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Yahoo Woos a Social Networking Site
Mark Zuckerberg is a member of the Google generation, one too young to remember all the ambitions dashed and fortunes lost when the last dot-com boom ended.
That may be one reason Mr. Zuckerberg, the 22-year-old founder of Facebook, a social networking Web site, has so far shied away from selling his company, rejecting offers that would have made him several hundred million dollars.
“We’re focused on building the company for the long term,” he said yesterday.
When Viacom offered $750 million for Facebook in January, he asked for $2 billion and was rebuffed, according to a person involved in the negotiations. Now, he remains undecided about the latest offer, made in the last few weeks by Yahoo. That offer, first reported by The Wall Street Journal, was confirmed yesterday by two industry executives, one briefed on the deal by Facebook and the other by Yahoo. Both spoke on the condition of anonymity because the negotiations are continuing.
To woo Mr. Zuckerberg, Yahoo has offered about $900 million for Facebook and says it will keep the company somewhat independent, with Mr. Zuckerberg in charge. This has been its model with other acquisitions like Flickr, a photo-sharing site, and Del.icio.us, a social bookmarking service that lets members share lists of their favorite Web sites.
“A lot of people say there are problems with having a 22-year-old C.E.O., but one thing that is good about it is that he doesn’t remember the boom and the bust that followed,” said an adviser to Facebook. “That has distorted the thinking of a lot of people. If they have a good product or service, they sell way too early and they don’t stick with it.”
The adviser spoke on the condition of anonymity because of the sensitivity of continuing negotiations.
Mr. Zuckerberg, through a spokeswoman, declined to comment on any potential acquisition offers.
Money, at least so far, does not seem to draw him. He lives in a barren apartment in Palo Alto, Calif., a short walk from Facebook’s office. He only bought a stereo recently at the request of his girlfriend.
“Mark is the kind of guy you worry needs to get other things in his life,” said David Sze, a partner with Greylock Partners, one of Facebook’s venture capital investors.
By all accounts, Mr. Zuckerberg is motivated by his passion for his invention, which he created less than three years ago as a Harvard undergraduate. The site quickly became an electronic bumblebee, pollinating many American colleges with gossip, flirtation and news of the next fraternity party.
He said the minimalist design sensibility of Google, and also Apple, influenced how Facebook should look.
“I can remember the time when Yahoo was the coolest company, but for me and a lot of people my age, that is how people feel about Google,” Mr. Zuckerberg said in an interview earlier this month.
He also modeled his management style as Facebook’s chief executive on that of Google’s founders — Larry Page and Sergey Brin — as well as Steve Jobs of Apple.
Mr. Zuckerberg keeps tight control over the company’s activities. He still writes some of the site’s program code, designs most of its features and represents the site in public.
And he has been able to keep an unusually high share of the stock in Facebook, giving him the dominant say in its fate.
For Yahoo, an acquisition of Facebook would solve many problems. Yahoo has been trying, with little success, to build its own social networking service called Yahoo 360. Its brand is not seen as relevant by younger people, something the company has been trying to fix. Most of all, its growth has been slowing, increasing the gap between Yahoo and Google, which has become the largest Internet company.
“Yahoo is losing its grip on the younger demographic,” said Jordan Rohan, an analyst at RBC Capital Markets, who said he thought that Yahoo should buy Facebook, even at a high price. “It needs to buy its way out of this.”
Yahoo itself has been inconsistent about its pursuit of Facebook. It made an offer last summer, then withdrew it in July, the day after it announced disappointing second-quarter earnings. And Yahoo, which has prided itself on financial discipline, is still unsure exactly how much it wants to pay for such a small business. Facebook will have revenue of less than $50 million this year, according to two people briefed on the company’s finances, and hopes to take in more than $100 million next year. It has been profitable.
A similar problem faces many large companies these days, both traditional media companies that want to follow their audiences online and older Internet companies that want to reverse their slowing growth. They are interested in buying some of the new crop of Internet companies that have emerged in the last two years. Many of these, from YouTube, the user-contributed video site, to Digg, a news site, have attracted large audiences but little revenue.
