Making Money

How would Facebook turn its social success into a lasting, moneymaking
business? It was a question that could elicit a surprisingly broad range of
answers even among senior executives at Facebook when Sheryl Sandberg
arrived. Zuckerberg didn't have a good answer, though that didn't
bother him much. But Sandberg, who is a very methodical manager,
was intent on creating alignment among Facebook's leadership. She had
come to the company to turn it into an advertising powerhouse. She
needed all her staff and peers on the M team to work in synch. There
was no question in her mind that Facebook represented one of the great
advertising environments of all time.
The matter was hardly academic, because Facebook needed the
money. It was burning through the $375 million it had raised from
Microsoft, Li Ka-shing, and the Samwer brothers faster than anybody
had expected. Some of Zuckerberg's allies in management had already
concluded it had been an error not to accept a lower valuation, which
would have allowed Facebook to raise a lot more money because so
many more investors would have been willing to buy. The company
had been hiring quickly and was by now paying about five hundred
employees and adding servers to its data centers by the hundreds. Soon
Facebook would also have to build new data centers outside the United
States to accommodate its international growth. It had built a fancy
new cafeteria for employees in a separate building a block or so from
its main buildings, with chefs hired from Google and fabulous food —
all served free. Plans were afoot to move out of the twelve buildings
in which staff was now scattered throughout downtown Palo Alto and
move into one big new space.
After Sandberg had been at the company about five weeks, she deMaking
Money
cided to host a series of meetings to get Facebook's management to
focus on the ad opportunity. Zuckerberg wasn't going to be around,
because he was embarking on a monthlong around-the-world trip, now
that he'd completed his search for a number two. He'd wanted to take a
break for a while. Now was his chance. He traveled alone, carrying only
a backpack, to Berlin, Istanbul, India, and Japan, among other places.
In India he made a brief pilgrimage—by dusty local bus—to the ashram
high in the Himalayas where Steve Jobs and Baba Ram Dass, among
others, have sought enlightenment.
Colleagues believe Zuckerberg timed the trip deliberately, to give
Sandberg a bit of runway to establish her authority inside the company
without his interference. But it is symbolically apt that her meetings
about how Facebook could best turn its vast user base into a powerful
business occurred with Zuckerberg—he of the ambivalence towards
ads —out of town. Never before had executives from across the organization
come together to brainstorm on what people in the Internet business
peculiarly call "monetization"—how to turn all those Facebook
users into money.
The meetings ran from 6 P.M. to 9 P.M., with dinner brought in,
once or twice a week. The first one included a small number of the top
ad-related leaders of the company: Mike Murphy, who headed ad sales;
Chamath Palihapitiya, who was in charge of growth and international;
Tim Kendall, who oversaw the online self-service ad business; Dan
Rose, who managed the Microsoft ad partnership; Kent Schoen, head of
advertising products; Kang-Xing Jin, the engineer responsible for advertising
software (and Zuckerberg's close friend since Harvard days); and
Matt Cohler, Zuckerberg's tousle-haired "consigliere." On the whiteboard
Sandberg wrote, in big letters, "What business are we in?"
These were bull sessions at first, giving everyone a chance to express
their views. As they continued, the meetings grew steadily in size. Word
spread that you shouldn't miss these conversations. Pretty soon the entire
M team and a larger swath of ad people were making it, a total of
fifteen to twenty on a typical evening.
At the time, Facebook's monetization strategies were varied. Microsoft
was selling banner ads, of course, but by the end of 2007, despite
the new international deal, Microsoft accounted for less than 25 percent
of overall revenue. Facebook wanted that figure down even further,
so that it could control its own destiny. The self-service online ads
launched at the same time as the disastrous Beacon were now growing
rapidly. Facebook also had what it called "sponsored stories"—ads inserted
into users' News Feeds that looked like an alert you'd get from a
friend, except that it was from Coca-Cola or another company. Virtual
gifts, a fast-growing but still tiny share of revenue, were little graphic
icons people paid for. For your friend's birthday, for example, you could
buy a little picture of a cupcake with a candle for a dollar. And finally
there was the Facebook Marketplace, a classified ads system, which had
only recently debuted to a lukewarm response from users.
