Thursday, December 01, 2011

Enhanced Network Effects

Mark Zuckerberg is one of the foremost business men of our age. Don't be put off by fact that he is 'only' 27 - Steve Jobs was 21 when he (and Steve Wozniak) started Apple and Bill Gates was only 20 when he co-founded Microsoft. He has created a product that is used by millions of people around the world every day (over 800 million active users, at last count) and is the subject of almost endless commentary and speculation. Cutting through the chaff can seem like a daunting task. But do not worry, help is at hand. David Kirkpatrick's 2010 book (already wildly out of date – ha!) The Facebook Effect: The Real Inside Story of Mark Zuckerberg and the World's Fastest Growing Company is a non-partial and well-balanced account of Zuckerberg and Facebook's meteoric rise over the past seven years – from Harvard dorm room to global dominance.

Growing up

The world's first 'social network' was probably the Whole Earth 'Lectronic Link or WELL, an early electronic bulletin board system or BBS, established by Stewart Brand and Larry Brilliant in San Francisco in 1985, mainly frequented by Grateful Dead fans and a few digitally-progressive celebrities, journalists, and artists like Brian Eno and Peter Gabriel. With the birth of the World Wide Web in 1991, the WELL, which operated a present day Forum sites, was supplanted by a bunch of websites that enabled users to create their own 'profile pages' online and interact in that way - Six Degrees of Separation (which still owns the general 'social network' patent that describes Facebook and all other, similar websites), Friendster and MySpace. Furthermore, prior to the creation of Thefacebook in 2004, universities such as Stanford, Yale and Colombia were already beginning to put their facebooks online (note for non-Americans: prior to Facebook becoming the name of one of the most popular websites in the world, 'the facebook' was the name of a book issued by American universities and colleges every year with the names and pictures of every student). In that sense, what Mark Zuckerberg created was not 'new'. The idea was already 'in the air'.

Others claim that the idea was not his at all. Twin rowing champions Cameron and Tyler Winklevoss (popularly known as the Winkelvii, if Kirkpatrick's book is to be believed), along with their friend and business partner Divya Narendra, famously sued Zuckerberg claiming damages for intellectual property theft. Prior to the creation of Thefacebook on February 4th 2004, the trio approached Zuckerberg to help them to develop a dating website called Harvard Connection (later ConnectU). The book does not go into detail about the case - I was interested to find out that the 52 email and text correspondences referred to in The Social Network film were real - but pretty much sides with Zuckerberg. As history shows, there is nothing unique about the idea of an online social network.

Even Thefacebook was not the sure thing it looks like in hindsight. In the very early days, Kirkpatrick tells us, Thefacebook one just one of a number of projects being developed by just another enterprising student. For a long time, Mark was seemingly even more interested in developing a project called Wirehog – his idea for a P2P platform that would integrate with Thefacebook in order to allow people to share documents, music, movies and whatever else they wanted. Sean Parker, who became part of the company when Mark moved to Palo Alto (Silicon Valley) in the summer of 2004, discouraged further development of Wirehog, knowing that big media companies, with a lot of money invested in intellectual copywrite in the form of films, music and games would use it as an excuse to shut down Thefacebook, which Parker recognised as being vastly more important.

It was at this time that Mark started to fall out with Eduardo Saverin, with whom he co-founded the company, along with dorm room friends Dustin Moskovitz and Chris Hughes (who, as a matter of interest, went on to co-ordinate Barack Obama's highly successful online campaign in 2008) . The crunch time came when Saverin, for whatever reason, suspended credit being drawn from the company's bank accounts. Once again, the book does not go in detail – apparently, Mark still refuses to talk about what happened between the two – but, over that summer Mark invested roughly US$85,000 of his and his parent's money in order to stop the servers from falling over, as site traffic continued to grow at a staggering pace.