In some cases, the larger companies are willing to gamble on growth — as eBay did when it bought the Skype chat service last year for $2.6 billion. But in other cases the asking prices of the entrepreneurs and the offers of their potential acquirers have failed to line up.
For Facebook the key question is whether it will be able to find ways to weave advertising into its site in a way that its audience will accept.
Its larger rival, MySpace, is on a track to do so, spurred on by the News Corporation, which bought it last year. Google recently agreed to pay MySpace at least $900 million over three years to sell text and banner advertisements on its site.
Facebook has recently made a similar but smaller deal with Microsoft. And it is working to create special sections, called groups, for advertisers. But Mr. Zuckerberg’s focus on uncluttered design, like that of Google, is keeping the advertising on each of the site’s main pages far smaller than on MySpace.
Much of Facebook’s hope for growth rests on a planned expansion beyond its core audience in the college market. Sometime soon, it will open up membership to anyone in the world, a change that may alienate its existing members, who have become used to its exclusive college-only atmosphere.
As students returned to campus this fall, Mr. Zuckerberg introduced a new feature meant to give users easer access to what they wanted most from the site. When they log on, they see an up-to-the-minute list of everything their friends have done on the site: made a new friend, posted new pictures, even declared their allegiance to a political cause.
For many users, this took the site, which was already tending toward voyeurism, to an unacceptable extreme. And by the hundreds of thousands, they used Facebook itself to organize a mass protest.
Two days after the changes were introduced, Mr. Zuckerberg came back to a hotel room after a day of press interviews, and at 1 in the morning, made final tweaks on hastily conceived changes to the new feature. The next afternoon, after just a few hours of sleep, Mr. Zuckerberg joined a live discussion with hundreds of Facebook members.
He read their comments while sprawled on a hotel bed, wearing gym shorts and a T-shirt, tapping on a computer while propped up on his elbows. Some members told him they liked the new features or appreciated the modifications, but many expressed their anger in the sort of sharp words the Internet fosters.
“Wow,” Mr. Zuckerberg muttered, as he read one particularly personal comment that began “Mark Zuckerberg is a pretentious Harvard” and ended with an expletive.
“Normally I talk to people, but not everybody at once,” he said. “It’s a bit overwhelming.”
Then after a pause, he added, “It’s neat.”
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Facebook, Riding a Web Trend,
Flirts With a Big-Money Deal
Networking Sites, Start-Up
Is in Talks With Yahoo
September 21, 2006; Page A1
One popular use of social-networking site Facebook.com is to flirt with other members. As it happens, Facebook Inc., the start-up company behind the Web site, has been doing some serious flirting of its own.
People familiar with the matter say the company has held separate acquisition talks with Yahoo Inc., Microsoft Corp. and Viacom Inc. over the past year. Now, say some of these people, the start-up is in serious discussions -- again -- to sell itself to Yahoo for an amount that could approach $1 billion.
![[Zucker]](http://online.wsj.com/public/resources/images/HC-GI721_Zucker_20060920185318.gif)
Behind the pursuit of Facebook is a high-stakes battle by big technology companies to extend their influence on the Internet. Sites like Facebook and rival MySpace have become the Web hangouts for a coveted market: young people. They gather there in large numbers to create Web pages with their own profiles and musings, look for friends, pick up strangers and send messages to each other.
Suddenly, social-networking sites, as they are called, are starting to look like the latest incarnation of the Internet's Holy Grail: an entry point onto the Web, where an owner can sell access to all the consumers that come there. In past years, that search has taken investors and marketers to Web browsers, to "portals" such as Yahoo that assemble a wide array of Web services and to search engines such as Google Inc. (See related article.)
Rupert Murdoch's News Corp. bought MySpace last year for $650 million and quickly set about turning it into a cash machine. The Murdoch empire now uses MySpace to promote music, movies, soft drinks and books, helped by features including video downloads and instant messaging. In August, Google guaranteed MySpace and some other News Corp. sites a minimum of $900 million in ad revenue over the next three and a half years.
