Facebook Files For IPO: How The Company Evolved From Straus Hall To Wall Street
Long before Facebook emerged as a ubiquitous web giant, its co-founder and CEO Mark Zuckerberg wondered if his fledgling website would ever amount to anything.
"I still don't know if we have something," Zuckerberg said in 2005. "Whether we have something that will last for a really long time or is just a cool toy for people to play with now, we'll see."
After Facebook filed for an initial public offering on Wednesday, it's clear Zuckerberg requires no further reassurance: Facebook boasts 845 million users, made over $3 billion last year, and is estimated to be worth as much as $100 billion.
Though Facebook is not the first social networking site to go public, it is by far the largest. Facebook's public offering, which seeks to raise $5 billion, will be the biggest IPO by an Internet company since Google, and caps off a year of IPOs by other Silicon Valley stalwarts such as Pandora, Groupon, LinkedIn and Zynga.
The sheer size of Facebook's offering makes it a momentous event on Wall Street, where investors are salivating for a piece of the company, and its debut on the public market promises to reshape the startup landscape by infusing Silicon Valley with billions of dollars.
Yet Facebook's IPO touches not only the site's investors and employees, but also the hundreds of millions of users whose personal disclosures on Facebook have fueled the site's growth. Their engagement with the site has helped it attract billions of dollars in revenue from advertisers eager to target individuals based on intimate data about their likes and dislikes. The hours Facebook's members dedicate to the site and the personal details they divulge rank among the social network's most valuable assets, and perhaps more than any company before it, Facebook's public offering involves the public.
"As a general rule, if it's on the Internet and it's free, you're the product, the user is the product," said Max Wolff, chief economist at GreenCrest Capital, a private equity firm. "To some extent, Facebook is a user-generated product going public, so 800 million people are about to watch their intimate life go public."
Facebook's ascent over the past eight years has all the hallmarks of the typical Silicon Valley success story. It was launched in a dorm room at Harvard University's Straus Hall by a college dropout, Zuckerberg, who displayed the headstrong hubris of a Bill Gates or a Steve Jobs and resisted cashing out early (Zuckerberg turned down a $1 billion offer from Yahoo in 2006, followed by a $15 billion bid by Microsoft). And just as Google co-founders Larry Page and Sergey Brin tapped the more experienced Eric Schmidt to be the company's "adult supervision," Zuckerberg appointed former Google executive Sheryl Sandberg to be Facebook's chief operating officer and grown-up in residence -- a decision some experts say was one of the most important the company made.
Facebook's S-1 filing with the Securities and Exchange Commission tells the story of a company that has enjoyed enviable growth over the past several years. Facebook says it has 845 million active users, 483 million of whom return to the site daily, and has captured more than 100 petabytes, or 100 quadrillion bytes, worth of photos and videos. The company reported a $1 billion profit last year on revenues just over $3.7 billion, an 88 percent increase in revenue over the previous year.
Yet Facebook's prospects looked far less certain when it launched in 2004, one of numerous social networking sites seeking to emulate the success of services such as Friendster and Myspace. In 2006, while Facebook was still open only to students, Myspace overtook Google and Yahoo Mail as the most popular website in the U.S. And just four years ago, Myspace still boasted more visitors than Facebook.
Zuckerberg's genius was creating a site where people wanted to share real information about themselves -- and, of course, refusing Yahoo's and Microsoft's 10- and 11-figure offers, respectively. Unlike rival sites like Myspace, Zuckerberg required Facebook members to use their real names, effectively linking their online and offline identities in a way that has allowed users to bring their social circles with them throughout the web. Now, Facebook is leveraging the information people have offered up about themselves -- from the music they enjoy to the people they're friends with -- to deliver more targeted advertising and personalize the sites its members visit.
"If Facebook had not been identity based and had not had privacy settings, it would not have been able to articulate the social graph that made everything possible," said David Kirkpatrick, author of "The Facebook Effect."
The real name-requirement also helped keep the social setting on Facebook civil and clean -- attributes attractive to both users and advertisers -- while Myspace developed a reputation among many for being a cesspool of stalkers, strangers and pedophiles.
