“What business are we in?”
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 decided 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,” 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-savvy “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 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-to-thirty-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 targeting 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 roommate-turned-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.”
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.
