$ 1 5 Billion

Opening Facebook up to everybody had been a huge success. By the
fall of 2007 more than half the site's users were outside the United
States. The explosive international growth was a powerful sign of Facebook's
growing universal appeal, since the company had done nothing
to make it easy for non-Americans to join. All the text remained completely
in English, for one thing.
But the growth also presented a serious business problem. Facebook
had to start figuring out how to make money—providing service
to people all over the world was expensive. All the ads were aimed solely
at Americans, which meant that Facebook was not generating any appreciable
revenue from more than half its users. The advertising deal
Facebook had signed with Microsoft a year earlier only applied inside
the United States. If Facebook was going to take advantage of its newfound
global presence, it needed a partner to help it sell display advertising
internationally. Microsoft had made it plain it would love to be
that partner, extending its U.S. deal to a global one.
Zuckerberg had always been blase about advertising . But Facebook
now had 50 million active users and the platform had transformed it
into an industry darling. The company had to find a way to pay for it
all. Hundreds of thousands of new users were joining every week. And
Facebook continued to build its infrastructure based on the assumption
it would be much, much larger in the future. That meant spending millions
of dollars for new servers. If he had to have ads, Zuckerberg hoped
to develop a new kind that would work uniquely well on Facebook, ads
that wouldn't interfere with a user's experience. The last thing Zuckerberg
wanted was for it to feel like watching network television, where
the show is routinely interrupted by irrelevant and inane advertising.
The U.S. ad deal gave Microsoft the exclusive right to sell banner
advertising on Facebook. That had to change. Relying primarily on Microsoft
for the lion's share of revenue was precarious. Facebook needed
its own self-managed streams of revenue.
Separately, Zuckerberg and Facebook's board decided it was time
to raise more money. Peter Thiel in particular wanted to do it that
fall. Thiel has a refined nose for the twists and turns of the financial
markets. Stocks were at levels not seen since the dot-corn bubble and
investors were feeling buoyant. Facebook's reputation and growth had
been transformed by f8 and the platform launch, and it was time to take
advantage of enthusiasm among investors. But Thiel also knew that if
they went out asking investors for money, someone might try to buy the
entire company. To Thiel and Jim Breyer that was an appealing idea,
but it horrified Zuckerberg (whose two unfilled seats on the board of
directors remained in his control as a form of horror insurance).
The CEO asked Van Natta and his newly hired chief financial officer,
Gideon Yu (who had been CFO at YouTube), to see what kind of
interest they could drum up for a small stake in the company. Yu now
says he thought Facebook might be able to get investors to buy stock at
a valuation of about $4 billion. That would have been a huge leap. A
little more than a year earlier, its third round of financing (called Series
C) had raised $27.5 million, valuing Facebook at $525 million.
But this company, as usual, didn't conform to the usual expectations.
Several venture capital and private equity firms were willing
to buy a chunk of Facebook at a $10 billion valuation. That was eyeopening
to Yu. He'd clearly been thinking too small. But Zuckerberg
wasn't satisfied. He thought the company was worth $20 billion, says another
confidant. He and Van Natta decided to try for $15 billion. Sure
enough, they found interest from several parties, but not enthusiasm.
Nobody would invest at this level without doing some serious negotiating
on the terms. "We found where the market was," says Yu. "We were
going to be able to get a deal done at $15 billion."
This was right about the same time that talks with Microsoft about
an international ad deal began in earnest. The software giant also
wanted to hold on to its U.S. deal with Facebook, but Microsoft execu$
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tives felt they couldn't let it stay the same. It needed to renegotiate the
deal as much as Facebook did. Microsoft was losing about $3 million a
month on the U.S. ads. It was putting the lion's share of its banner ads
on Facebook pages that displayed photos, but people just didn't much
notice ads in that environment. The price Microsoft thus could charge
advertisers was low. Yet it had agreed to pay Facebook a guaranteed
minimum amount—around 30 cents for every thousand page views,
regardless of what it was getting from advertisers.
Everything Microsoft was doing in online advertising was fundamentally
a response to Google's growing power. Google search ads
were garnering over half of all online advertising dollars, even as the
increasingly profitable search giant was starting to toy with other sorts
of software that directly competed with Microsoft's core PC products.
To fight back and defend its turf, Microsoft was now going head to head
with Google across the board in online advertising. As part of this effort,
it was investing billions of dollars to improve its own online search
software. Separately, it had in May made its biggest purchase ever—paying
$6 billion for aQuantive, which distributed advertising across the
Internet. Now that it owned this distribution engine, it badly needed
additional inventory to sell through it.
Microsoft CEO Steve Ballmer was fed up with losing deals to Google.