This is the short version of the story told in The Social Network, from Mark Zuckerberg's point of view. One of the things that the film was most wrong about was Mark's desire for Thefacebook (as it was then) to be 'cool'. His vision was far greater than that, even early on. Being cool was what gave Thefacebook its start, attracting vast numbers of the children of America's social and economic elite at Harvard, before going on to do the same at schools and colleges nationwide. The Winkelvoss twins were right in at least one respect – the domain name gave the site both a cool factor and a credibility factor, which was enormously valuable when it came to attracting a wider audience. But, in Mark's, and later Sean Parker's view, Facebook would know it has succeeded when it stopped being 'cool' and instead made itself 'useful' – then everybody would want to be a member. The people at the company foresee Facebook eventually becoming part of the infrastructure of the internet – less of a brand and more like something people just take for granted.

Not Selling Out

Sean Parker, whose experience working with web start-up companies during the dot-com bubble was clearly invaluable to Mark early on, became one of his closest confidants and a trusted advisor. According to Kirkpatrick, Parker was probably the man most responsible for enshrining Mark Zuckerberg at the centre of Facebook's corporate structure, a far cry from the snake oil salesman played by Justin Timberlake in David Fincher's very entertaining but inaccurate movie. Indeed, it was Parker who arranged for Peter Thiel, who had co-founded PayPal and later sold the company to eBay for US$1.5 billion, to become Thefacebook's first 'angel investor'. Thiel put in US$500,000 of his own money to pay for development costs and new server racks in return for an ownership share and a seat on the company's board – a position that Thiel retains to this day.

Facebook's growth attracted interest from all over Silicon Valley and both Zuckerberg and Parker knew, the only way to pay to keep the site running was an investment round of some kind. Typically, that would have meant selling a substantial portion of the company to a Venture Capital firm, which would have supported site the with investment, but which would have probably demanded a rapid move towards monetisation, adult supervision in the form of professional management and an IPO sooner rather than later. Zuckerberg favoured doing a deal with The Washington Post, the CEO of which, Don Graham, believed in the project to the extent that he was willing to invest without making any demands on the future direction of the company – he wanted Zuckerberg to develop the business at his own pace, in the best way that he saw fit.

In the end, Facebook did a deal with one of the biggest Venture Capital firms in the Valley, Accel Partners, but not before Sean Parker had crowned Zuckerberg 'King of Facebook' – he negotiated a deal that gave board seats to Mark, Peter Thiel, Accel Partners and himself, with another seat to be assigned at Mark's discretion – when Parker left the company in 2005, his board seat also reverted to Mark. I feel slightly more comfortable about Facebook knowing that, for the time being at least, Mark Zuckerberg has a whip hand in guiding the company's future direction. As described in the book, he has shown appropriate humility and restraint whenever he has gotten something wrong, and listened to user criticism when it has been appropriate for him to do so.

It is interesting to read about the relatively calm head he kept during his baptism of fire as CEO of a major technology company, listening to and, ultimately, rejecting increasingly extravagant bids to buy the company from Viacom, AOL, Yahoo, and even, later, Microsoft, fighting his corner and winning most of the boardroom battles. The anecdote about the time when he spent four hours at some high-powered event talking to Rupert Murdoch, while the CEO of MySpace (which News Corporation acquired in 2005) looked on, forlorn, gives a little glimpse into the even more elite world (he went to Harvard for goodness sake!) into which Zuckerberg was being inducted.


Zuckerberg says that the 'mission' of the company is to make the world more 'open and connected' because he believes that doing so will make the world a better place. Maybe I am naive, but I think he is being genuine. Despite the fact that I am not a billionaire business man living in Silicon Valley, I feel like I have a pretty decent understanding of where Mark Zuckerberg is coming from. We are around the same age and both share similar interests. However, personally, I worry that his heartfelt idealism may be a very convenient way for powerful interests to push an agenda that benefits a few big businesses, over the interests of the millions of people who use Facebook to communicate with loved ones.

