The CEO

As Facebook kept evolving—and growing faster with every change —the
established powers of the technology and media world began paying
ever closer attention. This appeared to be the kind of irresistible consumer
website every executive had dreamed of owning since the Internet
took off in the mid-1990s. Mark Zuckerberg suddenly had a lot of
new older, well-dressed friends from Los Angeles and the East Coast.
But he didn't think like the CEO of an established technology or
media company. He barely gave a thought to profit and was still ambivalent
about advertising. This wasn't easy for his newfound suitors to
understand. One senior executive from a tech company recalls a frustrating
visit during that time with Zuckerberg, who seemed uninterested
in increasing the company's revenue. "He didn't know what he didn't
know/' he says. "But when he opened his mouth he was very direct, very
smart, and he was very focused on Facebook as a social tool, to the point
of naivete. It sounded just too altruistic at the time. So I asked him, 'Is
it a social tool as a tactic to get to the next point?' And he says, 'No, all I
really care about is doing this social tool.' So I thought, 'Either this guy
is being very strategic and not telling me what his next thing is, or he's
just got his sandbox and he's playing in it.' I couldn't figure it out."
Viacom's MTV subsidiary had identified Facebook as a natural
partner back in early 2005 when strategy boss Denmark West had vainly
proffered the idea of a $75 million acquisition. A few months after that
overture was rejected, MTV almost succeeded in buying MySpace,
only to have it snatched away by News Corp. in July. Viacom's octogenarian
CEO, Sumner Redstone, was enraged that archrival Murdoch
had stolen his prize. By the fall of 2005, MTV's interest in Facebook
was stronger than ever. After all, West and others reasoned, there was
so much overlap between the two companies' audiences that Facebook
could be MTV's digital strategy.
West called Cohler, who told him that Zuckerberg only wanted to
have CEO-level conversations. If Viacom CEO Tom Freston would
participate, Zuckerberg would come for a meeting. It was quickly arranged.
Cohler and Zuckerberg flew to New York to meet with Freston
and MTV Networks CEO Judy McGrath. Freston, solicitously, explained
that there seemed great synergy between MTV and Facebook
because of how much their audiences overlapped. He said he'd love to
find a way to work together. He suggested, for example, that Viacom
could help Facebook develop content for its growing audience. "We
think of ourselves as a utility," Zuckerberg replied brusquely, dismissing
the idea. Viacom, Freston continued, could also assist Facebook in
extending its reach into an older audience. Tm pretty much focused
on high school and college," answered Zuckerberg. Why the two had
flown all the way to New York somewhat mystified the Viacom executives.
"It was a no-thank-you meeting," says one Viacom attendee. But
Viacom did not give up.
In early November 2005, Michael Wolf, a longtime media industry
consultant at McKinsey & Company, joined MTV as president, reporting
to McGrath. He almost immediately took on the task of cultivating
Zuckerberg.
Whenever MTV held a focus group among the college students
who were its core demographic audience, they talked incessantly about
Facebook. It gave Viacom a unique and early window into the power
of this phenomenon. Viacom executives fretted that this new form of
media might upstage them, and they wanted to get a foot in. Freston
and his executives at MTV were also worried that News Corp/s Fox
networks were going to use their new ownership of MySpace to gain
an advantage with TV advertisers. It seemed likely that a new kind of
package deal including both social network and television components
could soon emerge, at least for programming aimed at young people.
Wolf flew out to Palo Alto to visit Zuckerberg in his office. The
Facebook CEO was in T-shirt and shorts, wearing his trademark rubber
Adidas sandals. These had become so notorious that as Wolf arrived,
an assistant was nailing one of the old worn-out sandals to a
board. It was going to be given to one of Facebook's programmers as
an award. Wolf considered himself to be cultivating Zuckerberg, and
merely wanted with this meeting to start a cordial dialogue, but he
did ask whether the CEO was thinking about selling the company. "I
don't want to sell/' Zuckerberg replied. "What kind of number might
make you interested anyway?" Wolf asked. "I think it's worth at least
$2 billion," said the kid who had launched Facebook in his dorm
room twenty months earlier.
Shortly before this, an aggressive thirty-five-year-old dealmaker
from Amazon.com named Owen Van Natta had joined Facebook as
vice president of business development. The upbeat veteran executive
was hungry for impact and authority, and had an enormous amount of
energy. After only five weeks Zuckerberg promoted him to chief operating
officer. Van Natta created Facebook's first strategic plan and
immediately started bringing some order to what remained a chaotic
and ragtag operation. The new COO wasn't shy about exercising his
authority, and fired a number of engineers and other employees who
had been recruited pell-mell earlier in the year. But Van Natta's greatest
skill, honed at Amazon, was in negotiating deals. He would soon get a
chance to prove himself.