"Having people use their real names means there's light and air in the platform. People trust it more, they know who they're dealing with, and they can choose who not to deal with," said Rebecca Lieb, an analyst with the Altimeter Group. "It proved openness is better than creepiness."
Zuckerberg designed Facebook to be a conduit for its users' stories, allowing it to tap into the public's narcissistic tendencies and voyeuristic inclinations. Over the past several years, Facebook has also evolved beyond a platform for individuals into one that hosts third-party companies, from the Wall Street Journal to Zynga, and allows these firms to add even more content to the site. Browsing Facebook today offers up not only photos from ex-boyfriends and musings from college roommates, but songs from music streaming services, articles from the Washington Post, TV shows from Hulu and coupons from Sephora. These partnerships have been so successful that Facebook's applications help create nearly 200,000 jobs in the U.S. alone, according to a study by University of Maryland's Robert H. Smith School of Business.
"Facebook came out and said, 'We're not a content site, we're a platform. We want to make it easy for people to put content on our site,'" said Forrester Research analyst Nate Elliott. "They quickly had lots of photos and information on the site, and that's the content that keeps people coming back."
The social network both features its users' data and continuously learns from it. Facebook gathers copious information about its members' clicks, then dissects it for feedback on how to make the site more compelling. It has shifted away from listening to what its users say, and instead watches how they behave, which often delivers far more accurate data. When Facebook introduced the News Feed, for example, users staged a revolt, railed against the tool, and swore they would delete their accounts. In fact, their engagement with the site doubled, according to Facebook engineer Ruchi Sanghvi.
"Facebook has been very, very brave about experimenting, and when things have seriously not worked, like Beacon, they've pulled back," Lieb said. "But a lot of the things people complain about are the things they use the most."
Facebook has proven itself a cultural phenomenon, a powerful rival to tech industry incumbents, and a disruptive influence that has forced companies to rethink their strategies. The eight years leading up to its IPO are merely the warm-up for its biggest act, however: completing Facebook's transition from online distraction to business behemoth, and demonstrating that it can continue to attract both users and vast sums of cash.
"As a consumer behavior, social media came of age a long time before this. As a business, it still hasn't come of age," Elliott said. "Facebook is still having trouble manifesting value to the people who pay their bills. Everyone is struggling to unlock that opportunity."
Though Facebook's growth has been nothing short of spectacular, analysts say the company must now demonstrate it can evolve its offerings and innovate on its business model, while also doing a better job of satisfying the advertisers that keep the company afloat.
"Facebook is basically a one-trick pony," said Vivek Wadhwa, a visiting scholar at UC Berkeley's School of Information. "Facebook hasn't diversified the way Google has. What is Facebook? A social network. What else are they? Nothing."
Elliott concurs that Facebook must show it can mature its business model to move beyond advertising, which made up 85 percent of its revenue last year.
"Facebook has a very 1970's business model and it needs to get to a 2012 model. This means using data in powerful and transformative ways, and it means following Google's path," Elliott said. "There are bigger business opportunities here, but Facebook seems to be struggling to find them."
And what does the IPO mean for users? Expect to see more scrutiny of the company's practices, more attempts to squeeze money out of the data that members share with the site, and more changes to the social network's interface, analysts say. They also predict Facebook will use the funds raised in its IPO to bring other companies into the fold and improve the Facebook user experience on mobile devices. Facebook noted in its S-1 filing that it plans to "continue expanding our operations abroad" and to "continue to make acquisitions."
"I think that there will be more scrutiny as to how Facebook operates, so they will have to be more prudent and socially aware because they will be monitored that much more closely as a public firm. It will help ensure that the user experience is improved," said Mark Cannice, a University of San Francisco professor who focuses on entrepreneurship strategy and international business. "They'll have to adhere to an even higher bar of expectations and how they treat their customers, and that includes privacy issues."
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First Posted: 02/ 1/2012 6:05 pm Updated: 02/ 1/2012 6:16 pm