Viral Loop

by ADAM L PENENBERG

  After the announcement became public, eBay approached PayPal about a deal. Hoffman, who had been tasked with dealing with the auction Brobdingnagian from the beginning, told negotiators from Goldman Sachs it appeared to him like the classic we-can-destroy-you-so-we-are-going-to-offer-you-a-pittance ploy. If eBay was serious about acquisition, he wanted a common framework for evaluation. When they met to exchange spreadsheets, PayPal valued itself at $650 million while eBay’s estimate was $320 million. After poring over eBay’s spreadsheet, he recognized that values they had agreed to beforehand were set too low. Hoffman theorized that eBay had told Goldman its maximum price was $400 million and Goldman fixed the variables to offer haggle room. After they again exchanged spreadsheets, Goldman inserted the original variables, and Hoffman accused the bankers of not bargaining in good faith. EBay responded with what Hoffman calls the “Microsoft lecture”: “We are going to make this offer once and then crush you; you should really take this offer.” Hoffman walked out.

  Subsequently, Hoffman realized that as long as eBay was negotiating with PayPal, it couldn’t bad-mouth it in the press during PayPal’s quiet period. If investors contacted eBay and it said, “We think the company is built on cards, it’s going to fall over, and we are planning on replacing it as fast as possible,” PayPal’s IPO would sputter. Hoffman gathered the board together to settle on a minimum sticker price they would accept in lieu of going public. They decided on $1 billion. When Hoffman relayed the news to eBay, negotiators countered with $750 million, then, as negotiations dragged on, $800, $825, and finally $850 million, while Hoffman stood pat at $1 billion. After several weeks eBay claimed $850 was its final offer. Hoffman replied: “I have a mandate to sell the company for a billion dollars. I’ll be very clear again: You give me a billion dollars, you own the company. At $850 million I don’t know if you own the company or not. I’ll have to go back to the board to talk about it.” Five days before PayPal had its IPO, Hoffman got back to eBay. “Sorry,” he said. “The board decided they want to go out. All the investors have already been lined up, so we are going to go public.”

  There were eleven revisions to the prospectus and a delay caused by a patent infringement suit over its transactions technology (which settled for a “nonconsequential payment”). Finally PayPal’s stock debuted at $13 on February 15, 2002, and after a wild ride closed the day at $20.09, giving the company a valuation of $800 million. As the NASDAQ cratered, PayPal’s stock continued to edge up, and by the time PayPal and eBay rekindled negotiations, the market valued PayPal at $1.2 billion. By law, PayPal could not sell for less than that, since that would be cheating investors. EBay would have to offer a premium. After some hemming and hawing, eBay agreed to $1.5 billion.

  All the documents were finished, the due diligence completed, and all Hoffman had to do was get PayPal’s four other top executives—the two cofounders Peter Thiel and Max Levchin, Roelof Botha, and David Sacks—to sign off on the deal. Hoffman and Thiel voted to sell, but the other three balked. The company had heralded its successful IPO with its first quarter or profitability and the future looked bright.

  Thiel told Hoffman he didn’t want to sell unless everyone agreed.

  “Look, I thought we wanted to do this,” Hoffman replied. “I went and architected this whole thing, but now we will have a serious problem when we tell them no, because they are going to feel like the bride left at the altar.” He reiterated his strong recommendation to sell, which the other three rejected. Fine, Hoffman said, but he was done dealing with eBay. He had burned up all his credibility. “Blame the whole thing on me,” he told Thiel. “Tell them I exceeded my mandate.”

  Meg Whitman’s response when she heard the news was, “If it’s war you want, it’s war you’ll get.” This was no idle threat. Soon after, Hoffman learned that eBay was in negotiations with Citibank, proposing they join forces to build a PayPal killer, which would be entirely free to eBay users for two years, then Citibank would receive an exclusive contract to build all sorts of other services. The way Whitman was feeling, he wouldn’t be surprised if eBay banned PayPal and dared it to sue after launching the new service.

