I‘m not sure what it means.” Facebook CEO Mark Zuckerberg is talking about a new application created by an outside developer that allows his site’s users to throw sheep at one another. The sheep aren’t real, of course; they’re just a playful digital expression–of, well, who knows what?–that users can send to each others’ online profiles. “Who knew that people would have liked that?” Zuckerberg muses. The sheep could rake in over a million dollars in ad revenue this year for their shepherd, a company called Slide.
The world has Facebook fever. Launched just three years ago by Zuckerberg–a college dropout and acknowledged hacker who famously turned down a $1 billion buyout offer from Yahoo in 2006–Facebook has become the “it” company of the tech world. An entire industry has sprouted up around the site seemingly overnight, as everyone from software wizards to marketing honchos rush to figure out how to make money from a user base that has ballooned to 41 million. In May, Facebook opened its software platform to applications from outside developers, preempting every major Web 2.0 competitor. Since then, some 80,000 developers have added more than 4,000 new applications, from virtual bookshelves to, yes, sheep throwing. Developer conferences have been selling out, venture funds have formed to hunt for promising Facebook-specific ideas, and more than a dozen advertising networks have popped up to help developers monetize applications. Stanford’s computer-science department is even offering a course on creating Facebook applications. And instant “experts” are proliferating. Nick O’Neill, 25, started the blog AllFacebook, then hung out a shingle as a consultant. His client list already includes several Fortune 100 companies. “The phone is ringing off the hook,” O’Neill says.
The rub for Facebook: The company itself won’t make a dime from the sheep-throwing business. Or, in fact, from any of what could turn out to be hundreds or even thousands of other wildly successful new applications now running on its site. And for some reason, Zuckerberg says that’s just fine with him, claiming, “It’s good for the ecosystem, good for the product, and good for the users.”
Yet the question remains, if Facebook is a business, how will it eventually monetize the opportunity that Zuckerberg has created? And how soon will the race for cash flow begin? Already there is rampant speculation about potential advertising models and other next-stage transformations of the business model. Microsoft is said to be angling to buy a 5% stake that could value Facebook at $10 billion–a huge sum for a company that’s on track for revenue of $150 million this year. Google and venture funds also reportedly want a piece of the company. None of the parties are willing to comment, but one person close to Facebook says that, for Zuckerberg, it’s a question of finding a good match that could provide cash to help the company ramp up to meet demand.
Inside the eye of the Facebook maelstrom, in the company’s three-building headquarters in Palo Alto, the mood is calm. The offices still have the heady feel of a startup: iconoclastic murals on the walls, beanbag chairs strewn about, periodic all-night “hackathons” by coders and engineers. The staff size has increased by 50% in the past six months. But this is not the Googleplex, with its 10,000 employees. There are just 300 Facebookers, and things still feel a little rough around the edges–ad hoc yet optimistic, with the invincibility of youthful exuberance. They see themselves as calculated risk takers. “We may not always be that way,” shrugs chief technology officer Adam D’Angelo, 23, with a smile. “But we’re that way now.”
Zuckerberg is now visibly more comfortable in his CEO’s skin than when I first met him six months ago. Back then, he was confident but guarded. Facebook had done well since he rebuffed the Yahoo offer: He’d signed a big ad deal with Microsoft, and the user base was growing briskly. But Zuckerberg still hadn’t proved that his vision of Facebook changing the world wasn’t simply wishful thinking. “For a long time, we resisted even forming a company,” Zuckerberg told me on that visit, recalling the early days when he and his pals coded Facebook all night in sublet apartments and he tooled around in a beat-up Craigslist car.
This visit, Zuckerberg still looks the part of a programmer: He bounds into our meeting, a half-hour late, wearing a T-shirt, jeans, and his trademark Adidas sandals. But now that his decisions and vision have been validated by Facebook’s booming audience and rising prestige–60% of the site’s users are not in college networks, and the fastest-growing demographic is 25 and over–Zuckerberg has a new ease about him. He talks about 15-minute board- meeting calls that stretch to two hours and a cell phone that won’t stop buzzing, the laments any frazzled, big-shot CEO might share. “Somebody was IM-ing me on the way here, and I just stopped responding,” he says with a grin. Two short years ago, Zuckerberg was personally coding the site and dashing to check on overloaded servers. Today, he’s swatting away rumors of IPOs and big-bucks suitors as if they were so many buzzing flies.