On the whiteboard Sandberg listed the options. Facebook could
be in the advertising business. It could sell data about its users. It could
sell avatars and other virtual goods to those users. Or it could enable
transactions and take a small cut, like PayPal. Staffers researched various
markets and brought carefully compiled charts to the next meeting,
showing the size of each market, its likely growth rate, the big players,
and what Facebook could do uniquely well. After weeks of this, at the
final meeting Sandberg went deliberately around the room and asked
each person what percentage of Facebook's revenue would ultimately
come from each category. Virtually everyone said 70 percent or more
would be advertising in some form.
They all knew Zuckerberg only approved projects that fit into
his long-range plan for Facebook. "Mark is very focused on the long
run," says one participant in the meetings. "He doesn't want to waste
resources on anything unless it contributes to the long run. If you don't
know what business you're in, then anything you do to make money is
a waste, because it might not last." While Zuckerberg had been forced
by circumstances to accept advertising, he did so only so he could pay
the bills. Whenever anyone asked about his priorities, he was unequivocal—
growth and continued improvement in the customer experience
were more important than monetization. Long-term financial success
depended on continued growth, he believed, and even his grand declarations
at the Facebook Ads launch just meant the company would start
seeking new approaches. And the Beacon fiasco had shaken everyone's
confidence.
In order to articulate a business strategy that would fit solidly and
inarguably into Zuckerberg's long-term frame, the conferees at the
Sandberg sessions went further than merely saying ads were it. They
arrived at a crucial distinction to clarify and differentiate Facebook's
opportunity. Whereas Google — Sandberg's corporate alma mater and
the undisputed king of Internet advertising up to now—helped people
find the things they had already decided they wanted to buy, Facebook
would help them decide what they wanted. When you search on something
in Google, it presents you an ad that is a response to the words you
typed into the search box. Very often it's relevant to you and that process
makes many billions of dollars for Google. But the ads you typically
click on there are the ones that respond to what you already know you're
looking for. In advertising-speak, Google's AdWords search advertising
"fulfills demand."
Facebook's, by contrast, would generate demand, the group concluded.
That's what the brand advertising that has long dominated television
does, and that's where most ad dollars are spent. A brand ad is
intended to implant a new idea into your brain —hey, you should want
to spend money on this thing. But such ads have never worked well on
Google. You may find a Canon camera via a Google search ad if you
type the keywords "digital camera" in the search field, but the company
has never found a good way to convince you that you should want a
digital camera. (Google's efforts to find such methods are what have led
it to emphasize, for example, its Gmail service, in which its software
watches words in your emails and displays messages it thinks you might
respond to.)
For all Google's success, it operates almost entirely within a relatively
small sector of the overall advertising industry. Only 20 percent—
at most—of the world's $600 billion in annual advertising spending is
spent on ads aimed at people who already know what they want, Sandberg's
researchers discovered. The remaining 80 percent, or $480 billion
a year, was up for grabs as more and more ad spending shifted to
the Internet.
The long-term prospects for advertising on Facebook looked bright
to this group. The Internet is pulling consumers away from TV, newspapers,
and magazines. And Facebook is taking a disproportionate amount
of that Internet time. It is now where Net users spend the most online
time by far in the United States and most other countries. That, says advertising
marketer Dan Rose, combined with Facebook's unparalleled
ability to target ads based on information about its users, should enable
it to attract more and more demand-generation advertising as time goes
on. Says Rose: "There is an imbalance between where the dollars are
spent and where the audience is spending its time. Those dollars are
going to move online over the next ten years/' Rose was so effective
in the sessions that afterward Sandberg gave him the new title of vice
president for business development and monetization.
Sandberg's eight or so business-model sessions concluded just as
Zuckerberg was returning from his round-the-world vacation. He was
impressed with the group's conclusions. "Now Mark understands that
we have a business model and this is the long-run thing," says one top
ad executive. "So now he's willing to invest."
Zuckerberg explained his ideas about ads on Facebook in detail. At
a subsequent off-site meeting on monetization, he told the group what
made Facebook different from other websites was its ability to help users
have two-way dialogues with one another or with advertisers. "The basic
idea is that ads should be content," he says now. "They need to be essentially
just organic information that people are producing on the site.