  Long ago Hoffman had received the title “Mr. Fix-It,” but when the four other executives showed up at his office he only had one solution. One of them—and it couldn’t be Hoffman or Thiel—should contact Jeff Jordan, eBay’s head of North American operations, who had been the one most vocal about buying PayPal. They dispatched David Sacks, Thiel’s coauthor of The Diversity Myth, who told Jordan that PayPal would agree to the deal the two companies struck. A few days later they struck a deal. Then, while the companies conducted the required due diligence, Thiel and Hoffman flew to Hawaii to unwind, jet-skiing, paragliding, and touring the islands.

  The day that eBay took over, Thiel, Levchin, and Hoffman, who collectively took in more than $100 million, walked away from the viral company they had started just a few years earlier. But PayPal was simply the beginning for these former employees, and the lessons they learned at PayPal would spread virally to other viral concerns. Thiel founded his own hedge fund, Clarium Capital Management LLC, invested $750,000 in Facebook, and joined the board. Levchin created Slide, a widget maker that counts hundreds of millions of installs of its photo slideshow and other applications across social networks. Hoffman is the CEO of LinkedIn, a networking tool for business that counts almost 40 million members and, since it has multiple revenue streams, boasts that it is profitable. Roelof Botha, PayPal’s CFO, moved over to the venture capital side and became a partner at Sequoia Capital. One of his first investments was in YouTube, which was started by former PayPal alums Chad Hurley and Steve Chen.

  As for eBay, it appears to have gotten a good deal for its $1.5 billion. Revenue for PayPal in 2008 was $2.4 billion, which eBay predicts will double by 2011. Eventually, PayPal’s revenues may exceed auctions and become eBay’s biggest business.

  9

  Flickr, YouTube, MySpace

  Spreadable Spreadables, Stackable Stackables, and the Point of Nondisplacement

  When PayPal launched, less than 10 percent of Internet-enabled households in the United States had broadband connections. By February 2004 the number had risen to 30 percent, and it was close to 70 percent by 2008. But high-speed access is not relegated to the domain of the desktop. Mobile devices are the fastest-growing broadband segment, and this has vastly increased the size and reach of the viral plain. It has energized collaboration, interactivity and interoperability in the form of wikis, photo- and video-share sites, social networks and millions of blogs, which have effectively ridden this wave of greater connectivity. Their numbers have grown even faster than broadband penetration, doubling every five months since 2003. Taken as a whole, the blogosphere is a teeming viral network, with every blog that sprouts up offering a testimonial to the ease of self-publishing.

  “Blog” (short for “web log”) is an unfortunate term that sounds like the noise someone makes after scarfing down a plate of nachos and tipping back one too many tequila shots. It has evolved into a sphere of memes and ideas constantly shaped by the millions of Web users who write, read, and comment on blogs, many of whom followed links there, which were themselves spread virally. In a sense, the blogosphere operates in a similar fashion to open-source code, where a loose confederation of programmers tinkers with software, adding to it and sharing contributions with anyone who is interested. Of course, there are often stark intellectual inefficiencies, as well as a lot of hot-gas rhetoric, vitriol, inane discussions, score settling, and outright buffoonery. Actually the blogosphere can be downright Hobbesian, with posts that are nasty, brutish, and (often mercifully) short. At its best, though, it is a marketplace of ideas, with the best ones holding sway, a pure meritocracy. Indeed, during the 2008 presidential campaign, blogs—the really good ones from all sides of the political spectrum—competed with the traditional press and not only held their own but were often superior: Nate Silver, Andrew Sullivan, Daily Kos, Town Hall, Politico, and Hu
ffington Post did not just provide analysis but in some cases broke news. Taken as a whole, the coverage was far more insightful than it was in 2004 or 2000 or 1996.

