The Facebook phenomenon

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.