A lot of the information people produce is inherently commercial. And
if you look at someone's profile, almost all the fields that define them
are in some way commercial —music, movies, books, products, games.
It's a part of our identity as people that we like something, but it also has
commercial value."
From these discussions with Zuckerberg emerged something Facebook
calls the "engagement ad." It is a modest-looking message from
an advertiser on users' home pages that invites them to do something
right on the page. It might ask you to comment on a video in hopes
that friends will be drawn into the conversation. It might be a product
giveaway. Starbucks has offered coupons for free cups of coffee. It might
enable you to engage in a dialogue with friends right there on the ad.
Or it might enable you to click on the ad to instantly become a fan of a
product's Facebook page.
Soon engagement ads replaced the sponsored story as the main
product sold by Facebook's advertising salespeople. Sponsored stories
are not, in Zuckerberg's terms, "organic information that people are
producing on the site." The new engagement ads became a big hit. In
the first year alone they generated close to a hundred million dollars
of revenue. Facebook charges at least $5 per thousand views for these
ads. With 400 million users viewing their home page many times a
month, those dollars can add up. Moreover, once an advertiser establishes
some sort of connection with a user it gets a tremendous amount
of what Facebook calls "derivative value." Executives say that once a
brand makes a connection with a consumer that leads to an average of
about 200 free additional "impressions"—occasions when people on
Facebook see information about that brand.
"We will never again sell banner ads," says Rose. "Engagement ads
leverage the power of the Internet to enable the marketer to have a dialogue
with the audience. That's very different from traditional banner
ads on the Web. Those do what advertisers have done on TV and in
print for fifty years—intentionally disrupt the experience you are having."
Meanwhile, Microsoft continued to sell such banners for Facebook.
They generated about $50 million in 2009, but the deal ended
in early 2010, with Microsoft getting more involved in Facebook search
in exchange.
But while the company has put great energy into developing and refining
engagement ads and carefully managing its relationship with Microsoft,
the lion's share of its ad revenue is coming from a third source:
self-service ads that smaller advertisers purchase right on Facebook's
site, using a credit card. Anyone can buy them, but these ads are typically
purchased by local businesses.
Facebook gives advertisers more targeting options than most websites
because people overtly and willingly put there a tremendous
amount of information about themselves. They also spend a lot of time
and do a wide variety of activities there, which creates opportunities to
present people with ads. If on Google you buy an ad that displays when
someone types "digital cameras/' on Facebook you display a similar ad
to married men in California who have young children but who haven't
posted any photographs.
For all the importance of advertising, even in the Sandberg sessions
there was another category of revenue that many believed will become
quite large over time. Rose calls it "consumer monetization," meaning
users pay Facebook directly for something, just as they already pay
lots of money to play various games and other applications inside the
service. Facebook was already selling things like virtual birthday cakes
for a dollar, but there are many other ways Facebook could get money
from its users. For example, there might be fees associated with a currency
that people could use to buy and sell things across Facebook,
especially in games. The company is testing such a system already. On
other social networks around the world there is a healthy market in virtual
decorations and virtual statements between friends. Sandberg says
she believes that ultimately 20-30 percent of Facebook's revenues will
come through the sale of virtual goods or the operation of an on-site
currency. Virtual goods sales totaled an estimated $30 million in 2009.
In early 2010 Facebook began putting renewed emphasis on "Facebook
credits," which users purchase from the company and then use
mostly in games, to buy virtual goods. When a user spends the credit,
Facebook keeps 30 percent of its value. Some games have begun using
only this form of payment, replacing a plethora of third-party payment
options that prevailed before. Justin Smith, who runs Inside Network,
the leading analysis firm for Facebook commerce, says he believes such
credits will become a major part of Facebook's future. "The idea," he
says, "is that Facebook will be able to enable new kinds of revenue
growth because users will be more comfortable paying Facebook than
a third party." Smith even believes it possible that the company could
eventually allow users to use Facebook credits for purchases across the
Internet. Even a small cut of such a system might become a significant
source of revenue. Zuckerberg, however, says the company work on
credits thus far has been primarily to make life easier for application
developers on Facebook's platform. "Our intention is not to be profiting
off of this anytime soon/7 he says. "Over time, if it becomes a widely
used thing, it could be a good business."