Van Natta was annoyed that MTV's Wolf had figured out that the
best way to reach Zuckerberg was by instant-messaging him and had
thus been able to make an appointment directly with the CEO. Van
Natta told Wolf in the future to go through him instead. Wolf ignored
the instructions. Instead he periodically IM'd Zuckerberg to say that he
planned to be in Palo Alto—whether or not it was true—and suggest a
dinner. If Zuckerberg agreed, he'd fly out.
Wolf was only one of many top media and technology executives
pursuing Zuckerberg. Facebook was hot. The office and the University
Cafe down the block—the favored rendezvous—became a parade of
big names. "The guys from NBC are coming by this afternoon." "When
is that meeting with Microsoft?" "Peter Chernin is here!" (He was Murdoch's
top deputy at News Corp.) "Did you hear that Zuck met with
Dan Rosensweig from Yahoo?" There were meetings about a deal with
AOL, which owned the AIM instant-messaging system that Zuckerberg
(and most of Facebook's users) used every day. For a while discussions
centered on whether there was a way to build a special version of AIM
for Facebook. Finally the companies struck a deal that enabled AIM
members to invite their IM buddies to join Facebook. It quickly became
a major source of referrals.
There was a lot of grumbling about all the Zuckerberg meetings,
especially among the growing number of not-twenty-one-year-old executives
whom recruiter Reed was helping hire. It appeared to many of
these guys (they were almost all men) that Zuckerberg was willing to
talk to anybody anytime about anything, especially if that person was a
CEO. What did all these meetings mean? Was Zuck about to sell the
company? Will we become part of Viacom or Yahoo or News Corp.?
Are we all going to get rich? And for the younger, more idealistic ones —
is this the end of the Facebook miracle? They sometimes wistfully discussed
whether they ought to be looking for a new CEO.
Zuckerberg wasn't bothering to explain his thinking. He thought
of these meetings as a learning process and didn't feel he had much to
explain to the staff. After all, he had no intention of selling his company.
And ironically, part of the problem stemmed from his good manners.
He readily agreed, out of both curiosity and politeness, to meet with
the honchos who came calling. And he listened politely, if impassively,
during the day when Van Natta and the other older staffers were bending
his ear. But late at night he continued to huddle more honestly
with confreres Cohler, D'Angelo, Moskovitz, and frequently still with
Parker. But so circumspect is Zuckerberg that sometimes they too were
in the dark about his ultimate intentions. And everybody was painfully
aware that he was in complete control of the company's destiny.
Reed was getting frustrated. She had helped bring in most of the
older men who were feeling sidelined and who were now getting worried.
She was proud of the quality of the team she'd helped assemble
but saw the staff being overwhelmed with what she calls "dorm-room
misinformation." Sean Parker may not have been an ideal company
president, but he was pretty good at communicating. After Parker left,
Zuckerberg gained more authority, but he didn't necessarily want it.
Reed had never gotten along with Parker, but it was almost worse without
him. Communication seemed to be completely breaking down.
Politics were also getting heavy. Doug Hirsch, Facebook's vice president
for product and a Yahoo veteran, was offending some of the other
executives, many of them also newly hired. They thought he was trying
to lead talks with the many companies that wanted various kinds of
deals. Why was he not just sticking to product issues, they complained?
Part of the reason was simply that Hirsch already knew many of the players
from his Yahoo days. They would call him up and suggest exploratory
meetings. Hirsch wasn't getting along very well with Zuckerberg,
either. Hirsch was hired because so many people had told Zuckerberg
that he needed someone else to head product development so he could
focus on corporate matters. The CEO had been ambivalent all along
about hiring someone as VP for product, since he considered that his
own bailiwick. "Doug kind of felt he was there to be adult supervision,"
says Cohler, "and that was certainly not what any of us were thinking
when we hired him." Hirsch himself says that some of the people he
spoke to before he was hired had led him to believe he might eventually
be a candidate to become CEO.
Reed had become a close observer of all the unhappiness, partly
because she had one of the only private offices at the company, which
she needed for candidate interviews. A copy machine had been moved
out of an oversize closet and she had installed a noren Japanese door
curtain for privacy. Next to her desk was a large sculpture of the Hindu
god Ganesh, the remover of obstacles. But Ganesh didn't appear to
be working. Many employees came to her office to gripe. Zuckerberg
wouldn't listen, they said. Zuckerberg should be replaced. Zuckerberg
didn't know what he wanted to do with the company.
Finally, Reed reached the end of her rope. "The morale of the executives
was imploding," says Reed. "The rumor mill was churning, and
Mark wasn't communicating with anybody about what was really happening.