Facebook’s strategy is already part Microsoft and part Google. Like Microsoft, Zuckerberg and his team are trying to build a communications platform (in Facebook’s case, a socially based one) upon which other functions can be layered. Like Google, Facebook is dedicated to serving its users first, adhering to a deeply felt philosophy of openness–its own version of “Don’t be evil.” Like both of those once-cherished and now, in some quarters, tarnished icons, Facebook must walk a tightrope. Zuckerberg has taken his time exploiting the full financial potential of the site. Ads are minimal; outside developers pay no fees to put their applications on the site. That patience was criticized not long ago as inexperience and naïveté. But as Facebook’s run has accelerated, the chatter has changed: It may be that the kid actually knows what he’s doing.
Facebook’s strategy is not just about Microsoft and Google. It is also an outgrowth of Zuckerberg’s own experience. In fact, the new open-apps policy at Facebook is nothing less than a re-creation of the environment Zuckerberg and his CTO D’Angelo operated in–and exploited–as high school kids, when they created their first market-worthy application: a plug-in for an MP3 player that would learn your music listening habits and automatically create a playlist for you. They gave the app away for free on the Internet. Major companies such as AOL and Microsoft came calling, offering some combination of money and jobs. (The two opted for college instead.) “We had a bunch of ideas to build a developer’s environment based on social connections,” Zuckerberg says.
It was Zuckerberg who insisted that Facebook open up to outside developers this year. “We want a system where anyone can develop without having our permission,” he says. “There are things that we will never think of, or get around to, that would really make the user experience better.” The result has been a flood of free software that has hyperfueled Facebook’s growth.
But if the timing of the open platform came from Zuckerberg, executing the transition was his longtime friend D’Angelo’s job. Raised on a small farm in Connecticut, D’Angelo headed to Caltech after high school. His presence on the West Coast was one reason Zuckerberg (with Facebook cofounders Dustin Moskovitz and Chris Hughes in tow) went to Palo Alto the summer after his sophomore year at Harvard, and ultimately stuck around. D’Angelo played an integral part in Facebook’s wild early days, then he took a break to finish his degree. Last fall, he returned full time to lead what Facebookers call the “platform team.”
Opening a platform isn’t a new or revolutionary idea in tech businesses, but it certainly was a risky one for Facebook. “We’ve had a lot of scalability problems in the past,” D’Angelo says. “If you’re not careful, you can overwhelm your engineering team to the point where your servers die and your service fails.” Then there are the ambitious developers who may run roughshod over things like copyright restrictions and user privacy. “You never know for sure how things will go,” says D’Angelo. Worries about melting servers and user revolts were particularly acute for the nontechies at the company. Dave Fetterman, who joined the company from Microsoft in January 2006 to work on the platform project, recalls discreet are-you-sure-you-guys-know-what-you’re-doing taps on the shoulder during the yearlong ramp-up. Zuckerberg, D’Angelo, and the five other members of the team became ambassadors to folks in legal, marketing, privacy, and customer service.
The platform team also spent time talking with outside developers, to determine what they would want, and how they would behave, in an open environment. “It would be impossible for us to police every application,” Zuckerberg explains. “If an employee does something that doesn’t work, I can ask them to fix it. If they do something malicious, I can fire them. An outside developer is hard to control.” With 30 days to launch, D’Angelo’s team held an all-night coding session to uncover any holes. “We asked our engineers to think like an outside developer would,” D’Angelo says. “Suddenly, there were applications that were doing crazy things.” Buzzing, blinking, annoying animations–all major assaults on the minimalist Facebook sensibility. “We knew we had to set better rules.”