Facebook now sits squarely at the center of a fundamental realignment
of capitalism. Mark Zuckerberg, as a man of his generation, has understood
this intuitively since he launched Facebook at Harvard. Marketing
cannot be about companies shoving advertising in people's faces,
not because it's wrong but because it doesn't work anymore. The word
advertising is no longer really the right word for what's going on at Facebook.
It is merely a useful shorthand, as in the Sandberg sessions, to
refer to a process in which companies spend money to get people more
interested in their products.
But marketers can no longer control the conversation. It first became
evident that consumers were becoming publishers when blogs emerged
in 2001 and 2002. The audience was starting to create the media. Now
Facebook is enabling that trend to broaden to even the least tech-sawy
"consumer." Users get their own home pages and the tools to send messages
and create and forward content. Much of that content is about
commercial products and services. Anyone can also now create a Facebook
page for any purpose.
Consumer spending is the engine that drives every modern economy.
But "the consumer" no longer just consumes, as Facebook makes
evident. Increasingly the people are in control.
"Brands are already on Facebook whether they like it or not," says
Tom Bedecarre, who heads San Francisco's AKQA, the largest independent
digital advertising agency, and an ardent fan of Facebook. "Whatever
people hate or love they will start groups or pages about, and post
messages about." One marketing tool often used by Facebook ad sales
boss Mike Murphy is to search Facebook's database when he's trying to
sell ads to a company, so he can demonstrate how enmeshed it already
is on Facebook. For a well-known company like McDonald's, for instance,
the number of mentions is in the millions.
Some companies make ill-fated attempts to squash consumer sentiment.
Canadian coffee-shop chain Tim Hortons responded to Facebook
groups that criticized the company by having lawyers send members
cease-and-desist letters. That had little effect. No lawyer can prevent
someone on Facebook from criticizing or insulting a brand or product.
As Randall Rothenberg, president of the trade group Interactive Advertising
Bureau, puts it, "Conversations cannot be controlled. They can
only be joined."
Rather than interrupting the conversation, the companies formerly
known as advertisers now have to figure out how to create the conversation
on Facebook, or to be part of it. Successful ones help users connect
to each other and communicate. "It's a new kind of exchange of value
for marketers," says Bedecarre. "I'll give you value and you'll have a
better feeling."
Mazda asked fans of its Facebook page to help it design a car for
2018. Design students from all over the world contributed ideas. Ben &
Jerry's ice cream let people tell the company what its next flavor ought
to be. Each time those Mazda or Ben & Jerry's fans write something on
those pages, a message is posted on their profile that goes into friends'
News Feeds. Consumers are sending messages to their friends that benefit
the marketer. That's how the flavor program, developed by marketing
firm Edelman Digital, enabled Ben & Jerry's to increase its fans
from 300,000 to a million in just six weeks. The campaign in both cases
began with engagement ads on Facebook's home page.
Facebook users often get something concrete as they're being marketed
to. In effect they are receiving some of the compensation that
would otherwise have gone to a TV station or newspaper in the past.
Starbucks has given away coupons for free cups of coffee. Ben & Jerry's
has given away ice-cream cones. Giveaways have worked for marketers
seeking to reach business customers, as well. AKQA helped client Visa
create the Visa Business Network for small businesses on Facebook.
Visa gave each company that signed up $100 worth of Facebook advertising.
Several hundred thousand did.
Some consumer-oriented companies now put less emphasis on
their website and more on their Facebook page, where they can host a
wide variety of Facebook applications and where actions of fans get virally
projected to their friends. Vitamin Water, for example, has begun
to direct consumers to Facebook.com/vitaminwater from its TV ads and
from banners placed elsewhere around the Web. Gap displays the address
of its Facebook page on billboards.