He had recently lost both of the industry's two biggest partnership opportunities
after coming exquisitely close to agreement. Each time, Google
swooped in at the last minute and stole the deal away. Ballmer had flown
to New York in December 2005 to negotiate a major ad partnership with
Time Warner's AOL. He left town thinking he had a deal. Google unleashed
its ad team headed by Tim Armstrong and came in with a better
offer in days and sealed a contract with a $1 billion investment in AOL
that valued it at $20 billion. Then in August 2006, Microsoft had a deal
with News Corp.'s MySpace and was poised to guarantee $1.15 billion,
according to one of the deal negotiators. Google pounced at the final
hour and won with a three-year guarantee to News Corp. totaling about
$900 million. News Corp. apparently wanted the status of partnering
with Google so much it was willing to give up revenue to do it. Microsoft
had been further galled when Google swept up Internet banner adverthe
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tising network DoubleClick for $3.1 billion in early 2007. This time,
Ballmer was resolved it would not happen again.
Van Natta's forte is deal-making. He coolly played Microsoft off against
its archrival. He knew that uttering the word "Google" was like a magic
spell to tame Microsoft's normally rapacious negotiating instincts. And
in fact when Google heard that Facebook was looking for a partner for
its international ads, it began aggressively pursuing a deal itself.
On October 10, 2007, Google hosted its signature annual event for
its best advertising clients —called Google Zeitgeist. Not only did the
biggest marketers and ad agencies come to its campus for the two-day
conference, but Google's board of directors converged too for one of
their quarterly meetings. It was a good time to make deals. Tim Armstrong,
Google's ad chief, had talked to Van Natta and knew that Microsoft
was well along in talks to win Facebook's international ad contract.
But it just so happened that Mark Zuckerberg was one of the signature
speakers at Zeitgeist. Armstrong talked to Google's board members and
got an official go-ahead to use this opportunity to begin serious negotiations
with Facebook to try to take the deal away from Microsoft. The
board even approved talks about buying Facebook, if it made sense.
Google didn't make any secret of its interest in an ad deal with
Facebook. At a press conference during Zeitgeist, Google CEO Eric
Schmidt called social networking "a very real phenomenon." He added,
"People don't appreciate how many page views on the Internet are in
social networks." It was an early expression of what would become a
long-standing concern—Google cannot search content that is behind
proprietary walls on the Internet. A close relationship with Facebook
might achieve even more than acquiring a bunch of new ad space. It
could help Google stay dominant as the Internet evolved.
That evening everybody was bused to a nearby park where Google
had erected a gigantic white tent. After a lengthy cocktail hour, all 250
or so Zeitgeist attendees sat down to a lavish, almost Bacchanalian feast.
The first course was served on thick plates made of ice. Google was at
the height of its powers —money was flowing in like manna. Here the

company was thanking the people who were spending those billions on
advertising while simultaneously proclaiming itself to be rich rich rich.
At the center table, immersed in intense conversation, were Google
co-founder Larry Page, Armstrong, deal expert Megan Smith, as well
as Zuckerberg, Van Natta, and Facebook corporate development boss
Dan Rose. The Facebook team said they were far along in negotiations
with Microsoft. Armstrong impressed upon the Facebook executives
that Google was serious about wanting to do the deal instead.
After the lavish dinner ended at around 10 P.M., Facebook's trio and
the Google executives retired to the company's nearby headquarters
building for some serious negotiating. They worked late into the night
until they had the rough outlines of a deal. Google would take over
both the U.S. and international ad deals. It also agreed to consider making
a small investment in Facebook at the $15 billion level. For Google
it made sense to buy the equity as a sweetener because Facebook would
have to go through quite a bit of trouble to dislodge Microsoft. If Facebook
pushed Microsoft out of the still-in-effect U.S. deal it was likely to
result in legal unpleasantness. But Google had gone further. Executives
told Zuckerberg that they were willing to consider buying Facebook
outright, though at a price considerably less than $15 billion. This time,
however, Zuckerberg was firm. Facebook was not for sale.
Even on the ad agreement, many on the Google side detected a
lack of commitment on Zuckerberg's part. They noticed he kept pushing
for very specific concessions on things like the size and shape of
display ads—the kind of thing usually left to underlings to iron out. It
seemed to them he might be seeking specific promises from Google
in order to strong-arm Microsoft to concede the same points. For all
the talk, the Google team knew that Microsoft's prior relationship with
Facebook gave it a big advantage. The chances of pulling Facebook
away remained small.
Microsoft had been carefully cultivating Zuckerberg. CEO Steve
Ballmer had flown to Palo Alto to visit his young counterpart twice. Ray
Ozzie, Microsoft's Chief Software Architect, had also repeatedly visited
Palo Alto. As Zuckerberg is wont to do, he took them on long walks. He
told Ballmer that Facebook was raising money at a $15 billion valuation.
