Saturday, November 17, 2007

Facebook networks to next big thing

The social website started by a Harvard dropout is stealing the spotlight from Google.

Facebook CEO and founder Mark Zuckerberg
Facebook CEO and founder Mark Zuckerberg. The online hangout said Tuesday it plans to let companies target their advertisements on the site based on what its users and their friends buy and do on the Internet.

By Jessica Guynn
Los Angeles Times Staff Writer

November 18, 2007

PALO ALTO — Google Inc. is used to being the center of attention, the giant that executives at other Internet companies wish Silicon Valley would shut up about already.

For the moment, they've got their wish. Now people here can't stop talking about Facebook Inc.

Commanding their attention: the social networking site's rocketing growth, cheeky business strategies and staggering valuation.

Microsoft Corp. last month took a small stake in Facebook that valued the company at $15 billion. The deal may have positioned Facebook's 23-year-old founder and chief executive, Mark Zuckerberg, to one day supplant Google co-founder Sergey Brin as the technology industry's youngest self-made billionaire.

Brin, whose company lost the bidding war to Microsoft, downplayed the defeat at a recent gathering for analysts, saying, "We don't feel at a higher level that we need to own everything successful on the Internet."

Maybe not. Google's spectacular success has made it the seventh-most-valuable U.S. company. Still, after years of all-Google-all-the-time, it's Facebook's turn in the spotlight.

Started in a Harvard University dorm room less than four years ago, Facebook spread like wildfire among college students. Last year, it opened membership to the world at large, and the wildfire is still raging. Facebook now has more than 54 million users, second among social networks to Beverly Hills-based MySpace. And it's become a magnet for Silicon Valley engineering talent.

Presidential hopefuls and entertainment heavyweights seek out Facebook's executives. Venture capitalists and software developers stalk its employees in coffee shops and on the site itself. Users post love songs about it on YouTube. Programmers and marketers pack conferences devoted to understanding the site better. Stanford University even offers a course in creating free software for Facebook.

One ex-Googler who recently joined Facebook's ranks called it "that company that shows up once in a very long while," meaning that it is bursting with the creative intensity that set Mountain View, Calif.-based Google apart when it was smaller.

Google wants to organize the world's information, but Facebook wants to connect the world's people. On Facebook, high school and college kids mingle with baby boomers and retirees, squeezing their social and professional lives into minimalist profile pages they load with photos, games, polls and updates on their activities.

Half of them visit the site at least once a day to announce hook-ups or breakups, send friends virtual gifts and cocktails, stump for political candidates or support cancer sufferers, all of which generates an average of 2 billion page views a day.

Facebook has become such an integral part of some people's lives that it's replacing e-mail. That's exactly what Zuckerberg has in mind -- his site as the starting point and focal point of the Internet experience.

On a recent afternoon, the Harvard dropout sat in a Facebook conference room, wearing his uniform of hooded sweat shirt, T-shirt, jeans and Adidas flip-flops. His boyish face, framed by curly brown hair, lit up like a Japanese anime character when he talked about Facebook's potential to transform how people connect.

"The things that are most powerful aren't the things that people would have done otherwise if they didn't do them on Facebook," he said. "Instead, it's the things that would never have happened otherwise."

Like his role models, Apple Inc. CEO Steve Jobs and Google founders Brin and Larry Page, Zuckerberg means it when he says he wants his company to change the world. Despite his young age, he has risen above rivals and confounded skeptics with a string of strategic moves inspired by his goal to make good technology and keep users happy.

He rejected takeover offers that would have netted him several hundred million dollars, girding instead for an initial public offering that investors have said could happen in about a year. He secured $40.7 million in funding from top private investors, plus $240 million from Microsoft.

Zuckerberg keeps a tight rein on his fledgling company, trying to avoid the kind of mistakes made by past Internet highfliers that crashed.

And he waited to milk the site for serious advertising revenue -- until this month, when Facebook unveiled an ambitious plan to harness word-of-mouth advertising and turn users into spokespeople for brands.

Members already alert their friends about the things they love and hate, such as movies, restaurants, clothing and cars. Now advertisers can feast on all the information they share, and even attach commercial messages.

They can do this when users befriend a product on its Facebook page or engage with the product on sites run by Facebook partners. For example, members can tell their pals when they add movies to their rental queue on or sell items on EBay.

Tracking what users do and buy online could help marketers direct more relevant ads to consumers and ultimately sell more. That's one big reason advertisers are likely to nearly triple their annual worldwide spending on social networks to $3.6 billion by 2011, according to research firm EMarketer Inc.

