The Facebook phenomenon
Commentary: Of virtue, value and newly minted verbs
By Bambi Francisco, MarketWatch
Last Update: 12:02 AM ET Oct 27, 2005
(Editor's note: Bambi Francisco's Net Sense column will now appear twice a
week, and she's just launched a weekly video product highlighting key
interviews, The Bambi Francisco Files.)
SAN FRANCISCO (MarketWatch) -- Move over, Google, there's a new verb in
town, and I'm not referring to Skype.
Apparently, about 4 million college students across the country are
"facebooking" their classmates, whether to connect with them or just get
more information about them.
Yes, "facebook" has officially -- in this column -- become a verb, much as
the Google (GOOG) name became the verb "to google," which is used to
describe the act of searching, or eBay's (EBAY) Skype lent its name to a
verb used to describe voice-over-PC calls, and Yahoo (YHOO) is employed to
describe the act of doing anything on the Web, according to Yahoo's
marketing minds and its dolphin mascot's famous words: "Do you Yahoo?"
OK. This column is not about the changing lexicon to describe our peculiar
behavior thanks to the Internet. Rather, it is about how valuable this
particular company -- Facebook -- has become, and whether it's one that will
be embraced by big media companies like News Corp. (NWS) or Viacom (VIA).
Already, these two companies have shown some interest in meeting with young
Mark Zuckerberg, the 21-year-old Harvard dropout who started Facebook in his
dorm in February 2004, and came into MarketWatch's San Francisco TV studios
recently for an interview.
Wearing mesh shorts and an orange T-shirt adorned with the words, "My mom
thinks I'm cool," Zuckerberg looked as if he'd just gotten off the
basketball court.
"Thanks for dressing up for the occasion," I said.
Zuckerberg is one of those guys you're inclined to like immediately. He
reminds me of Todd Masonis and Cameron Ring, who started Plaxo, a company
that's trying to automate our address books. Just like Zuckerberg, they're
young guys with real passion for doing something cool and useful.
Zuckerberg started the Facebook - essentially an online student directory --
while he was a sophomore at Harvard. The psychology major tells me that it
took about 10 days -- during finals -- for him to build the site.
He paid $85 a month for three months to run his tiny operation. But things
improved -- and his site was a hit on his own campus. He decided to take a
leave from Harvard his junior year and move to Palo Alto, Calif.
If the Facebook doesn't work, he said, there's always Harvard, a fallback
notion that Microsoft Bill Gates turned on its ear last year on a visit to
Cambridge, Mass. "'I encourage you guys to take time off and do something.
... 'If Microsoft ever falls through, I'm going back to Harvard,' "
Zuckerberg recalled hearing Gates say.
In the fall of 2004
former-PayPal-CEO-turned-hedge-fund-manager-and-angel-investor Peter Thiel
-- whose fund is up 60%-plus this year -- gave Zuckerberg $500,000 to buy
servers to support the growing audience base at Facebook. Thiel told me it's
one of the best, if not the single best, venture investments he's made.
By 2005 Zuckerberg had raised $12.7 million from venture capitalists, with
Accel Partners leading the funding round. Washington Post's chairman and
CEO, Donald Graham, was considering investing, as well. "Graham was
interested," said Zuckerberg, "but Accel gave us a better offer."
It was almost too much money for Zuckerberg, but the venture capitalists
weren't just willing to give him $5 million, he said. Facebook attracted a
valuation of about $100 million.
Of course, that seems quite reasonable given the seemingly inflated Internet
media prices these days. (Google is now worth $100 billion in market value,
which is more than Time Warner (TWX), twice as large as Walt Disney (DIS),
and nearly 40% the size of Microsoft (MSFT).)
You can apply the 20-plus times forward cash flow to the Facebook to get a
valuation, but it's unclear how much the Facebook makes. Zuckerberg only
told me that the fee site is profitable and makes money from advertising. (I
placed an ad on the site which cost me $80 for three days.)
Free is one reason the Facebook is fast becoming as popular as MySpace. The
other is humanity's obsession with who's who.
With 8.5 million unique visitors on its site, the Facebook attracts about
half of MySpace's unique visitors, according to comScore Networks.
And, the Facebook users spend more time on the Facebook than on MySpace, a
critical measure for advertisers seeking to place ads online. About 70% of
the nearly 5 million registered users log on daily.
Big media vs. new media
Now that Intermix, which runs the Facebook competitor MySpace, was just
snapped up for $580 million by News Corp, the Facebook is looking a lot more
valuable these days.
"We'll talk (seriously) to people soon," Zuckerberg said. But that doesn't
mean he hasn't already been contacted. At the beginning of October,
Zuckerberg met with Larry Kramer, my former boss and the founder of
MarketWatch, which he eventually sold to Dow Jones last year for half a
billion. Kramer is now at CBS, building up CBS's Internet network.
Zuckerberg also recently met with Fox Interactive Media head, Ross
Levinsohn. "The first thing Ross said to me was, 'It's really fast,'"
Zuckerberg recalls. "The site that is," he added, with a hint of frustration
about his view of media and what media means to the older-generation.
"They're run as traditional media companies," he said. Silicon Valley
companies are run differently because engineering is a higher priority, he
said. By the way, Zuckerberg isn't an engineer. He's studying psychology - a
very good background for any company during this swiftly changing Internet
world. In traditional companies, you move up the ranks if you're in
marketing or advertising, he said. At least at a lot of companies, "that's
their [the CEOs] formal training."
MySpace is run as an L.A. company, he said. He recalls meeting with Chris
DeWolfe, MySpace CEO. DeWolfe saw the selling of his company to a big media
company as a natural progression for his relatively small media property. (I
heard the next step for DeWolfe is to launch a MySpace music label with
Interscope Records.)
Zuckerberg doesn't agree entirely. His philosophy, which I also concur with,
is that technology and engineering should be considered a big priority at
today's media companies.
And, he's not entirely sure that's the case with the media companies out
there. "We're not producing media in a traditional sense," he said. "We're
data mining. ... We want to take an engineering approach," said Zuckerberg.
Indeed, if we are entering the age of "My Media" and not Mass media, as
Yahoo CEO Terry Semel has said, the audience is either the producer of
programming or the audience certainly gravitates around a particular niche
subject. They want to build community around what they're consuming. That's
exactly why the Facebook was likely successful, said Zuckerberg. The
Facebook is very local, he said.
"What drives the site is an offline dynamic and culture around it." What he
means is that the Facebook communities revolve around a particular school.
He can walk out into the school grounds and see everyone he knows in the
Facebook. It's a closed community in some sense. MySpace is open and
anonymous, meaning people connect from across the country and they don't
have that offline connection like the Facebook has, he explained.
Asked whether MySpace competes with the Facebook or whether they're
complementary, he said they do and don't.
Their user base doesn't really overlap, first of all. The Facebook's users
are mostly college, some alum and a few high school students. MySpace is
mostly high school and college grads. But one potential problem is that the
CEOs are quite different. Zuckerberberg is young and idealistic while
DeWolfe is a bit of L.A.
What happens after college?
Still, Zuckerberg, his 40 employees, and his money backers, have some
decisions to make. It's a hot market for Internet properties and, if
Friendster is any guide, it's also difficult to maintain a lead in this
rapidly changing media business. What happens when the Facebook saturates
the 8 million college-student market?
Zuckerberg won't give away his secrets. So, let me just say: I wish him good
luck, and there's always Harvard.