But Ballmer had come with something very specific in mind. "Why
don't we just buy you for $15 billion?" he replied, according to a very
knowledgeable source. Zuckerberg, as usual, was unimpressed, even
by this fabulously extravagant offer. It was so high that, had it been accepted,
Microsoft's shareholders might have raised serious obstacles to
its completion.
"I don't want to sell the company unless I can keep control," said
Zuckerberg, as he always did in such situations. He knew that keeping
control once Facebook sold would be almost impossible, so for him this
was effectively a way to end the conversation.
Ballmer took this reply as a sort of challenge. He was emphatic
that Microsoft wanted to buy Facebook. He went back to Microsoft's
Redmond headquarters and concocted a complicated plan intended to
begin a process of acquisition without compromising Zuckerberg's ability
to call the shots. According to people close to the situation, Ballmer
proposed that Microsoft acquire a minority stake in Facebook at a $15
billion valuation. Then, in a provision loosely modeled on a deal arrived
at almost two decades earlier between giant Swiss pharmaceutical firm
Hoffman-LaRoche and Silicon Valley biotech star Genentech, Microsoft
would have the option, every six months, to buy another 5 percent of
Facebook. A complete takeover of the company would take 5 to 7 years,
depending on how much of the company Microsoft bought at the outset.
The price Microsoft was obligated to pay would rise steadily over time,
making Facebook's ultimate price considerably higher than $15 billion.
But from Ballmer's point of view, the deal addressed Zuckerberg's key
concern—it allowed him to retain control, at least for another few years.
Ballmer flew down to San Francisco again and brought along Kevin
Johnson, who oversaw all Microsoft's ad-related business. Van Natta
suggested that they all meet at his Palo Alto home in order to avoid
attracting attention. Ballmer didn't make that any easier. He arrived
in a big black Cadillac Escalade with a contingent of security personnel
wearing earpieces and microphones. As the security men cased
the yard, Van Natta delivered bad news to Ballmer and Johnson, while
Zuckerberg sat quietly and Microsoft software chief Ray Ozzie listened
in via speakerphone.
Facebook wanted to alter the U.S. deal, Van Natta declared. In fact,
it was going to start selling its own ads soon, whether Microsoft liked it or
not. Ballmer was nonplussed. If Microsoft wanted the international deal,
Van Natta continued, it had to agree to concessions on the U.S. one.
Facebook needed to try out some new ad formats of its own. If Microsoft
wouldn't agree, well, Google was waiting in the wings.
The encounter of Van Natta and Ballmer must have been a sight to
see. Van Natta may be fearless, a belligerent and uncompromising negotiator,
but Ballmer is big, loud, and consummately forceful himself.
You don't screw around with him. Not to mention he's CEO of what
is in financial terms still the most powerful technology company in the
world. Van Natta must have had an exquisite sense of just how far to
push, because Ballmer didn't lose his cool. He reiterated that Microsoft
had no interest in reopening the U.S. ad deal. What he was really interested
in, he said, was buying Facebook.
Zuckerberg was cautious. The young CEO had learned his lesson
the year before with Yahoo—once you open the door to a possible sale
it's hard to close it. Zuckerberg made it clear he was inclined not to sell,
but suggested that Microsoft would have to agree to a raft of conditions,
including even more autonomy for Facebook than the tiered proposal
anticipated, with Zuckerberg remaining at the helm indefinitely. Says
someone from Microsoft who heard about what happened, referring to
Zuckerberg: "It wasn't 'If you pay $X billion we'll do it.' The guy's not
a seller. His expectations were too high." Despite all the work Ballmer
had put into his acquisition proposal, Zuckerberg wouldn't bite.
While Microsoft was almost desperately seeking the international
deal, Facebook took advantage of the software giant's pliability to resolve
another dispute, a problem with Hotmail, Microsoft's free Internet
email service. The biggest tool for Facebook's growth was the contact
importer it had launched at the time of open registration. New users
entered their email username and password, and Facebook helped
them send anyone on their email list an invitation to join. Hotmail
was the largest source by far of such user referrals. But it interpreted
many email invitations coming in from Facebook as spam —unwanted
commercial messages. On some days Hotmail blocked the use of the
contact importer altogether. Facebook's user growth then dropped as
much as 70 percent, says Moskovitz. So in the midst of the ad talks,
uber-negotiator Van Natta, Moskovitz, and D'Angelo trooped up to
Microsoft headquarters in Redmond, Washington, to iron out the conflict.
"This was absolutely not something we could walk away from,"
says Moskovitz. After a day or so of talks, Van Natta got Microsoft to
stop interfering with the imports even though Facebook conceded almost
nothing in return.
In a classic brinksmanship move, Microsoft's executives told Van Natta
they wouldn't budge on letting Facebook sell some of the U.S. ads. Van
Natta refused to release Microsoft from its minimum payments for ads
next to photos. Microsoft ad chief Johnson replied that keeping the U.S.
inventory was critically important to him. In order to keep it, he said, he
was willing to lose the international deal. "Fine," said Van Natta. "We're
going with Google."