The team was almost ready to mutiny." Zuckerberg was on the
East Coast at one of his many meetings. She decided to intercept him
before he went back to the office. She instant-messaged him, asking to
meet on his way home from the San Francisco airport. But his plane
was delayed, and they didn't finally get together until 2:30 A.M. Reed
came down from her home in Marin County, over the Golden Gate
Bridge, and they converged in downtown San Francisco. Zuckerberg
arrived in a stretch limo, which somebody had mistakenly ordered for
him.
They sat in the neon glow of an all-night diner. Reed unleashed
her frustration. "Mark—we Ve pulled together a team of thoroughbreds
but they're locked in their stalls. Nobody knows what's going on. If you
want to sell your company, then stop dicking around and say you want
a billion dollars. Owen can go and get that offer. If it's two billion, say
that. If you don't want to sell, then say that!"
"I don't want to sell the company," Zuckerberg answered, in his
typical unflappable manner.
"Then stop taking all these meetings with Viacom and Time Warner
and News Corp.! You're sending the wrong message." Then she
unleashed her final barrage. "You'd better take CEO lessons, or this
isn't going to work out for you!"
"So now you're finally being straight with me," Zuckerberg replied,
turning more animated. "This is the first time I feel like you're telling
me what you really think."
He had defanged her. She could no longer be angry. He actually
was listening.
Over the next few weeks, Reed noticed a distinct change in Zuckerberg.
For one thing, he did agree to start seeing an executive coach
to get lessons on how to be an effective leader. He started having more
one-on-one meetings with his senior executives. The week after the
confrontation he called the entire staff together for Facebook's first "allhands"
meeting. He was feeling sick so he conducted the entire meeting
sitting cross-legged on the floor.
Zuckerberg took the executive team to an off-site meeting where
they could talk about goals and establish better communication channels.
When Moskovitz heard about this he was dubious. "Do I have to
fall back into people's hands so they catch me or something?" he said.
"Because I'm not doing that shit."
Zuckerberg started doing a better job explaining where he thought
the company was going. He wanted to make Facebook into a major
force on the Internet, and not see it taken over by someone else, he
repeated endlessly. He was getting better at explaining his priorities to
his staff. His presentations included the simplest of slides—sometimes
with just one bullet point, like "Company goal: grow site usage." The
team was mollified. Reed cheered up.
Zuckerberg called Doug Hirsch into his office and they agreed it
wasn't working. Hirsch wasn't officially fired, but it made no sense to
stay. He'd been at the company four months. Zuckerberg had chafed at
some of Hirsch's product initiatives, and they disagreed about some key
projects Zuckerberg was planning. Hirsch was also aggressively coming
up with ways to use Facebook's product to create more revenue, which
in most companies would be routine. But in this one, back then, it was
near apostasy. And there was talk among employees about unauthorized
meetings he had supposedly had with solicitous companies like Google.
To this day, many of Zuckerberg's young allies insist that Hirsch "was
trying to secretly sell the company." But of course he couldn't have
done that.
From the perspective of Moskovitz, who observed it all up close,
this was just another example of a repeating pattern. "It's the same story
with many of the executives," he says matter-of-factly. "Mark wanted to
build the product out and focus on revenue as late as possible. And they
wanted to make sure they had a business."
Reed brought needed structure to Facebook's management, but
very few of the staffers she hired worked out in the long run. Hirsch
was just the first of many who left within a year. Those in Zuckerberg's
circle blamed her for bringing in people who didn't appreciate
Facebook's unique mission and culture. Some of these stalwarts —the
ones who survived—took to calling Zuckerberg's new executive coach
"Wormtongue," after an evil adviser to the king in Tolkien's Lord of the
Rings. Criticism was coming from the outside as well. Tech industry
bloggers pointed to Facebook's revolving-door management and said
it suggested internal chaos. But Zuckerberg's adviser Marc Andreessen
gives the CEO credit for being decisive about making changes when
people weren't working. There's no way, Andreessen says, that a fastthe
facebook effect
growing company can consistently make the right hiring decisions. Better
to quickly remedy the inevitable wrong ones.
Zuckerberg preferred working with people his own age. He believed
they were superior programmers, for one thing. Sometime later,
at a small conference, he showed his stripes in talking to a bunch of
other entrepreneurs. "I want to stress the importance of being young
and technical," he said, according to the VentureBeat blog. "Young
people are just smarter. Why are most chess masters under 30?" You
can imagine how reading that made the growing number of Facebook
executives in their thirties and forties feel.
Even as he was trying to learn better how to exert authority and
manage his troops, Zuckerberg wasn't managing his own health very
well. Or maybe the stress of Facebook was finally getting to him. He
began fainting regularly, in the office and elsewhere, sometimes in the
middle of a meeting or while he was sitting at his computer. His friends
told him he should get more sleep and actually eat regular meals.
