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The new face of Facebook

How to win friends and influence people

The social network has turned itself into one of the world’s most influential technology giants, and wants to become ever more powerful

Apr 9th 2016 | SAN FRANCISCO | From the print edition

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A HUGE thumbs-up, Facebook’s “like” symbol, greets visitors at the entrance to the company’s headquarters in Menlo Park, in the heart of Silicon Valley. The imposing sign is crafted from that of a former occupant of the attractive corporate campus, Sun Microsystems, a once high-flying startup that crashed before Facebook moved there in 2011. When employees leave they can see Sun’s name and logo still inscribed on the back of the sign. This corporate memento serves as a reminder of how quickly fortunes can change if tech startups take success for granted.

Not long ago sceptics dismissed Facebook itself as a fad. Having watched its early rivals stumble, many doubted the longevity of another social network and underestimated the ingenuity of its 31-year-old boss, Mark Zuckerberg. An ill-managed initial public offering in 2012—the firm’s share price sank on the first day of trading—seemed to confirm those doubts. But those betting against Mr Zuckerberg were wrong.

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Facebook is now the sixth-most-valuable public company in the world, with a market value of around $325 billion. Facebook claims nearly 1.6 billion monthly users for its social network (see chart 1). Around 1 billion people, nearly a third of all those on the planet with access to the internet, log on every day.

Facebook takes up 22% of the internet time Americans spend on mobile devices, compared with 11% on Google search and YouTube combined, according to Nielsen, a research firm. As a result it has more data about more users than almost any other company in history. It has used that advantage to become one of the most powerful forces in the advertising business. Its revenues have more than doubled in two years, to $18 billion in 2015.

The firm has maintained its dominance by becoming one of the tech industry’s most active acquirers, buying other services that might have lured users away. Since 2012 it has spent more than $25 billion on businesses including Instagram, a photo-sharing site, WhatsApp, a messaging service, and Oculus, a virtual-reality firm. Americans spend 30% of their mobile time with Facebook and other apps it owns (see chart 2).

Facebook has become more like a holding company for popular communications platforms than a social network. But even that description understates Mr Zuckerberg’s ambitions. He is making big bets on the future of communication, mainly messaging services, artificial intelligence and virtual reality. Speaking to The Economist Mr Zuckerberg says that he sees his company as “a mission-focused technology company”. That puts it in direct competition with other tech-industry titans, especially Google.

Faced with the challenge of how to grow when a huge share of the connected globe already uses his products, Mr Zuckerberg is determined to bring the internet, and so Facebook, to people who are not yet linked up. One scheme involves an unmanned solar-powered plane. Such plans are audacious, sometimes controversial and by no means guaranteed to be successful. But Mr Zuckerberg has a history of pushing beyond what most observers thought possible.

I’m liking it

Facebook has reached its position of influence and power by defying three maxims about the internet: that social networks have short lifespans, that it is impossible to make money from them and that mobile advertising is a grim business.

Facebook goes from strength to strength but only narrowly avoided the fate which befell rival services that seemed destined for dominance. Friendster and MySpace fizzled out. Frequent headlines about executive departures in its early days contributed to the suspicions that Mr Zuckerberg was leading his startup to a similar disaster. In 2006 he came close to selling Facebook to Yahoo for $1 billion, but pulled out when it tried to negotiate the price down. Other firms, including Viacom and Microsoft, have also been suitors.

Mr Zuckerberg, however, always had a long-term plan. He spoke about how the service could become a “utility” and talked about the next ten or even 20 years, causing mirth among industry veterans.

That meant ensuring that Facebook did not meet the same end as Friendster, where frequent outages and long page-load times caused users to abandon it. From the start Facebook invested heavily in technology so the site would not go down. It expanded gradually to universities beyond a select group, then high schools and the rest of the world, but only when it felt it had the server capacity to support new users. The firm’s technology infrastructure “is not visible, but that is probably what we have spent most of our time on,” says Mr Zuckerberg.

Status update

The company’s commercial ambitions and professionalism changed markedly in 2008 when Mr Zuckerberg hired Sheryl Sandberg as chief operating officer. An early employee at Google, she had an important role in building the search engine’s ad business. At Facebook she has plenty to play with. The mass of data it has on users is attractive to advertisers, who can target messages to their desired audiences with greater precision than they can through traditional media, such as television.

Facebook has had to adapt to fast-changing technology and the habits of users to reap the rewards of digital advertising. By 2012, when it had built a robust ad business primarily for desktop computers, users started spending more time on mobile devices. This sparked a crisis at the company around the time of its initial public offering. “We had a problem, which was that we had exactly no revenue on mobile,” says Ms Sandberg. Services developed for use on mobile devices, such as Twitter, a live-blogging platform, were reckoned more likely to succeed.