  With blogs anybody with an Internet connection can engage anybody else. Concepts are presented, attacked, sliced, diced, added to and subtracted from, mangled, massaged, and molded until what is left is an amalgam of the finest online society has to offer. For the digitally well-endowed, it’s akin to free-market capitalism, with information as its currency. And not only do we all get to watch, we can join in—in real time or via asynchronous communication. Before, blogging was largely fixated on the failure of mainstream media. Now it is a necessary supplement and, in rare cases, a substitute. You can trace this back to July 2005 and the London bombings. When former Federal Communications Commission chairman Michael K. Powell watched television coverage, he noticed that most of the significant pictures didn’t originate from professional photographers employed by news agencies. They came from witnesses at the scene using cell phones and digital cameras to document the tragedy. “Journalists are trained not to be emotional, like a doctor doesn’t fall in love with his patients,” Powell says. “But people experiencing a tragedy can convey what actually happened while at the same time express[ing] deep emotion and engag[ing] in spirited storytelling. A photo of someone climbing up through train wreckage is extremely powerful. A reporter rolling up to the scene behind a police line can rarely give you that.” To Powell, London proved that blogging had morphed into the art of raw, personalized storytelling. “You really felt as if you were there,” Powell says of the blog posts and Flickr photos he surveyed, “as opposed to watching CNN or reading MSNBC.com, which are fine for the facts but stale and a bit removed.”

  [ MY FRIEND FLICKR ]

  The first viral network to stack atop the expanding blogosphere was Flickr, the popular photo share site and community. As with many Web innovations, it started out as one idea only to end up as something completely different. In 2002 Flickr founders Caterina Fake and Stewart Butterfield married. Two weeks later they started development of a massively multiplayer online game called Game Neverending. Both were early bloggers intrigued by the idea of creating a virtual world ruled by social interactions, a precursor to World of Warcraft and Second Life. The way Fake (her real name) describes it, Game Neverending sounds as if it were divined over a bong. Part whimsy (a player would find a wombat whistle, blow it, and baby wombats would cuddle up against her), part meta-reality: users could work alone or in concert to create a business or product, raise venture capital, hype it, and everyone would grow rich. “You could cheer people up by sprinkling everyone in a crowded room with magic sparkle powder and their mood would go up,” she says. Since it was intended for the Web, it wasn’t the kind of game you could shrink-wrap and sell at Best Buy, and they couldn’t interest financial backers. The young couple had mortgaged their home to partially self-fund the project, together with the money they had raised from friends and family, although not nearly enough to finish development. Discouraged but unbowed, they scaled back their grandiose ambitions.

  An important aspect of the game hinged on instant messaging, and Butterfield suggested they develop it with the capability of dropping photos into conversations, which they agreed was “very cool.” In early 2004 they stuck it up on a webpage and it went nowhere. The problem was, it wasn’t a stand-alone product. For a user to benefit, others had to be on the same instant-messaging client. So they created a primitive social network with photo share capability and incorporated tagging to better organize photographs. Butterfield and Fake recognized the impact that digital cameras, which were getting cheaper and more powerful by the month, were having on the Web. It meant that photography had become, as Fake put it, “delaminated from its delivery mechanisms.”

  An amateur photographer like Fake, with hundreds or even thousands of pictures on her hard drive, was faced with a seemingly endless list of JPEG files with no effective way to place them into context. She could, of course, organize them into folders, but that was a binary solution to an infinitely more complex organizational challenge. Where would she stash a photo of, say, her best friend on vacation at the Angkor Wat temple in Cambodia at sunrise with a monkey nicknamed “Filch” running off with a tourist’s backpack? In a folder labeled Vacation? Angkor Wat? Melinda? Monkey? Tagging allowed the photo to be easily found in all of these contexts. And since anyone could add a tag and a comment, it became a democratic mode of organization that jibed with Flickr’s mission—to be public in the way a blog was.

  Most photo share sites operated as loss leaders for portals, a strategy to keep users occupied and on the site. Flickr, however, was intended to be part of a larger conversation, where users could share photos with a community, indeed, the world at large, since a blogger could link to an entire album. The first newspapers online imitated the physical form from which they came, as did online magazines, which were called “zines” for a reason, since they all took their metaphor from prior (analog) technology. The same held true for photo share sites like Ofoto, Shutterfly, and Snapfish, which aped the look and feel of predigital picture albums. Flickr, a product of Web 2.0, was different. “The reason jellyfish are designed the way they are is because they live in water,” Fake says. “Flickr was designed in the way it was because it is digital.”