I would contend that Mark Zuckerberg has not necessarily thought through his ideas about 'openess and transparency' as well as he might. Just because he believes that a more open and transparent society will be better does not necessarily make it so, and just because more and more people are sharing more and more of their personally identifiable information on Facebook does not necessarily mean that they want the world to be more open and transparent, in the sense that Mark Zuckerberg does. That might sound like a contradiction. But it is not. Mark's seemingly ineluctable conclusion is that more and more people must want to share more and more details about their lives online because they are posting more on Facebook. This is incorrect. I think that the vast majority of people who post frequent Facebook updates do so in the mistaken belief that the information they post is not being posted 'online', as such, but is being distributed amongst a self-selected groupings of friends, family, colleagues and associates. People feel comfortable sharing their lives with people on Facebook because the site is a walled garden. My contention is that these people do not understand the relationship that they have with the company which mediates communication on the site, and would be quite creeped out by the kinds of profiles Facebook can create about them and their lives.

Marketers already deploy sophisticated techniques in their advertising 'messages' as a way of getting inside people's heads in order to make them want to buy things. If we gift them still more information about ourselves, as we do when we use Facebook, it will certainly be used to develop still more sophisticated tools for targeting advertising at individuals. I worry about where that ends and the seemingly subservient position in which it places lowly consumers. The biggest problem with the site is that, for all of its protestations about openess and transparency, Facebook's business activities are staggeringly opaque. The relationship between Facebook, the company, and its most active users is completely asynchronous; users share lots of intimate information about their daily lives – information intended for friends and family – and Facebook logs and stores it all, while we know nothing about the partners with which Facebook shares that information, in an aggregated form, or what those partners then use it for. If openess and transparency is the order of the day, users should request Facebook disclose all such agreements.

Moreover, I have a problem with Zuckerberg's assertion that 'you have one identity' and that having more than one identity is a sign that you lack 'integrity'. I wonder if he still stands by those comments. It was a couple of years ago. Digital commentator and inventor Jaron Lanier posits the question: how would Bob Dylan have gotten along as a quasi-mystical pop troubadour if he still had the nervous boy from Minnesota hung around his neck, like a mill stone dragging him back down to Earth? Seen in that context, I think you can begin to see that re-invention is important, maybe even necessary – especially for young people, who, consequently, also tend to be among the most avid Facebook users. A Facebook identity is a very limited representation of a person and I think that people are diminished when they start to think about themselves in terms of what will look good on their 'Wall'.

Planet Facebook

To its credit, the book does at least address most of the difficult issues. Both Mark Zuckerberg and Peter Thiel talk about Facebook's vision for the internet as a place with people at its centre, as opposed to Google's vision, which in their view, has computers and data at its centre. It is heartening to know that the people who control these very large companies are at least thinking about the implications of their actions. But they are hardly impassive observers.

If Facebook were a country, it would be the third most populous in the world behind only India and China; it already has more active users (note: active users. Not accounts. Not users who sign up and then forget they have done so. But active users) than live in Brazil, Russia and the United States combined. It is not hyperbole to think about the company in these terms because that is the kind of all-encompassing global vision with which the people at the centre of the organisation view the project upon which they have embarked. Google wants to 'organise all of the world's information', while Facebook seems to be aiming for nothing less than total global domination of the social aspect of the internet. Out of the nearly two billion people in the world who have access to the internet, more than 800 million already have a Facebook account – and Facebook is trying to help the remaining one billion or so get signed up as quickly as possible. In Africa, Facebook subsidises handset manufacturers and carriers to make Facebook free for end users – encouraging massive growth (why use email when you can use Facebook to perform all of the same functions for free?) – and in China, Facebook is negotiating with Baidu (the most popular search engine in that country) to develop a Communist Party-approved social network for use behind The Great Firewall.

At its current rate of growth, it only take a little bit of imagination to envisage a future scenario in which Facebook becomes the universal login for the World Wide Web. No more anonymous comments, no more flame wars (or far fewer), everybody would be immediately identifiable online (the same way you are when you walk down the street) and therefore have to account for their actions. That would be a profound change. But also one with enormous appeal to advertisers and media brands, with Facebook at the centre, managing, maintaining and storing all of the logs while 'pushing' updates in realtime to your friends and family – every purchase, every mouse click, every subtle indiscretion shared. Is that a more open and connected world or is it a vision of a nightmarish surveillance state with Facebook as Big Brother? Not that I am saying it will happen, or is even likely to happen, but it is one possible consequence of Zuckerberg's expansionist zeal. The seeds are already being sowed.