Twitter squandered its advantage. And mobile has proved an unexpected boon for Facebook, which is better suited to smartphones. Last year its advertising revenues were eight times greater than Twitter’s, largely because it has more users who spend more time generating more data. But it is also a result of Facebook’s more settled management. Since it went public Facebook has kept most of its senior bosses, regarded in Silicon Valley as among the best at getting things done—unlike Twitter, which is plagued by dysfunction and turnover at the top. And this stability allowed Mr Zuckerberg to devote more time and money to working out a suitable format for mobile advertising.

Mobile devices lengthen the amount of time people spend online each day, and give advertisers more information with which to target messages, including where users are and what type of device they own (wealthier ones tend to have iPhones). Facebook’s ads appear in users’ newsfeeds, where news from friends and other content is collected. They look like updates from pals, featuring a glossy photo or video of a product.

Facebook has also reached new users in emerging markets, such as Indonesia, where mobile phones are more common than desktop computers. Around a third of Facebook’s active users are in Asia (excluding China, where the service is blocked). Another third are in America and Europe; and the rest are elsewhere around the world. Of the top ten apps in India, Facebook controls three.

Facebook is in such an exalted position because no other company, with the exception of Google, has as many users, knows as much about their behaviour online and can target them as effectively. In addition to all the personal and geographical information, interests, social connections and photos users share, the social network is able to see where else they go online. Anywhere with a “like” symbol feeds back information, as do sites that allow people to log on with their Facebook credentials.

Advertisers can reach consumers with laserlike precision. An energy-drink company may target ads at parents of teenage athletes; a retailer can market goods to people from specific neighbourhoods who have visited its website. “There are three compulsory elements to online advertising today: you have to have a mobile website, and be involved with Google and Facebook,” says Peter Stabler of Wells Fargo, a bank. As a result Facebook claimed 19% and Google 35% of the $70 billion spent on mobile advertising worldwide in 2015, according to eMarketer, a consulting firm (see chart 3). Twitter and Yahoo had to make do with a meagre 2.5% and 1.5%, respectively.

Facebook is likely to remain on Google’s tail. Its core service continues to grow. Last year it added 200m new users. It has successfully outmanoeuvred regional competitors, such as Orkut, a social network owned by Google that was popular in Brazil. This is partly down to Mr Zuckerberg and his hacker mentality. He believes in rolling out products quickly: “Move fast and break things” is a company motto. Not everything works. Paper, a stand-alone app that aggregated news articles, was a notable flop. And sometimes employees complain about being “Zucked” when he changes his mind.

Mr Zuckerberg’s big acquisitions have helped to defend his firm’s place in the social-network order. The first was Instagram, a budding mobile photo-sharing service, bought for $1 billion in 2012. At the time, that seemed a huge sum for a firm with no revenues and only 13 employees, but now Instagram is regarded as a steal. Facebook started selling ads on Instagram only last year but this year they could bring in over $2 billion in revenues, according to Mark Mahaney of RBC Capital, a bank.

Instagram’s price tag was modest compared with the $22 billion Facebook paid in 2014 for WhatsApp, a profitless messaging service that then had 450m users, many of them in emerging markets. Services like WhatsApp, which let people communicate instantaneously, are potent because they compete with other social networks for time spent online and data collection.

Facebook has, for that reason, separately cultivated its own service, Facebook Messenger, which boasts 900m users. WhatsApp now has 1 billion users and analysts agree that the deal was a smart one. “There were three existential threats to Facebook: WhatsApp, Instagram and Snapchat,” says Jeremy Philips of Spark Capital, a venture-capital firm. “Zuckerberg bought two of them for a little more than 10% of Facebook’s market cap.”

Aside from the blockbuster acquisitions a little-noticed deal has also proved shrewd. Facebook’s bought Onavo, an Israeli startup involved in mobile analytics, for a rumoured $120m in 2013. Onavo helps Facebook track which apps are becoming popular and could be worth purchasing.

Onavo was instrumental in the acquisition of WhatsApp and also helped Facebook spot that Snapchat, a messaging service, was fast becoming popular, especially with teenagers. Facebook reportedly tried to buy Snapchat in 2013 for $3 billion. Today Snapchat, which is still privately owned, is said to be worth $16 billion and probably poses the greatest direct threat to Facebook for teenagers’ time.

Facebook proves that social networks do not always have short lifespans, but there remains the persistent concern—present in many real-life social networks too—that someone newer and cooler is going to come along. And Facebook will not be able to buy every rival.