At a Fortune magazine dinner in early December 2005 that I hosted as
the program director of a tech-centric conference called Brainstorm,
I asked everyone at the large table to briefly talk about what was most
on their minds. When his turn came, Jeremy Philips, a top strategist at
News Corp. and close adviser to Rupert Murdoch, said how pleased his
company was to have bought MySpace and mentioned that Facebook
also seemed very interesting.
Viacom's Michael Wolf left the dinner in a panic. "Oh my God, they're
talking to Facebook," he fretted. Viacom chairman Sumner Redstone
would hit the roof if he lost out to Murdoch yet again. Wolf immediately
called Zuckerberg and asked him point-blank if Facebook was considering
selling to News Corp. Zuckerberg conceded that the two companies
had talked, but said that he thought News Corp. was too Hollywood, and
in any case media companies like that didn't understand technology ones
like Facebook. Wolf didn't take the message as it was probably intended—
to suggest that Viacom was also not appealing to Zuckerberg.
In mid-December, Wolf got in touch with a better offer than a meal
at a local restaurant. He was planning to be in San Francisco with the
Viacom corporate jet, he claimed. Would Mark like a ride back to New
York for the holidays?
Zuckerberg took Wolfs bait. Since Viacom's corporate planes
were in fact unavailable, Wolf chartered an unmarked, top-of-the-line
Gulfstream G5 for the trip from San Francisco airport to Westchester
County Airport, near Zuckerberg's parents' home in Dobbs Ferry, New
York. Wolf flew out that morning from New York on American Airlines.
The MTV executive was waiting aboard the G 5 as if it were the most
normal thing in the world when Zuckerberg arrived, late, about 5:30
P.M. Then, as Wolf had shrewdly planned, they spent five uninterrupted
hours together aboard the plane. He was resolved to find a way for Viacom
to buy Facebook.
For much of the trip, however, Zuckerberg was in control of the
conversation. Zuckerberg interrogated Wolf about MTV's business.
How did companies like Viacom make their money? How much did
MTV charge for advertising? What amount of that was profit? How do
you build your audience? Wolf tried to steer the conversation back to
how MTV could work with Facebook. He talked about how MTV's ad
sales team could use its access to big advertisers to help sell Facebook
ads. And he noted that MTV's big hits like Laguna Beach and The Hills,
watched by millions of teenagers and young adults, were perfect places
to promote Facebook. Zuckerberg said he had noticed that during the
hours those shows aired, Facebook's traffic slowed discernably.
During the trip Zuckerberg took to admiring the G5. "This plane
is amazing," he said.
"Maybe you should just sell a piece of the company to us," Wolf
replied. "Then you can have one for yourself."
Wolf invited him to sit in the jump seat in the cockpit as the powerful
corporate jet landed at Westchester. When it pulled up to the private
aviation terminal, two cars were waiting. One was Wolf's corporate
black car to drive him into the city. The other was the Zuckerberg family
minivan, from which Mark's parents emerged. They beamed and
gave their son a big hug. It was as if he were merely coming home from
a semester at college.
Wolf flew out to Palo Alto again in January 2006 and brought MTV's
head of advertising strategy. Zuckerberg suggested they dine at the
Village Pub in Woodside, the same fancy restaurant where he'd had
his fateful dinner with Jim Breyer. He brought along Cohler and Van
Natta. Wolf had an elaborate PowerPoint presentation showing how the
two companies could work together. At the table he suggested a deal in
which Viacom would buy a piece of Facebook in conjunction with a
big ad partnership. Zuckerberg listened politely, but made it clear that
he wouldn't even contemplate any deal that could involve him losing
his absolute control over company decision making.
In early February, Wolf made yet another trip to Palo Alto. He and
Zuckerberg were becoming chums, and they took a long walk around
the palmy, well-groomed streets. For some reason they stopped by Zuckerberg's
modest one-bedroom apartment. The place was messy, though
mostly devoid of furnishings. There was a mattress on the floor with
sheets askew, piles of books, a bamboo mat on the floor, and a lamp.
Then they headed for dinner at a nearby restaurant. Wolf popped the
same question he'd asked on the plane. "Why don't you just sell to us?"
he asked. "You'd be very wealthy."
"You just saw my apartment," Zuckerberg replied. "I don't really
need any money. And anyway, I don't think I'm ever going to have an
idea this good again."
The conversation wove back and forth and Zuckerberg reiterated
that he believed Facebook was worth $2 billion and wouldn't talk about
selling it for less. "It wasn't like 'I want $2 billion,'" says Wolf. "It was
'If you pay me $2 billion I don't want to sell. Thank you.'" Zuckerberg
finally said it made more sense for them to just talk about some kind of
partnership.
A thwarted Wolf went back to New York and met with McGrath
and Freston. They weren't interested in a partnership. They—and Redstone—
wanted very badly to own Facebook. So Freston decided to just
make an offer. He sent Zuckerberg a letter proposing Viacom would
pay $1.5 billion to buy the two-year-old company. The money was to be
paid out 51 percent in cash and the rest over time, depending on how
well Facebook's business performed. It was by far the most significant
and concrete offer Facebook had ever received. Zuckerberg didn't even
respond.
