Incorporated: 2004 as Facebook, Inc.
Sales: $100 million (2007 est.)
NAIC: 513390 Other Telecommunications; 519130 Internet Publishing and Broadcasting and Web Search Portals; 541890 Other Services Related to Advertising
Facebook, Inc., runs a leading social networking web site, Facebook.com. Initially launched by undergraduates at Harvard University for college students, the site was soon expanded to include alumni in the corporate world as well as high school students. Membership was opened to anyone with a valid e-mail address in 2006. Facebook seeks to emulate real-life connections by structuring networks around schools, corporations, and geographic regions. A user's full profile information is available only to other users who are somehow connected. The resulting "social graph" is what makes Facebook a billion-dollar idea; the company has turned down acquisition offers worth at least $800 million. A news feed feature, controversial at first, allows sponsors to push ads to highly targeted audiences in ways never before possible. The value of online connections that imitate those in real life is also reflected in classified advertising and peer-to-peer lending services. Global searches of all registered users are not possible, limiting the possibilities for SPAM and other abuses.
Facebook began in 2004 as a kind of online directory for undergraduates at Harvard University. Mark Zuckerberg, the son of a dentist, was the driving force behind the company and served as its CEO. He was joined by his Harvard roommate, Dustin Maskovitz, as vice president of engineering, and former schoolmate Adam D'Angelo as chief technology officer. (A handful of other students sued Zuckerberg for allegedly stealing their idea; the case took years to work through the courts.)
Facebook was not Zuckerberg's first attempt to aggregate student information. In a scene reminiscent of War Games, Zuckerberg had earlier hacked into the university's computers. Instead of changing his grades, he downloaded pictures of undergraduates for his own "Hot or Not" style web site called Facemash, which invited browsers to rate the photos on their relative attractiveness. Instant notoriety followed, and Harvard pulled the plug on the site within hours, according to Fast Company.
After being censured for purloining images from the student records, Zuckerberg set up a site that allowed the students themselves to upload their photos and personal information. Called thefacebook.com, it debuted on February 4, 2004, and proved instantly popular. Within months, other colleges were being included, and advertising money began to trickle in.
Facebook was registered as a Delaware corporation in July 2004. Zuckerberg had just finished his sophomore year and was a still a teenager. According to Fast Company, while staying in Palo Alto on summer vacation, Zuckerberg met Napster cofounder Sean Parker, who introduced him to Peter Thiel, the founder of PayPal. Thiel became an early investor in Facebook. Zuckerberg decided to take some time off from his studies to grow the new enterprise. Facebook exceeded one million users by the end of the year. It was, noted Fast Company, being run from rented rooms with open source (MySQL) software.
A UNIQUE MODEL
According to the Economist, Zuckerberg saw himself as a kind of cartographer of human relationships. Facebook users communicating with each other could see how they were connected through other users, resulting in a "social graph." Part of Facebook's appeal was its exclusivity, although the budding enterprise soon grew beyond the Ivy League. To register with it, early users needed to provide an e-mail address with the ".edu" suffix designated for the world of academia.
Facebook later broadened its membership to include high school students and employees of certain large corporations. The aim was to allow recent alumni to maintain their connections and open the doors to the next generation. These changes seemed to go over well; the college age users understood wanting to remain on the site, which most used on a daily basis, after graduation, and many had younger relatives still in high school.
EMBRACING WEB 2.0
Facebook added new features to stay relevant in the Web 2.0 world, the generation of interactive web sites designed to make it easy for users to share video, music, and other multimedia content. By the end of 2006, Facebook had worked out a program that allowed Facebook users easily to share links to videos and articles in the online publications of numerous new and old media companies. Facebook then invited hundreds of developers to write programs to enhance the web site. Within a month, a dozen of the applications had attracted a million users or more.
Not all the company's innovations were well received at first. One new feature introduced on September 5, 2006, caused a public relations debacle. This was a news feed that automatically registered changes on users' profiles and disseminated these tidbits to their friends. Although this involved only information that was freely available within individuals' networks, many protested the automatic gathering and distribution as too invasive. Programmers worked around the clock to strengthen privacy controls related to news feed items. A couple of months later, some paid advertising links were added into the feeds.
A BILLION-DOLLAR-PLUS IDEA
Zuckerberg lined up $12.7 million in venture capital from Accel Partners in the spring of 2005, according to a profile of the founder in Fast Company. Another round of funding in the spring of 2006 added another $25 million. Social networks were the latest hot commodity for tech investors. Friendster had reportedly turned down a 2002 buyout offer from Google, only to watch others steal the spotlight. In 2005, News Corp. bought MySpace for $580 million; YouTube went to Google in late 2006 in a $1.5 billion deal.
Fast-growing Facebook was reckoned to be the second largest social networking site, although it had less than one-tenth the user base of MySpace's 100 million. In the summer of 2006, Yahoo! Inc. reportedly offered between $800 million and $1 billion to acquire Facebook. Media giant Viacom, Inc., had made an earlier bid worth $750 million. However, Zuckerberg, said to control 30 percent of shares, stubbornly refused to sell, believing the best was yet to come and likely expecting to fare better when the time came for an initial public offering. Others close to the company supported his optimistic assessment.
Facebook is a social utility that connects people with friends and others who work, study and live around them. People use Facebook to keep up with friends, upload an unlimited number of photos, share links and videos, and learn more about the people they meet.
Facebook had already signed a five-year deal for Microsoft Corp. to supply banner advertising, a deal possibly worth hundreds of millions of dollars per year. Just as MySpace had overshadowed Friendster, in 2006 Facebook appeared to be outpacing MySpace's rate of growth. Nevertheless, a slew of potential competitors continued to emerge, each tailored to audiences ranging from teenagers to Wall Street traders.
OPENING THE GATES
Originally reserved for college students, Facebook widened its membership in stages. In September 2005, it allowed members to invite high school students into their networks. Several months later it opened the rolls to those with e-mail accounts at large employers of recent graduates. In September 2006, shortly after the news feed fiasco, Facebook opened membership to anyone with a legitimate e-mail address. With a measure of exclusivity removed, some observers wondered what would differentiate it from MySpace, the giant of social networking sites. Zuckerberg defended the move by pointing out that individual members still had control over who had access to their personal information. New members outside of institutions such as corporations or colleges were grouped into 500 regional networks.
THE VALUE OF CONNECTIONS
Lending Club Corporation introduced a peer-to-peer lending service for Facebook in May 2007. It allowed members to request loans and fund others' requests. Around the same time, it began offering free classified advertising. Their value was enhanced by the site's built-in network of connections; members placing ads could decide whether they would be limited to close friends or entire networks. The value was obvious to anyone leery of conducting business with strangers.
By 2007, Facebook had more than 20 million registered users. There were a couple of hundred employees and revenues were said to be in the neighborhood of $100 million for the year. Though the privately owned company was tight-lipped about finances, hints in the media strongly suggested it was turning a profit.
- Facebook is launched as a social networking site for college students only.
- High school students are allowed to join as friends of existing members.
- Membership is opened to everyone; five-year ad deal signed with Microsoft.
Facebook ranked as the sixth or seventh largest social networking site. It was on top in some key metrics, according to comScore Media Metrix statistics quoted in Fast Company. It led the country in photo sharing, a capability at the heart of the Web 2.0 challenge. In 2007 the company signed up with Comcast to produce a webcast called the "Facebook Diaries," based on video contributed by users. Opening membership to the general public swelled the membership rolls and shifted the demographics away from the college age crowd. Interestingly, more than one-quarter of users were outside the United States.
Frederick C. Ingram
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