Mr Zuckerberg insists his firm is not going to waste cash and time on an acquisition unless it has the potential to grow into a truly fearsome competitor. “A lot of companies will try to acquire the number two or three product and assume that they can make it good. We are not interested in that,” he insists. It will probably leave alone sites like Pinterest, where people post photos of things they like. “If you look at everything we are doing through the lens of this intense mission focus and this underlying focus on building technology platforms, everything we do will make sense,” Mr Zuckerberg explains.



In your face: Facebook, the world's most addictive drug

Facebook’s plan is to embed itself deeper into people’s daily lives. That will make it harder for users to leave or switch to competitors. In the past Facebook has tried, in partnership with software developers, to become a “platform” on top of which other firms can build content and apps. However, with the exception of gaming, this plan has failed, in part because the scheme was mismanaged but also because a social network is not a natural means of interacting with companies and services.

Facebook is pushing Messenger and WhatsApp, to become services through which people can buy things and privately communicate with businesses. For example, KLM, a Dutch airline, is giving flyers access to boarding passes and flight information through Messenger, and letting them chat with customer-service representatives. Already people can hail an Uber car through Messenger instead of going to the taxi firm’s own app.

Sign in with Facebook

The strategy of turning a messaging app into a platform has been a success for WeChat, a Chinese messaging app which enables users to do everything from wiring money to ordering food for delivery. Messaging services are sure to play a larger role as the mobile internet evolves beyond apps (see article). This will make Facebook even more powerful, because it can connect what people share with their friends in a public forum (a social network) with private transactions and communications (messaging services), giving it even deeper insight into people’s behaviour on the web.

Facebook has already become a sort of “universal passport” on the internet, allowing people to log on to other websites using their Facebook credentials. Its messaging strategy is a more concerted push in the direction of becoming an authenticator of people’s digital lives. The more it knows about users and the more users that go through it, the greater its power as a single port of call online, and the less likely it is to be dislodged by competitors.

Messenger is also experimenting with a personal-assistant service, called M, which is operated through a combination of human errand-runners and artificial intelligence (AI). It can answer people’s questions and complete assignments, such as recommending and buying gifts.

Several other firms are betting that people will use the internet differently in the future too. Google Now and Microsoft’s Cortana also offer help from a smart “secretary”, which employs clever algorithms to anticipate people’s needs and tell them what they want. Such a shift will intensify the relationship between tech firms and their users.

Facebook does not make money from WhatsApp or Messenger, and is unlikely to introduce advertising on them, but it could start to take a cut of transactions that are completed on these services or charge businesses for finding customers. Facebook’s strategy, which many startups embrace, is first to build up usage and then design a business model later. By one estimate the combined revenue of Messenger and WhatsApp could be $10 billion by 2020.

One question is how big the messaging business will become. Another is what other ventures will widen Facebook’s net. The social network is full of posts by amateurs (otherwise known as your friends). Investing in professionally made content might lure ever more users. The firm is already spending more money on video.

Another possibility might be to acquire Pandora, a popular music-streaming firm. Although Facebook never buys media companies and, rather than making its own content, has preferred producing it in partnerships with established firms in the industry, the idea might not be so far-fetched. Mr Zuckerberg’s first startup, developed when he was at boarding school, was a music-recommendation service.

Facebook owes much of its past popularity and profitability to clever predictions about what people want to see: photos and videos, relevant posts about their friends, adverts that are not too annoying. All of this is possible in part because of AI. Facebook’s success in the future will depend on its offering even more useful services. With that in mind it is investing heavily in AI.

Facebook does not have the field to itself. Google is acquiring AI startups and talent. In 2014 Facebook tried to buy DeepMind, a startup in “deep learning” which lets computers work out, by repeatedly processing complicated statistics, how to extract general rules from masses of data. It was outbid by Google, which reportedly paid $600m for the firm. Facebook then set up its own AI lab. So far it has helped Facebook to target ads better and to filter spam, which means fewer human workers are required for those tasks.

The lab has already paid its way for the next ten years, says Michael Schroepfer, the firm’s chief technology officer. Though AI has mundane applications like spam filtering, it could also lead to more ambitious and profitable breakthroughs that Facebook is keeping under wraps for now.

Facebook is investing in other areas where fast-developing technology is opening new opportunities. In 2014 it bought Oculus VR, which makes virtual-reality headsets, for around $2 billion. In partnership with Samsung, it has released a headset costing just $99 and recently started selling the Oculus Rift, an expensive version for gamers. VR’s prospective audience may not extend much beyond a niche. But the acquisition of Oculus keeps it out of the hands of competitors and is a relatively cheap gamble in case VR suddenly becomes popular.