A week or so later, Wolf called Zuckerberg and they had a few desultory
conversations, to no effect. Wolf met with both Peter Thiel and
Jim Breyer, complaining of Zuckerberg's tepid reaction, but both said
they couldn't do much to intervene. Van Natta, by contrast, confided to
Wolf that he himself was trying to convince Zuckerberg to sell.
Meanwhile the Viacom team had heard that Yahoo might be talking
to Facebook as well. The elite precincts of media mogulhood are
like a small town. It happened that Viacom's Freston played tennis regularly
in Los Angeles with Yahoo CEO Terry Semel. One day on the
court Freston tried to sound out Semel to learn whether he was talking
to Facebook. He got the impression the answer was yes. The pressure
on Viacom increased.
Up to this point, Wolf had taken painstaking measures to keep the
Facebook talks secret. Few others at Viacom even knew about them.
Freston and McGrath thought one reason Murdoch had been able to
swoop in and bag MySpace was that Viacom's talks with that social
network had been too public. But at the end of March, Business Week's
online edition published a story titled "Facebook's on the Block." It reported
the incomplete fact that the company had turned down $750
million dollars and hoped to get $2 billion. The article didn't say Viacom
had been the bidder, but speculated about its interest. To Wolf and
his colleagues, this was embarrassing. They presumed Facebook had
leaked the info to elicit additional bids. And sure enough, shortly after
the article appeared, Zuckerberg called and said he still wanted to talk.
Then Facebook came close to selling out. Van Natta and Zuckerberg
came to New York. Wolf flew back out to Palo Alto. With several
Viacom colleagues, Wolf camped out in a Facebook conference room.
Zuckerberg, Cohler, and Van Natta would come in, negotiate, then
retreat to another nearby conference room. The Viacom team would
walk around the block. Back into the conference room. Another tetea-
tete. Mark wanted more cash up front. Viacom wanted guarantees
the faeebook effect
on performance before it would pay the remainder of the $1.5 billion.
Van Natta wanted fewer restrictions on the payout. Wolf finally agreed
to increase his initial payment to $800 million in cash. But they continued
to quibble about the remaining $700 million. Neither side had
an investment banker assisting them, as would be routine in most such
talks. Wolf knew Zuckerberg well enough to realize that bringing in
cold-blooded Wall Street experts would only further spook him.
But Wolfs bargaining leverage was limited. Viacom's chief financial
officer was leery of paying too much for a company that for all its
online presence remained puny in financial terms. Facebook had only
seen around $20 million in revenues over its entire history to that point,
with effectively no profit whatsoever. It planned on $22 million in revenue
for 2006 and $55 million for 2007, executives told Wolf, but the
Viacom delegation was skeptical it would reach those numbers. Paying
$800 million was really stretching it.
In the end the two sides could not agree on how Facebook would
earn its additional $700 million. The Facebook negotiators felt the
deal's terms were too complicated and the payout uncertain. Zuckerberg
seemed to be getting cold feet anyway. He was saying things
like "Google was smart not to sell early. Look at how well they did."
Wolf responded that Google had hundreds of millions of dollars of
profits before it went public, and Facebook had none. But to Zuckerberg,
what was more significant was that Facebook had by then become
the seventh-most-trafficked site on the Internet, with 5.5 billion
page views in February, according to the measurement firm comScore
Media Metrix.
As the Viacom deal was petering out, Facebook did some of its own
financial maneuvering. It raised more money from venture capitalists,
but for this second VC round (known as Series C because it was the company's
third financing), the pre-investment valuation was $500 million,
five times the $97 million postinvestment valuation Accel had agreed
to eleven months earlier. Premiere venture firm Greylock Partners led
the April round, joined by Meritech Capital Partners. In addition, Peter
Thiel and Accel Partners each put in more money and added to their
Facebook holdings. Altogether Facebook received an infusion of $27.5
million. It significantly relieved the financial pressure and made it considerably
easier for Zuckerberg to walk away from Viacom.
Facebook's success was attracting another sort of attention—from international
imitators. Though the company had begun expanding to
select elite schools in English-speaking countries outside the United
States, it had no presence in Asia and virtually none in Europe. A site
called studiVZ (from the German for "student directory") in Germany
now borrowed Facebook's design, making red the elements that on
Facebook were blue. Otherwise it was a pretty shameless imitation. It
launched at German universities in October 2005 and was an instant
success. By January 2007 it had 1.5 million users and sold to the powerful
Holtzbrinck publishing firm. Facebook was so worried that this
might preclude its ultimate success in Germany that in late 2007 it
came close to buying studiVZ—for about 4 percent of Facebook's total
equity. The prospect of a purchase was made easier, ironically, because
the imitation was so complete. That would make integrating the two
services much easier. Another imitator, which launched around the
same time in China, called Xiaonei, blatantly copied some of Facebook's
software code and even initially included at the bottom of each
page "A Mark Zuckerberg Production/' Xiaonei too was a hit, garnering
many millions of users.