The relationship between people and companies will continue to
evolve rapidly on Facebook, and will most likely yield some startling
developments. There's growing evidence that by enlisting consumers
into the very process of conceiving, designing, and even building
a product, companies can reduce their costs, create products people
want, and engender customer loyalty. Facebook can be seen as a giant
collaborative network. It is the perfect platform for such innovation.
The competitions from Ben & Jerry's and Mazda pointed the way, but
in 2009 a small film company called Mass Animation, working closely
with Facebook staffers, took the idea considerably further.
It produced an animated film created by the users of Facebook.
The five-minute film, titled Live Music, includes segments contributed
by fifty-one different people from seventeen countries, including Kazakhstan
and Colombia. Some were as young as fourteen. Mass Animation
created a storyline, soundtrack, and first scene, which established
the film's graphic style. Its Facebook page attracted 57,000 members,
17,000 of whom downloaded special software. Members of the page
voted to determine which segments should be included in the film.
Winning contributors received $500 and acknowledgment in the film,
which Sony distributed to theaters in late 2009 as the opener for an animated
feature. "Social networking is becoming social production," says
Don Tapscott, an author who wrote both Wikinomics, about new forms
of business collaboration, and Grown Up Digital, about young people
and technology. "This is not just about friendships. This is changing
the way we orchestrate capabilities in society to innovate, and to create
goods and services."
Facebook is the most targetable medium in history. Advertisers want
to show their ads to the people who are most likely to respond. On
the Net, until Facebook came along they had to hire services to laboriously
and expensively follow users' digital footprints across the
the facebbok effect
Internet, attempting to infer their gender, age, and interests by where
they visited and what they clicked on. But on Facebook users are
forthcoming with accurate data about themselves, because they are
confident the only people who will look at it are those they approve
as their friends. "Facebook has the richest data set by a mile," says
Josh James, CEO of Omniture, a big Internet ad-targeting service that
works with Facebook. "It is the first place where consumers have ever
said, 'Here's who I am and it's okay for you to use it/" Sandberg says,
"We have better information than anyone else. We know gender, age,
location, and it's real data as opposed to the stuff other people infer."
The inferential targeting used by advertisers on the rest of the Web is
frequently wrong, she says.
Users on Facebook do volunteer vast amounts of data about themselves,
and then generate even more through their behavior on the site,
by interacting with other users, on groups and with pages. Facebook
tracks all this in its database and uses it to place advertisements. Facebook's
policy is not to look at any individual's data except to ensure it
does not violate the service's rules. It says it never shares the actual data
with advertisers. Facebook just lets advertisers use the aggregated data to
select from a vast menu of parameters to target ads at precisely the type
of person they are trying to reach.
Anybody can pick through endless combinations on Facebook's
self-service ad page. You can show your ad only to married women aged
thirty-five and up who live in northern Ohio. Or display an ad only to
employees of one company in a certain city on a certain day. (Employers
aiming to cherry-pick people from a competitor do this all the time.)
Customers for Facebook's more expensive engagement ads can select
from even more detailed choices—women who are parents, talk about
diapers, listen to Coldplay and live in cities, for example. "That targeting
pure and simple is the driver of what we're able to do today, and why
we're growing," says Facebook's Rose.
I am a baby boomer and list many musicians I like on my profile.
So I frequently see an ad on Facebook for a USB turntable that converts
old vinyl records to digital MP3 files. The advertiser targets music lovers
my age because we're likely to own a lot of records.
The knowledge Facebook has about its users enables it to help advertisers
with market research. Say a company is deciding what music to
use in a TV ad. Facebook can survey the profiles of all the people who
are fans of that advertiser's page and report what music they are most
likely to listen to. If you buy an engagement ad, Facebook can tell you
the exact demographic breakdown of the users who clicked on it. "I can
tell an advertiser, for example, that while it thought its audience was
eighteen-to-twenty-four-year-old women, they are actually nineteen-tothirty-
eight-year-old men," says Facebook ad boss Mike Murphy, "and
they like football and these are their three favorite movies. If you want to
reach these guys, here are their favorite TV shows. You can build your
entire media campaign around the data we provide you. It's an asset you
couldn't buy anywhere else on the planet." Now the company is working
with a service called Nielsen Homescan to correlate data Nielsen
collects about product purchases in thousands of American homes with
the Facebook behavior of those residents. Advertisers will be able to see
which ads Facebook users saw and which products they bought. That
sort of data has existed for a long time for television. If Facebook can
demonstrate it is at least as effective, advertisers will become more eager
to be there.