  The earliest members came from the Game Neverending community, and Fake made it a point of introducing everyone who entered the site to someone else. “I see you are into Norwegian metal; here’s this other guy who’s also into it,” Fake would offer. Or, “You live in Pittsburgh? Here’s another person from there.” “Communities take on a certain kind of character of a party at the outset and you need to be a good host,” Fake says. “If you come to a party and nobody offers you a drink, you leave to a happening party somewhere else.”

  While Flickr was free, it wouldn’t always remain that way since photos online soak up a lot of expensive bandwidth. Why not use that to help seed the site? Fake thought. She instituted a viral policy: invite five friends to join and get three months free. The implicit carrot-stick worked better than she could have imagined. For the first few months sign-ups increased 75 to 100 percent month over month, then spiked as bloggers became hip to the site. Like Andreessen, who predicted that Web users would embrace the ability to post pictures, Fake figured that bloggers also wanted to add to their palette of self-expression. As the blogosphere exploded, so did Flickr. Every blogger who used it acted as an advertisement, since to view pictures readers had to click to Flickr. Its growth quickly accelerated to 30 to 50 percent month over month, a product of the social and conversation-fueled viral loop that was created. The more blogs that displayed photos that were stored and shared on Flickr, the more people were exposed to Flickr. This led to more blogs and more blog readers adopting the service.

  Soon the site that Butterfield and Fake had started as an afterthought to their multiplayer game had become the fifth most popular site on the Internet, generating revenue by charging a fee to heavy users wanting to store a lot of photos. A year after launching, the formerly debt-riddled couple sold Flickr to Yahoo. Six months after that, the site hosted its millionth photo. Five years later, it was approaching 3 billion images.

  Although Flickr might be a billion-dollar business today, Fake says she has no regrets selling out for $40 million: “If you throw a rock in Silicon Valley, you can find somebody that could have been a contender,” she says. “I think it’s a waste of time to sit around and think of what could have been.”

  [ MYSPACE: GLITTER AND SMILEY FACES ]

  After the blogosphere propelled Flickr’s viral loop, the next stackable ecosystem to arise was MySpace, launched from the seamy side of cyberspace six months after Flickr. Initially it was devised as a last resort to save eUniverse, a lowbrow net-based entertainment company that trafficked in adware and recycled printer cartridges and was about to go under. As Wall Street Journal reporter Julia Angwin relates in Stealing MySpace: The Ba
ttle to Control the Most Popular Website in America, MySpace cofounder Chris DeWolfe was a notorious spammer having trouble selling ill-gotten ads to advertisers, a brash gambit even for him. After the United States invaded Iraq in 2003, he peddled free software to turn a PC user’s cursor into an American flag. Alas, such patriotism was merely a Trojan horse, a way for DeWolfe to spread spyware that would log an unwitting user’s online movements and fire ads based on his Web-viewing habits, burying the poor schmuck in a blaze of pop-up ads. Visit an auto site and ads for car insurance would plaster the screen.

  His partner, Tom Anderson, was spending a lot of time at home logged into Friendster—more time than he would have liked, since the site was buggy and slow. The famously antisocial Anderson had been a notorious teen hacker who, under the nom de hack Lord Flathead had broken into a Chase Manhattan Bank data center, that, according to a New York Times article held “much of Chase’s data processing and record keeping,” including mortgage records and the “portfolios of major customers such as pension funds.” Once inside, he allegedly altered passwords to prevent bank officials from accessing their own system. The Times reported that Anderson threatened to erase bank records unless he was given free use of the system, which led to a massive FBI raid. The fourteen-year-old Anderson was given probation. After graduating from the University of California at Berkeley, he performed in a band called Swank in San Francisco, did a brief stint in Taiwan, returned to the United States to attend graduate film school at UCLA, then took a job as a copywriter at a company called XDrive, a digital storage company where he met DeWolfe. When the company declared bankruptcy, he and DeWolfe formed a new company called ResponseBase that would eventually merge with eUniverse.