Despite his MySpace coup, News Corp.'s Murdoch grew ever
more intrigued by Facebook. He and Zuckerberg got to be fairly good
friends. The mogul was charmed by the passion of the young CEO,
and Zuckerberg liked Murdoch's big-picture view of how media was
changing. Murdoch, almost uniquely among media leaders, had accepted
that the Internet was transforming the landscape for all media
companies. He considered his purchase of MySpace just one in a
series of major moves. But he couldn't understand why Zuckerberg
thought Facebook, which had far fewer users at that point, was worth
several times what he'd paid for MySpace. The conversations never got
as serious as those with Viacom, but they would gain momentum, then
peter off as Zuckerberg's interest declined.
the facebo'ok effect
Zuckerberg was getting a little cocky. Everybody wanted to talk to
him. Every company seemed to want to buy Facebook, and everybody
seemed to want to use it. And he had noticed another thing—every offer
he got for the company was higher than the last. Meanwhile, the service's
growth was steady. If it was going to keep getting bigger, it would
keep getting more valuable. He didn't want to sell anyway, so there was
no urgency to any of these conversations.
But Facebook was still burning tons of cash. It couldn't keep endlessly
pulling in investment money to cover its losses, no matter how
much contempt Zuckerberg had for ads. Luckily, Google, Microsoft,
and Yahoo all wanted to talk about a deal to place display ads on Facebook.
Zuckerberg authorized his deputies to begin negotiations. To
him it seemed like easy money. He wasn't going to give them much
onscreen real estate anyway.
Facebook was now so successful it was beginning to saturate the college
market, operating at thousands of schools. At almost every school
it opened, the majority of students became users. Its success at high
schools reinforced Zuckerberg's belief that Facebook had the ability to
spread quickly among new groups. What mattered was that the target
group needed to include lots of dense, overlapping relationships.
And what was the mother of all such communities? The workplace.
Zuckerberg decided to launch what he called work networks. It would
be Facebook's first effort to recruit adults to its service. A work network
would be set up at a company the same way Facebook established a
closed student network at each university. The default privacy setting
was that members of such a community could all see one another's
information. Zuckerberg believed work networks would extend the
company's ubiquity out of the academy into the whole country, and
maybe even ultimately the world, or at least to everyone who worked for
companies. It was very different from Facebook investor Reid Hoffman's
Linkedln, which was structured more as a resume-based network and
did not so much emphasize day-to-day communication or workplace
social connections.
In May 2006 the work networks debuted, but not much happened.
The world barely noticed. Facebook created networks for a number of
companies, opening the doors, but few passed through. One exception
was the unique workplaces of the U.S. Army, Navy, and Air Force. The
intensity of shared experience among young people in the military is
apparently much like that in college. Facebook made sense there. But
in most of the big companies where Facebook initially set up networks,
there was little if any response from employees.
Few in business knew that Facebook was opening up. And Facebook
was developing a bad reputation. At almost exactly the same time
work networks debuted, the New Yorker published a lengthy profile of
Zuckerberg and Facebook, the most in-depth coverage the company
had ever received. Author John Cassidy made the site seem like a curiosity,
focused a good bit on the Winkelvosses' lawsuit, and implied
that Facebook's users were antisocial. "Clearly one of the reasons the
site is so popular is that it enables users to forgo the exertion that real
relationships entail," he wrote. He also quoted a sociologist who speculated
that the main reason Facebook was so popular was "voyeurism and
exhibitionism."
Facebook still seemed to nonusers to be mostly about dating and
doing pointless, possibly suspicious things like poking people. Whenever
you added a new friend on Facebook back then, a box popped up
that asked you how you knew them. One of the options was "we hooked
up." How could this be a service for professionals? And Facebook faced
a chicken-and-egg problem. Adults didn't want to join until other adults
were already there.
Perhaps Facebook only worked for students after all. Maybe adults
didn't need this kind of service, many Facebook executives worried. The
mood around the office darkened. Even though growth was continuing
strongly among college and high school kids, if adults didn't want to
join Facebook then perhaps something was wrong with Zuckerberg's
theories. He was disappointed and befuddled. This was a major setback.
Maybe the world wasn't becoming more transparent as quickly as he
had thought. "It was the most wrong he'd ever been at Facebook," says
Cohler, "and the first time he'd ever been wrong in a big way."