Facebook's ability to marshal all that user-reported data makes
some believe it can make a lot of money. "Facebook has the opportunity
that Google only wishes it had—the ability to build a credible
proposition for the largest brand advertisers," says Alan Gould, who
runs ad-measurement firm Nielsen IAG. "Now Steve Ballmer's valuation
doesn't look so silly." "I believe Facebook is going to fundamentally
change marketing and become a monster business," says Mike
Lazerow, CEO of Buddy Media, which builds promotional Facebook
applications and pages for companies. "When you combine four hundred
million people with data about not only where they live, but who
their friends are, what they're interested in, and what they do online —
Facebook potentially has the Internet genome project."
So far there has been little resistance among Facebook's users to
using their data to target ads to them. But it could be where the privacy
challenge becomes greatest. It's easy to imagine how some error of tarthe
facebook effect
geting or other clumsiness could lead to a major ad backlash that sullies
the company's reputation.
Not that there haven't been problems. In this world of marketing
centered on the likes and dislikes of actual people, the biggest danger so
far has been that users would appear to endorse or to initiate the transmission
of messages that they actually disapprove. One man named
Peter Smith from Lynchburg, Virginia, noticed in July 2009 a Facebook
ad reading "Hey Peter—Hot singles are waiting for you!!" Next to it was
a photo of an attractive, smiling woman—who happened to be his wife.
It turned out Cheryl Smith played games on Facebook. She had given
a game permission to access her data, through the opaque process Facebook
uses to connect users to applications. The game company used a
third-party network, which displayed ads inside the game.
Apparently the ad network appropriated her picture from inside
the game and affixed it to the dating ad. The ad network that stole the
picture was violating Facebook's rules and was banned. Facebook subsequently
clarified its advertising guidelines to make clear that such
sharing of user data is not allowed. But as people interact with applications
and use Facebook in a larger variety of ways it has become increasingly
harder for the company to police how user data is handled. More
mistakes are bound to happen.
In the months after Sandberg arrived at Facebook, the company's leadership
went through a fundamental realignment. There was a string
of departures. Owen Van Natta was the first to go, not surprisingly. It
was obvious that no matter what happened, with Sandberg's arrival he
wasn't going to get a shot at CEO. Within a year Van Natta became
CEO of MySpace (though he lasted there less than a year).
As Sandberg settled in and refocused Facebook on its fundamental
opportunity in advertising, Zuckerberg's founding team—the young
posse who had helped him create Facebook—-also began to disperse.
Matt Cohler, his "consigliere" since early 2005, left to join prestigious
Benchmark Capital and become a venture capitalist, something he
says he'd always wanted to do. He remains close to Zuckerberg. Adam
D'Angelo, Zuckerberg's Exeter chum who has come and gone from
Facebook several times, left again to start a new company called Quora,
and took top engineer Charlie Cheever with him.
But most striking was the departure of Dustin Moskovitz, Zuckerberg's
right-hand man since the very beginning, and still one of the
company's largest shareholders, with about 6 percent of the stock. Moskovitz,
like D'Angelo, remains close to Zuckerberg. Moskovitz left to
start his own Internet software company called Asana, an idea he'd been
mulling for a long time. He aims to build Facebook-connected online
productivity software for businesses, competing with Google Docs and
Microsoft Office, among others. It's a big and ambitious vision. He says
he thought for a long time about whether he could stay at Facebook
while pursuing this new idea, but concluded it would be a distraction
for the company.
The influence Moskovitz wielded as the self-taught roommateturned-
CTO inevitably waned as the company passed one thousand
employees and everything became more professional. There was a long
time when he jointly controlled the direction of the company. But as
it grew, Zuckerberg's authority grew along with it, and Moskovitz's diminished.