The danger of building a business around networking sites -- which also include Friendster, Bebo and myriad smaller players -- is the fickle nature of their consumers. As the Internet has sped up the life cycle of success and failure, it is possible some of these sites will flame out as their young devotees flock to the next thing.
Two and a half years ago, Facebook was a college project run by an undergraduate. Today, in an echo of the 1990s technology boom, it is being chased by large companies with their wallets wide open.
During one series of talks with Microsoft, Facebook executives told their Microsoft peers they couldn't do an 8 a.m. conference call because the company's 22-year-old founder and chief executive, Harvard dropout Mark Zuckerberg, wouldn't be awake, says a person familiar with the talks. Microsoft executives were incredulous.
In an interview, Mr. Zuckerberg declines to comment on any talks. The young entrepreneur says he generally works late -- he recalls eating French fries recently in the parking lot of a local McDonald's restaurant at 3 a.m. -- and doesn't get to work early. "I'm in the office at 10:30 a.m. sometimes," he says.
These days, Facebook is wrestling with whether to sell or stay an independent concern. People familiar with the matter say some Facebook executives have considered following the example of Google, which countered critics and acquirers by going it alone. In the process it became a publicly traded juggernaut with a market capitalization of $120 billion.
"I would never say that at no point in the future would we go public or become part of a larger company...but what I would say is, it's not our priority," Mr. Zuckerberg says. "There's so much more to do here." People familiar with the matter say Mr. Zuckerberg holds a roughly 30% stake in the closely held Palo Alto, Calif., start-up business.
![[Chart]](http://online.wsj.com/public/resources/images/P1-AF792_Facebo_20060920190018.gif)
At some point, the venture capitalists who funded Facebook will want to see some return on their investment. Jim Breyer, partner at Accel Partners, says he and his firm invested around $13 million in Facebook in 2005. "Clearly we have had significant strategic discussions that have covered everything from outright acquisition to major strategic partnerships," he said. Mr. Breyer says his main focus is turning Facebook into a "major standalone business."
Based on online ad sales, Facebook will likely soon top $100 million in annual revenue, say people familiar with the matter. That is a level now considered the minimum for a high-technology initial public offering in today's difficult Wall Street environment for small-stock offerings.
Facebook may have a limited window of opportunity, having built much of its business on young, Internet-savvy students who could in time switch to using rival sites.
The company recently encountered the fickleness of its world when it rolled out features that enabled users to keep track of their friends' activities on the site. Hundreds of thousands of members joined groups protesting what they saw as a privacy invasion. Facebook added some privacy protections, but Mr. Zuckerberg concedes the company "did a very bad job of communicating" details about the original features to users.
Facebook originally limited membership to college students, later inviting high-school students and people who work for certain companies and organizations. Now, Facebook plans to allow anyone with a valid email address to join.
Some teenagers who once embraced social networking have started to shun such sites, saying they have become too popular and commercial. "It's like a bad party, where you've got too many people talking too loud and you can't enjoy yourself," says Carlo Montagnino, a 22-year-old living New York who killed his MySpace profile this summer. Mr. Montagnino says he was sick of reading the innermost thoughts of his 500 online "friends."
"I don't care about the food they ate that day, I don't care about the new poem they wrote, or the pictures of their birthday party," he says.
Facebook says its site is so integral to the lives of college students and others that it has become more like a service such as email, instead of merely a place to chat about parties and find dates.
Mr. Zuckerberg started Facebook while still a Harvard University student in February 2004. The native of Dobbs Ferry, N.Y., intended the site to assume some of the functions of printed "facebooks" with students' photos and contact information. Mr. Zuckerberg added features enabling students to customize their pages and communicate with each other. Members can "poke" each other, a message sent from one user to another that is sometimes considered a form of flirting.
Facebook quickly spread to other universities. By early 2005, the site had 1.6 million monthly U.S. visitors, a number that soared to nearly nine million last month, according to research firm NetRatings Inc. Facebook users spent an average of more than one hour a month on the site in August, a long time by Internet standards and more than double what they spent a year earlier.