Zuckerberg had other big changes in mind, but if adults weren't
going to respond to Facebook some of the changes would fail. As summer
began, Facebook's board debated how serious the problem might
be. David Sze, who had spearheaded Greylock's recent investment in
Facebook and was an official board observer, found himself having to
reassure its members. At one meeting Moskovitz, who also attended as
an observer, quizzed Sze about whether he regretted investing, given
the unexpected difficulties with work networks. At that moment Sze was
more optimistic than Facebook's otherwise chronically upbeat board.
That summer of 2006, for the third year, the company rented a Facebook
house, occupied mostly by recent arrivals in Palo Alto. One of
Facebook's lawyers argued that a company house was too great a legal liability,
but Zuckerberg overruled him. The CEO decided the company
should pay half the rent because anyone should be able to come by and
use the pool. In fact the pool was only used sparingly, since its heater
was broken and the water was always around 100 degrees.
Zuckerberg kept a room for himself in the house to use on weekends
but the rest of the time lived separately in his own apartment.
He had split up with the Berkeley undergraduate he'd been dating and
reunited with his old girlfriend, Priscilla Chan, who he had met while
in line for the bathroom at a Harvard party. She had graduated with
his original Harvard class of 2006. Instead of a diploma, Zuckerberg
had a company worth over $500 million and with almost a hundred
employees. After some negotiation, Zuckerberg arrived at a deal with
an insistent Chan: while they wouldn't live together they would spend
a minimum of 100 minutes of time alone each week and have at least
one date, which would not be either at his apartment or at Facebook.
But the company retained a collegiate air. Employees called another
nearby house "the frat house." Nine people lived in its four bedrooms,
many of them recently arrived Harvard-trained programmers. In
the window were three big Greek letters that had originally decorated
the first Facebook office on Emerson Street—Tau Phi Beta—for The
Face Book.
It's not hard to understand why the lawyer had concerns. The dining
room was turned over to Beirut beer-pong tournaments, but one
resident, Chris Putnam, was only nineteen. As a sophomore at Georgia
Southern University, he successfully hacked his way into the company's
servers and made two thousand Facebook profiles look like they were
on MySpace. He inserted a note in the code saying he didn't intend any
harm. The episode impressed Zuckerberg and Moskovitz so much that
they hired him.
At the frat house employee recreation could also be more productive.
"People would just come over and code, or party and watch Lost,"
reports programmer Dave Fetterman. "We could still fit everyone in
the company into the house for a party. At night we'd have beers, watch
TV, think up new ideas and just start coding them right there, either
in someone's room or out in the yard. Mark or Dustin would show up.
They were usually the first ones to open up their laptops." The programmers
would sometimes combine partying and working at what
they called "push parties." They'd load new software onto the site and
"push" it live from right there at the frat house.
Big advertisers were beginning to experiment cautiously with Facebook.
This wasn't just little record companies advertising Gwen Stefani songs
anymore. The giants of marketing now were getting interested in Facebook.
But it was a different environment than they were used to. The
company's still-small group of ad salespeople pushed clients to craft messages
and offerings unique to the service, in keeping with Zuckerberg's
near contempt for traditional advertising. (When he hired new ad sales
boss Mike Murphy in March 2006, Zuckerberg told him, "I don't hate
all advertising. I just hate advertising that stinks.") Even COO Van Natta,
a hard-charging industry veteran, had swallowed hard and accepted
Zuckerberg's dictate that advertising should always be useful for the user.
Though his mandate was revenue, he had taken to saying things like "We
almost shouldn't be making money off of it if it isn't adding value."
Chase credit cards was an important pioneer. Working with a small
New York ad agency called Noise Marketing, it created the Chase +1
card, specially designed for college students and only available to Facebook
users. The card was black, because that's what students said they
wanted. It offered something Chase called Karma points, which you
could redeem for modest rewards like concert tickets. But unlike most
rewards cards, you could accumulate points without spending large
amounts. That made sense for students because they typically make
only small purchases. Each purchase, no matter how small, garnered
twenty points. You also got points for joining Chase's sponsored group
on Facebook, as well as for taking an online course on how to manage
your credit. And Chase made its card "social." You could give your
Karma points to your Facebook friends.
A week after the program launched, 34,000 students had already
joined the group, and Chase soon issued thousands of cards. The bankers
were pleased, and Facebook had taken an important step toward
proving that customized advertising could work.
A few months later, Procter & Gamble tried something similar. Its
CEO, A. G. Lafley, had begun talking about the need for P&G to get
closer to its consumers. After reading about this, Facebook ad salesman
Colleran did one of his masterful cold calls to find out if P&G was targeting
any of its brands at the college market. It turned out that while
P&G7s Crest White Strips teeth-whitening product had never been
aimed specifically at college students, company data showed that the
strips sold particularly well at Wai-Marts located near campuses. Colleran
and P&G marketers came up with a Facebook campaign called
Smile State.