Johnson returned to Microsoft's headquarters in Redmond, Washington.
But Hank Vigil, the company's top dealmaker, stayed in Palo
Alto to continue talks with Van Natta. He made a breakthrough. Van
Natta had told the Microsoft team that his job depended on a successful
outcome of the talks. Now he waffled. Vigil proposed that Microsoft
would let Facebook use 15 percent of the U.S. ad inventory if it made
certain concessions. On Saturday morning Vigil set up a conference
call with Kevin Johnson and Van Natta to expand on the offer. Johnson
said he'd agree to release the inventory if Microsoft got the international
deal and if Facebook eliminated the photos ad minimums and agreed
to use Microsoft's search engine inside Facebook. Johnson instructed
Vigil to take his team to Facebook's offices on Monday morning and not
leave until he had a deal.
By 11 A.M. Monday, all the players were ensconced in a conference
room on the second floor of Facebook's office on University Avenue
in Palo Alto. Sitting at a big glass table, with sunshine streaming in
through the walls of glass, the two companies' teams conducted the
top-secret negotiation that would transform Facebook's reputation. In
another Facebook building, a smaller group from Google met for part
of this time, discussing its own possible deal.
For the next twelve hours the Microsoft and Facebook teams went
back and forth on issues large and small. Microsoft got an agreement to
move toward providing search technology inside Facebook, yet another
blow in its near-feudal joust with Google. Facebook demanded Microsoft
not display ad banners either at the top of the screen or on the lower
left, just on the lower right side. (Google's acquiescence on this point
gave Facebook ammunition.) Unlike the year-earlier U.S. deal, there
would no longer be any up-front guarantee of how many ads Microsoft
would display nor how much it had to pay Facebook. The two companies
would instead share the revenues from any ads sold. Facebook
successfully pushed for a higher percentage than is usual in such deals.
And the social network got its all-important flexibility to experiment
and innovate on new ad formats on 15 percent of the U.S. display ads.
The Facebook team—Van Natta, Rose, Yu, and General Counsel
Rudy Gadre —occasionally ducked around the corner to huddle with
Zuckerberg, whose desk was only steps away. The CEO was much more
involved than in past such negotiations. Whenever things bogged down,
Van Natta loosened Microsoft up again with a vague allusion to Google.
He implied, but didn't exactly say, that Google was ready to do all the
things Microsoft wouldn't. It was close to true, anyway.
At about 11 P.M. it was apparent a deal was in sight, though many
details remained to be resolved. Everyone's energy was flagging. Just
then, a blast of thumping house music invaded the quiet conference
room. Several negotiators stepped out into the loftlike office to see what
was going on. They found a Facebook programmer at a DJ stand, with
the music turned all the way up. This was the signal to Facebook's engineers
that a hackathon was about to begin. These were the all-night
sessions, legendary in Facebook's engineering culture, when many of the
site's most interesting innovations emerged. Unlike a typical hackathon,
though, this so-called "convertathon" had a specific agenda—to change
Facebook's underlying software code to make it easier to translate into
languages other than English. Translation of the site was set to begin in a
few months in order to further bolster already torrid international growth.
Back in the conference room, heads began to bob and feet to tap. It
was ludicrous, but energizing. A Microsoft negotiator got up and stood
cordially in line with Facebook programmers, waiting to dig into the
bins of take-out Chinese food. Negotiations picked back up once the
music was turned down. By 3 A.M., they had a deal. Essentially Facebook
got everything it wanted. The negotiators left the engineers to
their labors and went to bed.
The issue of an accompanying investment had not been a topic
during the glass-room negotiations, but the next morning, Van Natta
raised it bluntly. Says his then-deputy Rose: "We said to them, 'Look, if
you want to use the investment opportunity to cement the relationship,
we want you to lead the round/ We said, We might be talking to your
competitors/" Microsoft had continued to make clear that if Facebook
was willing to sell, it was interested in buying. But Zuckerberg was not
about to sell. Van Natta was prodding Microsoft to buy a small chunk.
Ballmer had in effect already agreed that Facebook was worth $15 billion,
so the valuation wasn't much in dispute. At that astronomical level
even a small percentage of the company would net Facebook many
millions that it could use to underwrite its money-losing operations.
The Hong Kong billionaire Li Ka-shing, often called "Asia's Warren
Buffett," had earlier approached Facebook to invest and had been negotiating
hard during these very same days and had agreed to invest at
that valuation. "It was a frenzied period," says Yu. Everybody was acting
as if Facebook could become a financial colossus, even though at the
moment the only thing huge about it was its membership growth rate.