As Facebook's popularity swelled, Mr. Zuckerberg, who wears Adidas sandals to work many days, dropped out of Harvard after his sophomore year and moved to Palo Alto. The former computer-science and psychology major quickly set a brash tone, joking with colleagues about Facebook's goal of "world domination" and once distributed business cards that read, "I'm CEO...bitch." A Facebook spokeswoman says the cards were a joke.
News Corp.'s July 2005 announcement that it was buying MySpace raised Facebook's profile among Internet and media industry deal makers. Yahoo, of Sunnyvale, Calif., for one, began negotiating to take a minority stake in Facebook, with a deal that would have given the start-up company a $750 million valuation, according to a person familiar with the matter. The deal never worked out.
Facebook entered discussions with Viacom, of New York, in early 2006 to be acquired for a total that could have exceeded $1 billion if Facebook reached certain targets, say people familiar with the matter. The talks broke down over valuation and other disagreements, according to those people.
Yahoo, meanwhile, continued to pursue its Facebook aspirations. The Web company has roughly 500 million users world-wide but largely missed the boom in social-networking sites.
Around March, Yahoo was weighing a roughly $1 billion offer, according to people familiar with the matter. Facebook's Mr. Zuckerberg met with executives at Yahoo's headquarters in late March to discuss a possible deal.
At one point in the Yahoo negotiations, the talks extended into the weekend, says a person familiar with the matter. Mr. Zuckerberg, this account continues, said he couldn't take part because his girlfriend was in town. Others pointed out they were closing in on a billion-dollar deal. Mr. Zuckerberg said it didn't matter: his cellphone would be off, this person says.
Mr. Zuckerberg says he doesn't "remember anything like that." He adds: "I have a girlfriend; when I'm hanging out with her I tend to not be that engaged."
In April, Facebook announced $25 million in a third round of financing. That valued the company at around $500 million, according to a person familiar with the matter.
Microsoft soon got word that Facebook had suitors and contacted the company, says a person familiar with the matter. Microsoft Senior Vice President Hank Vigil was one of the main drivers behind starting acquisition talks. After several weeks the talks faltered, largely because Facebook told Microsoft it wanted $2 billion, according to one version of events, a number that had been touted by some investors. That was too rich for Microsoft, which was thinking of a figure in the hundreds of millions of dollars, say people familiar with the talks.
Microsoft also faced internal challenges. The talks with Facebook were being driven by Mr. Vigil and the corporate mergers-and-acquisitions team, not its MSN online business. Without full backing of the online group, Microsoft couldn't justify a deal, say people familiar with the talks.
In July, Yahoo formally offered roughly $1 billion for Facebook, say people familiar with the matter. Shortly after, a new batch of traffic numbers for Facebook indicated the site wasn't growing as quickly as Yahoo had expected. At the same time, Yahoo stock fell sharply after it announced a delay in a key corporate initiative. The company dropped its offer closer to $800 million, say people familiar with the talks, which Facebook rejected.
Facebook's whipsawing series of talks took another turn in August when Google announced it had agreed to broker ads for MySpace and other News Corp. sites. The size of the guaranteed revenue spurred Facebook executives to put any acquisition talks aside and pursue a similar deal, first with Google, then with Microsoft. The deal with Microsoft was signed and sealed in less than a week. Microsoft has promised to deliver ads valued at a minimum of $200 million over three years, according to one person familiar with the deal.
Although it has joined forces with Microsoft, Facebook signaled to Yahoo that the advertising deal didn't preclude further acquisition talks, according to people familiar with the matter. The discussions are at an advanced stage, although it appears the two sides still differ about valuation. If a deal goes through, Yahoo could use Facebook to boost advertising revenue and pitch Yahoo services -- which range from email to music and online dating -- to Facebook's young member base.
Mr. Zuckerberg says he isn't focused on making money or using his position at Facebook to become a media tycoon. Still, he has met media luminaries such as Donald Graham, the chairman and chief executive officer of Washington Post Co.