Despite his large stockholdings he cannot have the impact he
once did. "There are just disagreements about the direction the company
goes in," says one friend of both men, "and when you've got someone
who has sole authority, those disagreements are irreconcilable." It
also made sense for Moskovitz to start Asana outside the company because
Zuckerberg has repeatedly shown he has little interest in adding
features that make Facebook more useful in the workplace.
In each case, Zuckerberg's close friends—and they all still call
themselves that—say they didn't leave because of any fundamental conflict
with Mark. D'Angelo says he is just not suited for large organizations
where compromise is constantly required. He says he remains very
attached to Facebook but got frustrated with the bureaucracy he had to
deal with every day. Zuckerberg "just has a lot more tolerance for that
than someone who doesn't feel like it's their company," D'Angelo says.
Chris Hughes, the other co-founder, who had left the company
earlier, is more blunt. He thinks Zuckerberg's friends, most of whom
he's in touch with, have left in part because, like him, they got fed up.
"Working with Mark is very challenging/' says Hughes. "You're never
sure if what you're doing is something he likes or he doesn't like. It's so
much better to be friends with Mark than to work with him."
The CEO is a tad melancholy about the departure of his boys. He
says he was upset when Moskovitz first told him he wanted to go, a year
before he actually left. By the time it happened Zuckerberg was resigned
to it. As for Cohler and D'Angelo, Zuckerberg says, "I wish we'd
been able to figure out a way to continue finding them roles."
Bringing in Sandberg as number two had little to do with this posse
heading for the hills, but Moskovitz, for one, hasn't signed on to the
enthusiastic consensus that emerged from the Sandberg sessions. He responds
with typical directness when I ask him about Sandberg's impact
on Facebook. "Positive overall for sure," he starts out. Then he continues,
equivocating. "It's hard for me to be too positive, because I do feel
like her role is in conflict with what I think the natural course of the
company is. At the same time, I very much understand. But I am a huge
believer in investing as much as possible into the product, do as little as
possible to provide friction against more people joining or not liking the
experience as much. And that can often be in direct conflict with the
amount of advertising on the page, which is her job responsibility." He
says it's good that she clarified how ads would work on Facebook, but
adds, "I see that as just like a necessary evil, almost." Then he backs off
a bit and concedes, "It's probably the right balance now/'
Despite the consensus that Facebook's business is advertising,
Zuckerberg continues regularly to declare that growing Facebook's user
base remains more important than monetizing it. And both Moskovitz
and D'Angelo continue adamantly to agree with him. "You can make a
dollar off a user today," says Moskovitz, "but if you can get them to invite
ten friends, then you'll make eleven dollars. Facebook's growth is so
exponential that it's really hard to say this is the point at which you start
compromising." D'Angelo also shows little enthusiasm for emphasizing
ads now. "I'm on the growth side, personally," he says. "I mean, if you
think Facebook is going to be around for a long time, which I do, and
you take this approach that we need to get this thing to be everywhere
and get the whole world using it, then to me it's obvious you will make
a lot of money off of a product that the whole world is using every day/7
Zuckerberg's top anti-ad, pro-growth allies have retreated, but he
remains deeply committed to the long-term view. "It's really important
for people to understand that what we're doing now is just the beginning,"
he says. "The companies that succeed and have the best impact
and are able to outcompete everyone else are the ones that have the longest
time horizon." Board member Peter Thiel has always been another
strong believer in the need to continually emphasize growth. Even at
some points in the company's history when Zuckerberg was focusing on
other matters, Thiel repeated his steady refrain: "Grow the user base.
Grow the user base."
Mike Murphy, Facebook veteran and hard-charging sales guy, concedes
there has been ongoing tension over whether revenue mattered
as much as growth, and that it drove him crazy after he arrived in early
2006. "My level of frustration has decreased dramatically," he says now.
"Mark has never missed a commitment he's made about resources he
would give us." The company has about 260 people devoted exclusively
to ad sales. Before Sandberg arrived, Facebook only had sales offices
in Palo Alto, New York, and London, but in the year following the
Sandberg sessions it opened offices in Atlanta, Detroit, Chicago, Dallas,
Dublin, Los Angeles, Madrid, Milan, Paris, Sydney, Stockholm,
Toronto, and Washington. Shortly the company plans to add more in
Boston, Germany, Hong Kong, India, and Japan. Its international headquarters
is in Dublin.