After some frenzied back-and-forth occurring mostly over the
course of a single day, Microsoft agreed to invest $240 million at a $15
billion valuation for 1.6 percent of Facebook, alongside Li Ka-shing,
who would put in $60 million for 0.4 percent. Microsoft's executives
were happy. "It was all about the search war with Google," says one. "A
$240 million investment that helped us fight them was definitely worth
it." The pressure was great to conclude the deal, so Microsoft had little
time for any detailed financial due diligence. But it was critical to Microsoft
that another investor participate alongside them in the round.
Microsoft had to be able to demonstrate it wasn't paying an inflated
price in order to achieve an ad deal. Otherwise, were Facebook later
to be determined to be worth less than $15 billion, accounting rules
would require Microsoft to write down as a loss on its books the proportional
difference between $15 billion and the actual valuation. So Li's
stake, while small, was crucial.
Microsoft did not get a particularly attractive deal in legal terms,
either. In order to move quickly for this so-called Series D round, it
agreed to abide by the same documents that had applied to investors in
the Series C when several VCs had invested in mid-2006. The convertible
preferred shares it bought had what is called a "IX nonparticipation
liquidation preference," which means if Facebook were ever sold
outright, Microsoft would get back either its actual cash outlay of $240
million or 1.6 percent of the purchase price, whichever was larger. But
it could do nothing to stop a subsequent investment round at a lower
valuation. If there is eventually a public offering of Facebook's stock,
Microsoft will be forced to convert its preferred shares into common
stock proportionate to its ownership, no matter how much the company
is then worth, whether more or less than $15 billion. Microsoft was willing
to accept all these conditions because its primary goal was the completion
of the advertising deal. But at the last minute it demanded one
important condition: Facebook could not take any investment money
from Google. And if it ever contemplated an outright sale to the search
nemesis, Microsoft had to get advance notice.
The deal was announced on Wednesday, October 24, and prompted
an outcry of amazement. The Wall Street Journal called Facebook "the
newest Internet darling" and said the deal was "reminiscent of the Internet
bubble that ended in 2000." The Los Angeles Times called the
$15 billion figure "staggering." "It tips the scales in terms of totally ridiculous
valuations," wrote the influential TechDirt blog. This was by
far the highest valuation ever given to a private technology company,
and one with no profits to boot! Either Microsoft's Steve Ballmer was
insane, or Facebook mattered more than anyone had realized. But if the
f8 platform event five months earlier had firmly put Facebook once and
for all onto the technology industry map, this investment did the same
thing for Facebook on Wall Street. Microsoft's stock jumped markedly.
The ad deal that precipitated the investment was barely noticed in the
hubbub over the valuation.
Facebook's timing on the deal could not have been better. Only two
weeks earlier, the stock market peaked at a level it has not approached
since. In 2008 the world fell into the worst recession of the postwar
period. But Zuckerberg had a lot of crucial cash in hand to help him
through the down times. In addition to the initial $300 million it raised
in Series D, Li Ka-shing invested an additional $60 million several
months later, and three Munich-based venture capitalists, the Samwer
brothers, invested $15 million around the same time, bringing the total
raised in the Series D round to $375 million. Zuckerberg has a simple
explanation for how Facebook achieved such an amazing financial result.
"Peter [Thiel] helped us time it," he says simply. "He was like 'Now
would be a good time to raise money/"
Now that Microsoft was no longer an obstacle to Facebook selling ads
on its own site, Zuckerberg and company lost no time launching a new
sort of ad on the service. Only two weeks after closing the Microsoft
deal, Facebook hosted its first-ever big event for the advertising community
in New York on November 6. The announcement had several
parts. Any commercial entity could now create a "page" on Facebook
for free, which would have many of the characteristics of an individual's
profile, including the ability to host applications. The "sponsored page"
model had outlived its usefulness. The company's strategy was to get as
many companies into its system as possible, on the presumption that
once they were operating there they would find cause to advertise or
otherwise spend money, even if their page itself were free.
A user could become a "fan" of one of these pages rather than a
"friend," as they did with an individual. Activities of users on these new
commercial pages would be broadcast to their Facebook friends' News
Feeds. (I soon became a fan of the New York Times page, for example,
and my friends saw an announcement of that in their News Feeds.)
Barely mentioned was the fact that a service called Beacon would also
enable forty-four companies, and more later, to extend a similar alert
system onto their external websites. Activity on these external websites
could go into friends' Facebook News Feeds as well.
The meat of the Facebook Ads announcement, at least in the minds
of those who planned it, was that Facebook would launch a new kind
of self-service advertising that enabled any company, even a tiny one or
an individual, to go online and design and purchase an ad on Facebook
that they could target very exactly to their intended audience. In effect,
the kind of custom targeting that Moskovitz had pioneered three
years earlier—for example, when Interscope Records targeted ads for
Gwen Stefani's "Hollaback Girl" to cheerleaders—was now coming to
the mass market. One assumption was that the owners of the new pages
would be heavy users of these ads as a way to promote their presence
on Facebook. Another component of the new self-service ads was what
the company called "Social Ads," which would pair a paid commercial
message with a Facebook user's endorsement.