"I do feel like I share a lot of values with folks like Don. He's very into building a long-term business and focusing on that," Mr. Zuckerberg says. He describes Mr. Graham as "a bit of a mentor."
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SEPTEMBER 22, 2006
By Catherine Holahan
Yahoo Keeps Its Eyes on FacebookThe Web portal would love to link up with the social networking site, but analysts question the value of the relationship
Is Facebook really worth $1 billion? Analysts easily agree the answer is yes. Whether it's worth that much to Yahoo!, however, is a more complicated question. The Web portal initially offered Facebook $1.4 billion, according to people familiar with the deal. Talks broke down in July, about the time Yahoo shares lost 20% of their value on news that its new targeted advertising technology would be delayed. Sources close to Facebook say there has been no new deal, but discussions could easily resume. Speculation that a transaction may be in the offing surfaced on Sept. 21, after The Wall Street Journal reported that Facebook and Yahoo are in "serious" talks on a deal. On one hand, Yahoo (YHOO ) or any other owner stands to gain considerably from the acquisition. Independent social networking sites, such as Facebook, have become some of the hottest properties on the Web thanks to an ability to engage the large, young Internet audiences with whom advertisers want to develop lasting relationships. Facebook, which lets users swap photos and other information, was started by two Harvard sophomores in 2004 (see BusinessWeek.com, 3/28/06, "Facebook's on the Block"). It has become a top Web destination, with 14.8 million unique visitors in August, 2006, alone, according to comScore Media Metrix. Of those users, 56.6% were younger than 35.
Traffic like that reels in advertising dollars—just ask News Corp. (NWS ). The company purchased the popular MySpace social networking site last year for $650 million. In August, Google (GOOG) nearly doubled its investment, promising to pay News Corp. at least $900 million for the right to serve search ads to its audience and potentially offer other forms of advertising in the future (see BusinessWeek.com, 8/8/06, "Google Gets Back Into MySpace"). Yahoo also bid on the property but lost out (see BusinessWeek.com, 8/9/06, "Yahoo's Lost Deal Doesn't Spell Doom").
HITTING THE TARGET. Tim Boyd, a research analyst at Caris & Co., says given Google's deal, $1 billion for Facebook is about right. "If you look at what Google paid to be the exclusive provider of advertising, a billion for Facebook looks to be a reasonable price," he says.
The problem for Yahoo is that it may not see the kind of returns from Facebook that Google can reasonably expect from MySpace, which had 45.8 million unique visitors in July, according to Nielsen NetRatings. Google has been wildly successful at luring advertisers with its ability to serve highly targeted ads to online consumers. It made $1.7 billion in net sales during the second quarter of 2006, in part because advertisers trust that it can deliver relevant ads to the right audience (see BusinessWeek.com, 7/21/06, "Google R&D Pays Dividends"). Google can use that trust to cash in on advertisers looking to reach MySpace's demographic.
Yahoo has lagged behind Google in its ability to provide similarly targeted advertising. Its new Panama technology for search-related ads isn't due out until the first quarter of 2007, and advertisers may not be confident that it can similarly home in on Facebook's audience. That's a problem because an increasing amount of the online ad market is moving toward highly targeted advertising. Research firm eMarketer estimates that the market for targeted online advertising will grow from $1.2 billion this year to $2 billion by 2008. The total ad market is expected to reach $17.4 billion this year, according to eMarketer estimates.
DEFENSIVE ACTION. "Google has built tremendous technology—they move very fast and they're very targeted," says Paul Keung, an analyst at CIBC World Markets. Yahoo, on the other hand, has primarily sold ads on the basis of its large reach. "Just by buying this demographic, will advertisers pay them more because they have it?" Boyd agrees, "My opinion is that I don't think anyone is going to monetize things the way Google does. The best that anyone can do is try to prevent Google from gaining more market share."