Sandberg says that a focus on growth does not conflict with a mandate
to raise revenues. "Our goals are, in order: How much does the
world share information? Then, of equal importance, How many users
do we have? And revenue. Those are all really really important drivers
of the whole mission. But you can't do one without the other."
The ad industry is shifting its focus toward Facebook. The number
of advertisers using its self-service online ads tripled from 2008 to 2009.
A 2009 study by the Association of National Advertisers found that 66
percent of all marketers now use social media in some way, compared to
only 20 percent in 2007. Today that mostly means Facebook. The vast
majority of the biggest advertisers in the United States have begun advertising
there. Big clients include PepsiCo, Procter & Gamble, Sears,
and Unilever. And Facebook users are embracing the growing commercial
presence on the site. Pages had about 5.3 billion fans as of February
2010 and about twenty million users become new fans of Pages every
day. Pages with more than 3 million fans include Coca-Cola, Disney,
Nutella, Skittles, Starbucks, and YouTube.
The mood inside the company about Facebook's financial prospects
is bright. Marc Andreessen, whom Zuckerberg asked to join the company's
board of directors in early 2008 (to fill one of the empty seats),
cannot say enough about how big Facebook's business can be. "Facebook
has a springboard to monetization that is as clear as anything I've
ever seen," he says. "Like night follows day. With TV, radio, magazines,
and newspaper revenues dropping, there's $200 billion of ad spending
up for grabs. That money has to go online. And Facebook's just going to
have all this data as a consequence of all the user activity, and it's going
to be able to target against that." Television became the recipient of the
lion't share of ad dollars because that's where consumer attention was
focused. If that attention is slowly shifting to a new medium, as the data
suggests, so will the money.
Sandberg was surprised that Facebook's business did so well during
the recent economic downturn. In the fall of 2008 the company significantly
reduced its goals for growth and cut planned spending. "The
world looked like it was melting down, and I was nervous," says Sandberg.
It seemed inevitable the global recession would hurt Facebook. It
didn't. In an interview in mid-2009, she said, "Our ad rates are basically
holding, in an era when everyone else is dramatically decreasing theirs.
We're just doing better and better and better." The measurement firm
comScore reports that U.S. online advertising is moving to social networks—
they now garner 23 percent of total ads—and that Facebook displayed
53 billion ads in December 2009, or 14 percent of all online ads.
Sandberg's efforts to bring clarity to Facebook's business model are
paying off. She has found her place in this youthful culture. Other top
managers both on and off the record express admiration for how well
she runs the organization, interacts with people, and gets things done.
Now Facebook's numbers are rising rapidly. While Facebook does not
disclose its financials, overall revenues were, according to well-informed
sources, more than $550 million for 2009 —up from less than $300 million
in 2008. That represents a stunning growth rate of almost 100 percent.
The same sources say that the company could exceed $1 billion
in revenue in 2010.
Facebook's improving numbers are fueled especially by its highly
targeted online self-service ads, sold mostly to smaller advertisers, for
all the efforts devoted to larger advertisers are still the lion's share of
revenue. Between $300 million and $400 million came from those in
2009. While the prices Facebook can charge for such ads remain very
low on average, the company displays so many of them that it is becoming
an increasingly good business. Says one well-informed company
insider: "People dramatically underestimate the impact on our revenue
of two interrelated factors—the growth in the number of users and the
growth in usage." Research firm comScore calculated in late 2009 that
the average Facebook user in the U.S.—and there are almost 110 million
of them—spends six hours per month on the service.
The next largest category is engagement ads and other brand advertising
sold directly by Facebook, which probably amounted to about
$100 million. Ads sold by Microsoft represent another chunk—more
than $50 million. Finally, virtual goods and other miscellaneous revenue
accounts for between $30 million and $50 million.
"There has been this myth that everyone's waiting for our revenue
model," says Sandberg. "But we have the revenue model. The revenue
model is advertising. This is the business we're in, and it's working."
Few at Facebook disagree with her now.