"Users usually perceive ads as the cost they pay to have a free experience," said Mike Murphy, Facebook's vice president of media sales. "We are trying to find ways to create such relevant messaging that it feels more like content, so that users will actually appreciate it and interact with it more."

If users greet marketers with open arms, Facebook could generate "the most valuable data in the history of the media world," Pali Capital analyst Rich Greenfield said.

No one knows if Facebook's audacious bid to compete with search engines for a major share of online ad dollars will click with consumers and marketers. Privacy advocates have raised concerns about the program. It also prompted some tech industry observers to wonder if Facebook was starting to put its financial goals ahead of users' interests -- criticism that Google, too, faced as it matured.

Facebook may be courting the major brands, but so far the one benefiting the most from Facebook is Facebook.

Zuckerberg has assembled an all-star management team amid the energy and bustle of downtown Palo Alto, not far from where Google first rented offices in 1999. Here, Facebook is stitching together four office buildings within a six-block radius into an urban campus to house its more than 350 employees. Zuckerberg plans to double the company's size to 700 employees within a year.

In keeping with the company's focus on people, graffiti murals of faces are sprayed on the walls. Employees dine on free catered food, compete in software hackathons during which they dream up business ideas, and show off hidden talents and inner snark in "Facebook Idol" contests.

The biggest social networking site, MySpace, reflects its Los Angeles roots. It's owned by Rupert Murdoch's News Corp. and prides itself on being a next-generation media company. Facebook, in contrast, is a pure Silicon Valley play, betting its future on developing world-class technology.

Most of Facebook's top executives have technical chops. Even nontechies can enroll in a basic programming course, FB101, taught by a teaching assistant from a Harvard course on artificial intelligence that Zuckerberg once took. That hard-core focus on technology has produced two milestones.

Last year, Facebook created an addictive News Feed feature on profile pages that keeps users abreast of their friends' activities. Dave McClure, an Internet marketing expert who teaches the Stanford course on Facebook, says that innovation ultimately could prove as important to Facebook's success as text ads were to Google.

In May, Facebook began letting outside developers create software and services for its site and keep the proceeds. In just five months, Facebook added more than 7,000 features, including the practical (booking travel), the meaningful (joining causes) and the frivolous (a game in which friends turn one another into virtual zombies).

Google countered last month by launching OpenSocial, designed to make it easier for developers to write software for social networks such as MySpace, LinkedIn and Google's own Orkut.

But in Silicon Valley, where success is rooted in cubicles filled with engineering wunderkind, Facebook is fast becoming the company to beat in the recruiting wars.

Blake Ross, who helped develop the Firefox Web browser, and cohort Joe Hewitt recently sold their sought-after start-up, Parakey, to Facebook and joined its ranks. Benjamin Ling, one of Page and Brin's prized engineers who created the Google Checkout service, defected to Facebook to oversee its software platform.

"We have a culture based on building things," Zuckerberg said. "What attracts people to the company is that it is still relatively small, but you can have a relatively big impact."

That collective drive toward innovation -- and an IPO -- permeates the company, where employees are the biggest fans of the site they are building. Most were Facebook users before they started working there, and they communicate with one another through the site, even in the office. They use internal Facebook applications such as "Where do I sit?" to post company seating charts on their profile pages and match personalities with co-workers through the "Which Facebook employee am I?" quiz.

To help preserve this tightly knit social network, Facebook has a full-time manager of organizational development. And the company offers a $600 rent subsidy to employees who live within a mile of the office.

Zuckerberg himself lives just blocks away and has strong social ties within the company. College roommate Dustin Moskovitz is a co-founder and vice president of engineering. Boyhood friend Adam D'Angelo is a vice president and chief technology officer. Zuckerberg's sister, Randi Zuckerberg, is director of market development.

Nonetheless, Facebook has experienced growing pains. Like other social networking sites, it has been dogged by concerns about users' privacy and safety. Former Harvard classmates are suing, alleging that Zuckerberg stole their business concept.

Even inside Facebook, not all is warm and fuzzy. Employees complained when the company moved to change how paid time off accrued. Another hitch: Facebook's high valuation could undercut recruiting efforts and employee morale because stock options offered to new workers will have a higher exercise price than those held by current employees.

There is little doubt that Facebook will confront a battery of tests in this tightly contested market, which is clearly headed for dramatic growth and change. Its stiffest challenge: translating its soaring popularity into piles of cash without alienating the fickle young Internet users who have championed it. "It's a big gamble," IDC analyst Karsten Weide said.