At the announcement Zuckerberg attracted considerable attention—
and derision—with his grandiose introduction. It was the first time
he had ever given a big promotional talk outside the confines of Silicon
Valley. Hearing him speak, you might think he had gone almost overnight
from despising ads to wanting to own the worldwide ad industry.
"Once every hundred years," he began, "media changes. The last hundred
years have been defined by the mass media. In the next hundred
years, information won't be just pushed out to people. It will be shared
among the millions of connections people have. . . . Nothing influences
people more than a recommendation from a trusted friend.... A trusted
referral is the Holy Grail of advertising." Unfortunately, since Facebook's
original intention was to promote the new self-service ads, which were
more about making targeting available to the masses than about trusted
recommendations, Zuckerberg's intro was misleading to begin with.
The feature that would come to define Facebook Ads, and to turn
November 6 into a day of infamy, was Beacon and the way it worked outside
Facebook's walls. Beacon was a poorly designed alert service. It wasn't
even an advertising product, since it generated no revenue. It was built by
Facebook's platform team, not the ad group. But while it was intended
for activities like playing a game or adding a recipe to an online recipe
box, it also could be used to announce purchases you made on partner
sites. And Facebook had lined up a bunch of commercial partners for it. If
you, say, rented a movie at Netflix, bought a pair of shoes at Zappos.com
or a movie ticket on Fandango, you could give the website permission to
broadcast that fact to your friends back in Facebook via an item into your
News Feed. But Beacon was a last-minute add-on to the Ads launch and
had barely been tested with users. Its implications were overlooked by
Zuckerberg and his executives in days leading up to the launch.
And it had a major design flaw. When you, say, bought your shoes
at Zappos, you weren't asked to explicitly approve sending that fact to
your friends inside Facebook. Instead, you were shown a little drop-down
menu that asked if you wanted to not send the information. If you didn't
proactively stop the alert, it would proceed. In Web lingo, that's called
"opt-out" rather than "opt-in." And the opt-out menu only displayed for a
few seconds before disappearing. Many users seemed to miss it altogether.
After the launch, stories began emerging in the press of users who
had unintentionally launched word of their commercial actions back
into Facebook with unfortunate consequences. One Massachusetts
man bought a ring, whereupon an item appeared in his wife's News
Feed: "Sean Lane bought 14k White Gold 1/5 ct Diamond Eternity
Flower Ring from overstock.com." Within two hours Lane's surprised
wife, Shannon, sent him an instant message: "Who is this ring for?" In
fact it was to be her surprise Christmas present, according to a story in
the Washington Post. Lane told the Post that he was "crestfallen" that
his surprise was spoiled (and also possibly that Shannon's News Feed
item linked to an Overstock Web page showing he got 51 percent off).
Another relationship was disrupted when a New York man's girlfriend
saw he had purchased a ticket on Fandango to a movie he was scheduled
to see with her the following week. A number of users who did lots
of shopping at Beacon-affiliated sites found that the entire contents of
their Christmas gift list had been published to friends in Facebook.
Beacon felt invasive, and misused personal information. It seemed
to many that Facebook wanted to hijack data about its users in order to
make a buck. After things started going wrong, many in the press looked
back to Zuckerberg's hubris at the introduction as a sort of explana$
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tion —Facebook was all about power, and Zuckerberg didn't care what
happened to his users. This was a fundamental misreading of the young
CEO, but Facebook had become so large so fast that journalists were
only beginning to understand it.
The backlash built quickly. As with any Facebook controversy, the
viral distribution tools of Facebook itself were well used against it. The
liberal political group MoveOn.org stepped in to lead the Beacon protest.
It took out ads on Facebook (using the new self-service tool) that
asked, "Is Facebook Invading Your Privacy?" It invited users to join a
protest group, and 68,000 did. In reality the percentage of users protesting
was relatively tiny—0.1 percent versus over 10 percent at the height
of the News Feed, fracas. But MoveOn got a lot of attention. It and
other activist groups were also filing formal complaints with the Federal
Trade Commission. Some were preparing lawsuits.
And now whatever happened at Facebook was big news. It had
57 million users and Microsoft's money behind it. The press wanted
Zuckerberg to apologize and turn off Beacon. Many writers argued that
Facebook's stunning new valuation had made it suddenly, desperately
eager to prove it could be profitable. One story that indicates how far
Facebook's image had fallen was written by Fortune's Josh Quittner.
Titled "RIP Facebook?" it argued the company was "coming undone."
Quittner compared twenty-three-year-old Zuckerberg's rash decision
making in the Beacon episode to "watching an unattended child play
with a pack of matches in a wooden house."