Defensively, the acquisition makes sense. Yahoo's own social search network, yahoo 360, has failed to take off, and it doesn't want to allow Google or Microsoft's (MSFT ) MSN to control the fast-growing space. "Yahoo's 360 network, where they were trying to do video blogs and other things, never really gained a penetration," says Brian Bolan, an analyst with Jackson Securities. "Facebook really comes in with a standard audience."
However, there's no guarantee whether that audience will remain at its current strength or grow. Though it is trying to expand beyond its college market, Facebook's primary audience is still students—and when they leave college they've traditionally migrated to other sites such as MySpace.
STICKING AROUND. That high turnover means Yahoo would have to labor mightily to ensure Facebook stays hip enough to attract the new crop of college kids, says Keung. "Yahoo is assuming the responsibility of taking that audience that Facebook has today—it doesn't mean that they will capture the next generation," he says. "It has to stay with them when they leave college."
That's a big task. But one that could be necessary if Yahoo is to suceed in expanding its advertising muscle and offering more ad options to various demographics.
NEW YORK (CNNMoney.com) -- Facebook has been getting a lot of attention from Wall Street following reports of a possible deal with Yahoo, but some students say the site is old news.
Yahoo! (Charts) is said to be in serious talks to buy the social-networking site for an amount that could approach $1 billion, The Wall Street Journal reported Thursday. (Full story.)
Investment bankers said the deal could be worth it for Yahoo, which is struggling to keep up with Google (Charts) in the online search race. And Yahoo warned Tuesday that third-quarter sales would be at the low end of expectations due to softening ad sales from auto companies and financial services firms.
"Yahoo is having all sorts of problems these days because their advertising revenue is coming in less than expected," said Richard Dorfman, managing director of Richard Alan Inc., a financial advisory and investment company focusing on the media industry.
"What's beautiful about Facebook is that it's a great place to advertise because it generates the equivalent of online word of mouth. That's a powerful phenomenon," he added.
Closely-held Facebook, founded in February 2004, has more than 9 million registered users and ranks as the seventh-most trafficked site in the U.S., according to comScore Networks.
But more importantly, it is even more popular than MySpace among college students.
"I think ultimately [$1 billion] is a fair price given the example of what MySpace has been able to do in terms of partnering up on different advertising deals," said Jay MacDonald, partner of DeSilva & Phillips, a New York-based investment bank specializing in the media and digital media industries.
MySpace signed an advertising deal with Google in August that should lead to at least $900 million in ad sales for MySpace over the next few years.
According to Tim Boyd, an analyst with Caris & Company, $1 billion does seem like a reasonable price for the social-networking site, based on the assumption that that Facebook is approaching $100 million in annual revenues.
When factoring in Facebook's number of unique visitors, Yahoo would be paying 6 to 8 times what NewsCorp (Charts) paid for MySpace last year, according to Boyd. That is a hefty premium.
But Boyd said in a research note that such a premium is justified considering that Facebook's market of college kids is a very attractive market for advertisers to target.
Still, as Wall Street debates Facebook's worth, younger users are divided on how important the site is in their daily lives.
Lois DiTommaso, a student at Drexel University in Philadelphia, says she has both a MySpace and Facebook account but she uses MySpace more since that site "is more for everyone" while Facebook is tailored more specifically for college campus life.
"Facebook is more nerdy," she added.
Recent graduate Alicia Henry signed up for Facebook in college so she could communicate with her classmates and friends. But she took down her profile soon after graduating from Boston University.
"I joined because not a lot of people did it, and then when it became this big thing...and people were asking you to be your friend, it got kind of silly," Henry said.
But Tufts graduate A. Cartter Evans still swears by the site, although she graduated from school over a year ago. "Many of my friends from college don't use MySpace," she said.
"I love that it is very easy to post pictures in my profile. MySpace has several limitations with the number of pictures one can post as well as the amount of pictures one can post."
The mixed opinions about Facebook's popularity show just how risky the fickle business of networking sites can be. It's also highly competitive, with other admittedly less-popular sites like Friendster, Classmates.com and Bebo, in addition to MySpace, all targeting younger Web users.
Spokeswomen for Facebook and Yahoo declined to comment on the deal speculation.