The opening up of the site was set for May 24, to be announced at the San Francisco Design Center. “As we were developing the messaging around the launch event, we were talking internally about how an industry could form around this,” Zuckerberg says. They ultimately chose to keep that hope to themselves–”It’s such a bold claim to make,” Zuckerberg allows–but they planned a blowout event. The hall would have the feel of a party, complete with couches, the inevitable beanbags, and a DJ. The night before, D’Angelo’s team pulled an all-nighter, preparing to distribute the platform code. Some last-minute bugs forced them to scale back the launch to just those attending (though they did release the full, debugged code to the world within 24 hours). When Zuckerberg stepped out onto the stage for his 45-minute presentation, he faced a huge crowd–800 developers had turned out. It was his most mature public moment to date. “Social networks are closed platforms,” he said, pacing in front of a rapt crowd, channeling his inner Steve Jobs. “Today, we’re going to end that.” Walking through the Design Center, Fetterman recalls with a grin, “I felt like a rock star.”
The revolution that followed was swift. By opening its platform to outside content, Facebook had made it fast, effective, and cheap for Web entrepreneurs to get their ideas–good or bad–in front of the public. One example: Seattle-based iLike. A music-sharing social network, iLike launched a Facebook application that lets people list favorite songs and bands on their profile pages; it makes money by facilitating purchases of music through iTunes and concert tickets through Ticketmaster. Previously, over nine months on the Web, iLike had hit 3.5 million users. On Facebook, it added 5 million in just 60 days.
The primary accelerant is a Facebook feature called News Feed, which automatically shares information across friend networks and groups. As a result, “News Feed optimization,” the art and science of writing a compelling News Feed announcement, has become an industry itself. “News Feed is as important to Facebook as AdWords or AdSense is to Google,” says entrepreneur and blogger Dave McClure, who is teaching the Stanford course.
Harnessing the power of News Feed, the new apps, and the booming user base to make money for Facebook itself is the task of a new hire, VP of product marketing and operations Chamath Palihapitiya. Zuckerberg brought him aboard this summer to help figure out how to exploit what Facebookers call the “social graph”–those thousands of threads that make up users’ connections to other people–and to create Facebook’s coming targeted advertising program. Palihapitiya, 31, is tall and whippet thin, with elegant manners and a ready smile. A former electrical engineer, born in Sri Lanka and raised in Canada, he ran AOL’s instant-message group, then jumped to the venture fund Mayfield. He is part Sand Hill Roadster and part freethinker; he appeared in an art film last winter making pointed comments about Silicon Valley’s “old boy’s club.”
It is only day 67 for Palihapitiya at his new job when we sit down to talk, but he already sounds like a true believer. While cagey about details, he isn’t shy about the potential he sees for targeted ads to fill Facebook’s coffers. He madly sketches on a notepad, drawing a fine distinction between demand fulfillment (I want a cheap ticket to Hawaii. Now!), which the Internet has become quite good at, and demand generation, the shape-shifting set of marketing messages that conspire to get a consumer to want something. That, he says, is where he sees serious money on the table. “Facebook users are more engaged with each other,” he says. “Aren’t you more likely to be interested in what your friends are doing?” Google, which focuses by and large on demand fulfillment, is a $160 billion company. “For every dollar that goes into fulfillment, there are hundreds that are spent on generation,” he says, particularly by the big brands. So what could Facebook be worth? Five times Google? Ten times? “Could be,” he smiles.
The attention raining down on Facebook has not always been glowing, and for the tight-knit crew, the criticism can be hard to take. When Zuckerberg brought in Palihapitiya, he eliminated the COO position then held by Owen van Natta and loosely split its functions between the two. The shuffle was reported as a demotion for van Natta. Zuckerberg bristles at that interpretation, insisting he just wants to keep his growing organization as flat as possible. His senior team of seven reports directly to him, he notes, and they make all important decisions together. Van Natta, now VP of operations and chief revenue officer, calls the change “incredibly effective. Now I can focus on growing revenue on an international scale.”
Zuckerberg is focused on encouraging developers to come up with more programs for the platform. He’s even willing to give them money: In September, Facebook announced the formation of FbFund, which offers grants of $25,000 to $250,000 to developers with promising plans to build a business on the platform.
Instead of worrying about meeting Wall Street expectations as a public company–though it’s likely his team is planning for an IPO–Zuckerberg is enjoying apps like Scrabulous, which lets users play Scrabble together. Created in a week by two brothers from India, it caught on like wildfire, with half a million users signing up in the first 10 weeks. Zuckerberg was one of them. “It got my grandparents on Facebook,” he says, smiling. “They like playing with me.”
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