Beacon was the worst and most damaging controversy Facebook
has ever faced, for several reasons. First, unlike with the News Feed,
the company made a serious product design mistake. Beacon really did
result in data being misused. It thus violated Zuckerberg's principles
about the importance of privacy and user control of information. But
the damage was compounded because for more than three weeks Zuckerberg
did nothing to respond to the complaints. As his silence continued,
the controversy grew angrier. He was watching user statistics as he
always did and saw that Beacon was not affecting behavior inside the
service. But that fact belied the genuinely painful experiences of a small
number of users as well as the legitimate outrage of the press.
the facebook-effect
There is an edge of sanctimony to Zuckerberg that at times like this
can serve him poorly. But the irony was that he had endlessly resisted,
up until now, anything that resembled an intrusive ad or message on
Facebook. Here was someone who had said for years that he wanted to
do what best served his users, now suddenly acting as if he knew better
than they did.
Now, in retrospect, Zuckerberg acknowledges he'd become cocky.
"We didn't react quickly enough," he says ruefully, "because we were
just so used to people complaining about things and then us eventually
being right. We were like 'Hey, whatever, they'll eventually get over it/
Then it was like 'Hey, no, we actually messed this one up/"
Finally, on November 29, more than three weeks after Beacon
debuted, Facebook redesigned it to be a fully opt-in system. No message
about you would now be sent without your explicit permission.
MoveOn issued a cautious victory statement. Then a week later, Zuckerberg
made his first public statement on the mess, with a deeply contrite
blog post on Facebook's site titled "Thoughts on Beacon."
"We've made a lot of mistakes building this feature, but we've made
even more with how we've handled them," he began. "We simply did
a bad job with this release, and I apologize for it. ... We took too long
to decide on the right solution. . . . Facebook has succeeded so far in
part because it gives people control over what and how they share information.
. . . In order to be a good feature, Beacon also needs to do the
same." He also announced that Facebook was now making it possible to
turn off Beacon completely, something MoveOn had asked for.
Beacon put a black eye on Facebook that still hasn't fully disappeared.
Internally, the Facebook Ads launch was dubbed beforehand with the
project name "Pandemic." It really did turn into a disease that was hard
to wipe out-—a disease of negative perception that lingered long after the
product was modified. Membership growth slowed discernibly in the
aftermath of all the negative press coverage, though it picked up again
by early 2008. Dan Rose, the former Amazon executive who heads marketing
for Facebook's advertising efforts and was deeply involved in the
Facebook Ads launch, says the controversy was "devastating" for the company.
"By the time we fixed Beacon, the meme was already out there that
people didn't control the way their information flowed/' he says. "We just
really screwed it up. It took a long time for our brand to grow past that/'
But Beacon did illuminate where Facebook hoped to go in the future—
to become a social hub where information about your behavior
across the Web was aggregated for friends to see. If you buy something
or make a comment on a blog or indicate you like something, Facebook's
goal is that eventually it should be possible to let your friends
in Facebook know that. In fact, the Beacon program didn't end until
late 2009, along with the settlement of a lawsuit about it. Meanwhile,
objections to it had died away. Zuckerberg now says he may have simply
launched Beacon too soon: "One of the things that was bad about
Beacon was that people just weren't ready yet to share their information
off of Facebook." The company in 2008 launched a much more widely
deployed technology called Facebook Connect for people to share what
they do at partner websites. There has been virtually no protest, largely
because Connect gives users sufficient control over the information
about them that it sends to their friends.
Shortly after the Beacon frenzy died down, board member Jim Breyer
had a stern conversation with Zuckerberg. "We blew it," he said. "We
should have apologized right away. This, to me, Mark, is an example of
why it's so important for us to get a new chief operating officer into the
company." Owen Van Natta was a great deal guy, unsurpassed at business
development, but not the firm, steady, second hand on the tiller
that Breyer thought a company with a still-learning twenty-three-yearold
CEO needed. And the company also needed someone well-versed
in the complexities of the online advertising business. Zuckerberg took a
couple of weeks to think about it, then told Breyer he agreed. He would
tell Van Natta of their decision in early January and begin a search.
At a Christmas party in mid-December, Zuckerberg got into a conversation
with Sheryl Sandberg. She was a senior executive at Google
who had built the search company's self-service ad business into one
of the economic powerhouses of the Web. The two of them ended up
standing in a corner for over an hour as Zuckerberg queried her about
how to manage a growing tech organization. They agreed to get together
sometime for dinner.
In the meantime, after a difficult conversation with Van Natta,
Zuckerberg began meeting potential candidates for the COO job.
One of them was Dan Rosensweig, the former chief operating officer
at Yahoo who had only a little more than a year earlier avidly pursued
the purchase of Facebook with Yahoo CEO Terry Semel, and who with
his wife had hosted the party where Zuckerberg met Sandberg. Another
was Jeff Weiner, another top Yahoo executive widely known for his
judgment and managerial smarts.