Much as Chase and Apple had done, P&G created a sponsored
group on Facebook for Crest White Strips. It advertised the Smile State
group only to users who were students at one of twenty large state universities
located near Wai-Marts. Any student who joined got tickets to
an upcoming college-oriented Matthew McConaughey movie called
We Are Marshall. In addition, the schools that enrolled the most members
in the Crest White Strips group got a concert organized by Def Jam
Records. Over 20,000 people joined. To have 20,000 people explicitly
expressing affinity for Crest White Strips using their real name is the
kind of thing that gives marketers goose bumps. It was a huge win for
P&G and for Facebook.
Zuckerberg remained uninterested in advertising that interrupted
the Facebook experience and distracted users' attention, no matter how
lucrative it might be. In May 2006, Sprite was relaunched with new
packaging and a tongue-in-cheek ad campaign aimed at young people
that was meant to be brash and obvious. The soft drink's ad agency
offered to pay $1 million for a banner ad that would turn Facebook's
entire home page green for one day. Zuckerberg didn't even consider
taking the money. Nor was the CEO interested in impressing people
to get their business. The first time the top executive of a big San Francisco
digital ad agency visited Facebook, he ran into Zuckerberg, who
was barefoot and wearing NBA basketball shorts that hung below his
knees.
Most advertisers were still uncertain what exactly Facebook was,
not to mention how to take advantage of it. But in June the world's
third-largest ad agency declared itself in Facebook's camp with a dramatic
gesture. The Interpublic Group committed to spend $10 million
on Facebook ads over the coming year on behalf of its clients. As part
of the deal the ad giant also bought half a percent of Facebook's stock.
"Young and tech-sawy consumers are increasingly shunning traditional
media vehicles and defining themselves and their community online,"
Interpublic CEO Michael Roth said in a statement. He also noted that
65 percent of all U.S. college students by now were maintaining a Facebook
profile.
In August, Facebook got another major acknowledgment—this time
from a titan of the tech industry. First, MySpace announced a major
three-year, $900 million deal with Google to operate a search function
inside MySpace and to place advertising there. It was such a large
deal that by itself it turned Murdoch's investment in MySpace profitable.
It was the second time a huge MySpace transaction shed reflected
glory onto Facebook. The first time—when Murdoch bought it—it had
made Facebook look valuable. This time it made Facebook ad inventory
look like a gold mine.
COO Van Natta and newly hired Vice President of Business Development
Dan Rose, whom Van Natta had hired from Amazon, had
already begun talking with the companies with the biggest online display
ad operations—Google, Microsoft, and Yahoo. Facebook already
had a small deal with Microsoft's MSN online division to sell ad space.
Nothing motivates Microsoft like the desire to best Google. A day
or so after the MySpace-Google deal was announced, Rose called up
Microsoft, knowing the software colossus had battled for the MySpace
deal and lost.
Rose immediately got a positive reaction to his inquiry. Yes, the Microsoft
executive he spoke to said, he would love to talk about a similar
deal with Facebook. "What are you asking for?" he asked. Van Natta
and Rose huddled and quickly came up with what they thought would
be a juicy deal. They proposed that Microsoft use its ad sales network
to represent Facebook's banner ad inventory and guarantee a certain
CPM for every ad it placed. They didn't even get an argument. "Okay,
we'll be down there tomorrow to iron it out," said Rose's eager Microsoft
counterpart. It took some work to finalize the details. Says one Microsoft
negotiator: "Mark was adamant about preserving the user experience
and the layout. It drove our ad people crazy because it made it very
hard to deliver standard Internet ad units."
It was a transformative deal. Facebook now had a large and lucrative
new revenue stream. Instantly Microsoft turned 2006 from another
money-losing year for Facebook into a highly profitable one. A
few months earlier, Viacom's Wolf had been shown internal projections
aiming at $22 million in 2006 revenue, but Facebook ended up at
least doubling that. Microsoft's payments accounted for well over half
of company revenue for 2006. For 2007, the Microsoft deal guaranteed
Facebook $100 million in revenue.
Perhaps Zuckerberg's CEO lessons were paying off. He was letting
the experienced Van Natta play a role not unlike the one Parker had
played earlier—serving as Mr. Outside and building the business, letting
Mark focus on improving Facebook's product. Van Natta was managing
bigger and bigger deals with partners like Interpublic and Microsoft.
The executive team—purged of some of Robin Reed's hires—was coalescing.
Though her in-house recruiting stint had been extended more
than once, by now she was gone. The team didn't want to admit it, but
she had helped the company grow up.
Viacom had abandoned trying to buy Facebook, but his talks with
Michael Wolf had taught Zuckerberg a lot about deals and about how
the media industry works. That would serve him well in the coming
years. And inside the company he seemed more like a leader.