Oculus will also help Facebook develop its expertise in augmented reality (AR). Unlike VR, which requires a headset and provides an all-encompassing experience, AR displays digital information against the backdrop of the real world. Despite the failure of Google Glass, people may eventually wear glasses which let them glance at relevant information, if they become smaller and sleeker. “You have to build the BlackBerry before you can build the iPhone,” explains Mr Zuckerberg. Facebook has lots of competitors in AR, including Microsoft, which is building its HoloLens glasses, and Magic Leap, a secretive startup in which Alphabet, Google’s parent company, has an investment.

Friending the world

Facebook’s most audacious and controversial scheme yet is to take a role connecting the world’s poor to the internet and to its social network. It has joined forces with mobile-phone operators in emerging markets to make a lighter version of Facebook that is accessible without incurring data charges. Now it is thinking in even grander terms, beaming down the internet from the sky.

This smacks to some of calculated corporate self-interest dressed up as humanitarian rhetoric. Facebook’s critics are fearful that it might control poor people’s use of the internet, giving access only to a few sites including Facebook but not introducing them to an “open” web. In February it suffered a setback when attempts to connect Indians to a free version of Facebook was struck down by the country’s telecoms regulator. It said that the scheme violated net-neutrality rules, which call for equal treatment of all web traffic.

Mr Zuckerberg sees such efforts as a logical next step in Facebook’s mission to “make the world more open and connected”. He has hired aerospace engineers from NASA’s Jet Propulsion Laboratory and its Ames Research Centre. They have designed Aquila, an unmanned plane with the wingspan of a passenger jet but the weight of a car. Powered partly by solar panels that enable it to fly for months at high altitudes, the plane will transmit data using laser beams to towers and dishes in far-flung places.

A fierce rivalry on Earth—over users’ time, advertisers’ dollars and the best engineering talent—is now a battle in the sky. Alphabet is also working on a plan to bring the internet to people in poor countries using hot-air balloons and drones.

Schemes to bring connectivity to the unconnected highlight one of Facebook’s biggest challenges: as so many people already use its services, how can it attract more of them? China, a vast market, is out of reach, because its government refuses to let in Western internet firms. Nonetheless, Mr Zuckerberg is ready if China opens up. He has learned Mandarin and serves on an advisory board of Tsinghua University in Beijing. His smiling profile picture on Facebook was taken in China and recently he posted a photo of a smog-shrouded jog through Tiananmen Square in Beijing.

Mr Zuckerberg’s personality suggests that he will not stop looking for a way to keep his company growing. He has an intensity and inquisitiveness reminiscent of Jeff Bezos, the founder of Amazon, who started selling books online as a gateway to selling everything. His long-term approach to building his business should continue to serve him well.

Mr Zuckerberg does not appear to be motivated by wealth. Last year he and his wife pledged to give away most of their fortune to causes they care about, some of which align with Facebook’s interests, such as “connecting people and building strong communities”. Although he has a reputation as a computer hacker who does not play by even Silicon Valley’s relaxed set of rules (an image that “The Social Network”, a Hollywood film which dramatises the early days of Facebook, did little to dispel), Mr Zuckerberg has grown up.

As Facebook expands, however, it will face two tough issues that come with its particular type of triumph: market dominance and privacy. Microsoft and Google have shown that success can bring regulatory scrutiny. Already watchdogs around the world, and especially in Europe, are keeping an eye on Facebook. They may intervene if the firm continues to buy budding rivals. Given this closer scrutiny, it seems probable that Facebook would face objections were it to try again to purchase a large competitor, such as WhatsApp.

Privacy issues, too, will loom large. As Facebook pushes into messaging and other services, it will collect even larger amounts of data about users’ activities. Already the European Union, which takes a sterner view about privacy than America’s government, is looking at how Facebook uses and stores that information. In March Germany’s competition authority launched an inquiry into Facebook’s dominance and its notoriously complicated terms and conditions, which most users dismiss with a rapid click of agreement.

Facebook has a history of hastily changing its privacy policy and the information it shares in public. In 2007 it revealed people’s activities on external websites without their consent (showing, for example, the purchases they made on other sites), causing an outcry. Such occurrences have damaged the firm’s reputation for protecting users.

Facebook’s brand ranks below that of other technology companies according to the Reputation Institute, a think-tank, in large part because of its perceived lack of trustworthiness. Chris Cox, Facebook’s chief product officer, says the main misperception about the company is that it sells people’s data. In reality, it matches advertisements to users while keeping that information to itself. But users remain wary that Facebook’s interests are not the same as their own.

Likeability is not always necessary for firms to thrive. Ask any big oil company. But the big thumbs-up at Facebook’s gateway is a reminder that for a service bringing friends together and with ambitions to control the digital connective tissue between them, it is critical. This is not the youthful Mr Zuckerberg’s first big test, but it may be the defining challenge of Facebook’s adulthood.

The Atlantic