Sandberg, who had been at Google since 2001 and made many
millions from her stock options there, had decided she was ready to
leave. She had already been offered a great job at a big East Coast
media company, and was mulling it seriously. She spent an afternoon
talking to Roger McNamee, an industry sage and one of Silicon Valley's
best-known investors. She wanted his advice about the media job. "It's
a really good idea. You should do this," McNamee told her, then hesitated.
"But what you really should do is go work with Mark Zuckerberg
at Facebook." McNamee had been informally advising Zuckerberg and
knew he was looking for a new COO. Sandberg and Zuckerberg had
coincidentally been emailing about a dinner the following week. Sandberg
hadn't thought of it as a recruiting dinner, though Zuckerberg's
aide-de-camp and in-house recruiter Cohler had talked to her repeatedly
for over a year about Facebook. "When are you coming to work
with us?" he asked every time he saw her.
By the time Sandberg arrived at the quiet little Silicon Valley restaurant,
McNamee had spoken to Zuckerberg and made a case for
Sandberg. At dinner the two talked and talked. The restaurant closed at
10 P.M., then Zuckerberg went back to Sandberg's home to keep talking.
She's the mother of two small children and she usually goes to bed
by 9:30 P.M. By midnight she had to kick him out so she could sleep.
Dinners like that continued. Zuckerberg was in no hurry. He wanted
to get to know this person whom he might be working with for the next
ten to twenty years. This time he wanted to hire somebody for the long
haul. Sandberg says the meetings with Zuckerberg, which he estimates
took a total of fifty hours, were "endless." "He never left!" she says in an
interview. "Put that in your book. He just would not leave my house."
Sandberg is an elegant, slightly hyper, light-spirited forty-year-old with
a round face whose bobbed black hair reaches just past her shoulders.
Prior to her six years at Google she served in the powerful role of chief of
staff to Lawrence Summers when he was secretary of the Treasury in the
Clinton administration. She met him as a student at Harvard—yes, that
school again—where she majored in economics. She wrote her thesis on
the economic factors that lead women to remain in situations where they
are abused by their husbands. (Zuckerberg has always sought to hire academic
stars, despite having dropped out himself.) She speaks at an astonishingly
rapid pace, yet without omitting inflection, in a kind of musical
torrent of words. She's stylishly dressed when I come to see her, in new
knee-high black Prada boots with black slacks and a cashmere sweater,
and her polish contrasts dramatically with Zuckerberg's plainness—and
with just about everybody else at Facebook.
Sandberg was eager to keep these meetings secret from others in the
close-knit Silicon Valley community. One time she and her husband,
Dave Goldberg, a top Yahoo employee, joined Zuckerberg and his girlfriend,
Priscilla Chan, for dinner at an obscure restaurant near the San
Francisco airport where no one would recognize them.
Zuckerberg asked a lot of questions, and Sandberg replied in kind.
The topics they covered in their discussions ranged from where Facebook
would be in five years to Sandberg's experiences in government to
theories of management to personal history. He was vetting her, but she
needed to be convinced as well. Shortly before they started meeting, the
Harvard-oriented magazine 02138 had published a long expose about
the convoluted campus origins of Facebook. It accepted the Winkelvoss
arguments at face value and suggested Zuckerberg was probably an intellectual
thief. "We'll never know what really happened in the Harvard
dorms four years ago," the article concluded. "The question remains:
Whose idea was it?" Sandberg was concerned when she read it and queried
her friend McNamee, who assured her of Zuckerberg's honesty.
Late in January both of them were heading to the World Economic
Forum in Davos, Switzerland. Sandberg invited Zuckerberg to join her
for the flight from San Francisco to Zurich on Google One, as the 767
owned by its co-founders Larry Page and Sergei Brin is known. The two
talked conspiratorially the entire flight, a fact not unnoticed by some of
her Google colleagues.
As the discussions got more serious, Sandberg called her good friend
Don Graham at the Washington Post Co. to ask his opinion of Zuckerberg
and Facebook. Graham had been among the many who tried to hire
her in 2000 when she left the Treasury Department. (Others included the
New York Times Company and the nonprofit AIDS Vaccine Initiative.) It
turned out that Zuckerberg had also called Graham to ask about her. The
Post CEO gave them both strong endorsements. "What a sensational hire
that was. Wow," says Graham now about Sandberg at Facebook.
Jim Breyer also spoke at length with Sandberg and with others who
were in contention for the COO job. She was one of the few who didn't
say, one way or another, that she would like to keep open the possibility
of being Facebook's CEO some day. That was a deal breaker. "Mark's
our long-term CEO," says board member Breyer. "We were looking for
a great business partner who was comfortable with that."
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.