationship with Microsoft, the lion’s share of its ad revenue is coming from a third source: self-service ads that smaller advertisers purchase right on Facebook’s site, using a credit card. Anyone can buy them, but these ads are typically purchased by local businesses.
Facebook gives advertisers more targeting options than most websites because people overtly and willingly put there a tremendous amount of information about themselves. They also spend a lot of time and do a wide variety of activities there, which creates opportunities to present people with ads. If on Google you buy an ad that displays when someone types “digital cameras,” on Facebook you display a similar ad to married men in California who have young children but who haven’t posted any photographs.
For all the importance of advertising, even in the Sandberg sessions there was another category of revenue that many believed will become quite large over time. Rose calls it “consumer monetization,” meaning users pay Facebook directly for something, just as they already pay lots of money to play various games and other applications inside the service. Facebook was already s
elling things like virtual birthday cakes for a dollar, but there are many other ways Facebook could get money from its users. For example, there might be fees associated with a currency that people could use to buy and sell things across Facebook, especially in games. The company is testing such a system already. On other social networks around the world there is a healthy market in virtual decorations and virtual statements between friends. Sandberg says she believes that ultimately 20–30 percent of Facebook’s revenues will come through the sale of virtual goods or the operation of an on-site currency. Virtual goods sales totaled an estimated $30 million in 2009.
In early 2010 Facebook began putting renewed emphasis on “Facebook credits,” which users purchase from the company and then use mostly in games, to buy virtual goods. When a user spends the credit, Facebook keeps 30 percent of its value. Some games have begun using only this form of payment, replacing a plethora of third-party payment options that prevailed before. Justin Smith, who runs Inside Network, the leading analysis firm for Facebook commerce, says he believes such credits will become a major part of Facebook’s future. “The idea,” he says, “is that Facebook will be able to enable new kinds of revenue growth because users will be more comfortable paying Facebook than a third party.” Smith even believes it possible that the company could eventually allow users to use Facebook credits for purchases across the Internet. Even a small cut of such a system might become a significant source of revenue. Zuckerberg, however, says the company work on credits thus far has been primarily to make life easier for application developers on Facebook’s platform. “Our intention is not to be profiting off of this anytime soon,” he says. “Over time, if it becomes a widely used thing, it could be a good business.”
The Facebook Effect Page 30