Thousands of partner websites use Facebook Connect, which enables users to avoid the tedium of thinking of and remembering yet another password, to login using their Facebook account. A useful service, but also one that gives Facebook still more information about what you do and where you go elsewhere on the web. The Facebook Like button, which is used by million of partner websites is similar. All of this information is not only shared with your friends and family (depending upon your privacy settings) but with Facebook as well (regardless of your privacy settings). The site has faced relatively frequent backlashes, revolts and mutinies whenever it has introduced a new feature which makes sharing either easier or more automatic. The biggest of these was the News Feed debacle in 2006 – News Feed places alerts about what your friends have been doing on the site (and now elsewhere) on your front page and is now, largely, taken for granted. But, every time, users have settled back into a groove and committed to sharing even more information with the site. So, perhaps Mark is right.

Open government?

If you are anything like me, the story of Facebook's rocket-propelled rise probably makes you feel a little bit woozy – seeing the ground beneath your feet disappearing at such a rate of knots is likely to engender a feeling or vertigo. But the signs seem to show that the company is only just getting started.

In terms of revenue, Facebook is still a comparatively small fish in a very large pond. The company's latest estimated valuation is in the region of US$70 to US$100 billion, based on estimated revenues (because Facebook is a private company it is still quite difficult to gather accurate financial data) of around US$3 billion. That certainly sounds like a lot of money, but compared to Google (market cap US$200 billion, yearly revenues US$35 billion), Microsoft (market cap US$212 billion, yearly revenues US$71 billion) and Apple (market cap US$362 billion, yearly revenues US$108 billion), Facebook has still got a pretty long way to go to match the big boys.

We have not really seen a convincing business model from Facebook yet and Mark continues to resist what you might call 'full-scale' commercialisation. But, with an IPO possible in 2012, the company might not have much choice but to put greater emphasis on the commercial side, in order to satisfy the demands of investors on Wall Street. The structures are already in place and, most people seem to agree, the possibilities for future revenue streams are almost limitless. With a slight tweak, Facebook could become the most valuable market research company in the world – forget ratings based on analysis and estimates, Facebook can give you the data; or one of the world's most valuable advertising companies – social signals and the desire to be part of a crowd (the right crowd) are among the most powerful tools any marketer can deploy for building their brand.

In the long-term, however, Zuckerberg is a big fan of taking the long-term view, Kirkpatrick foresees the possibility that Facebook may become something other than a publicly traded stock-holding company. One of the principle 'commodities' Facebook trades in is identity – on Facebook your online identity is verified by the connections between you and your friends, what Zuckerberg has taken to calling the 'Social Graph'. Indeed, Facebook's Social Graph API, which enables web developers to integrate social tools that connect with Facebook's databases, with other websites, is an indication that the company's ambition is to move beyond being just a website to become a 'platform' – part of the underlying infrastructure of the internet, or the Operating System for the Social Web, as some people are starting to say.

So, we are presented with the possibility that your Facebook identity could become your universal digital identity; Facebook has already introduced Facebook credits for buying small tokens on the site because it understands that people feel more comfortable giving their credit card information to Facebook than to another third-party; And Facebook's impact in the social and political sphere is reported almost daily. These are odd situations for a company to find itself in, seemingly more akin to the role of a government – issuing identity documents, guaranteeing currency and exchange, and providing forums for debate. Facebook, already has oblique ties to the highest echelons of the power elite – Chief Operating Officer, Sheryl Sandberg, who played an important role in developing Google's advertising model before joining Facebook in 2008, used to work for US Treasury Secretary, Larry Summers, under the Clinton administration, and is now one of the most important people at Facebook. Companies that have to think like countries – is that where we have arrived at?

As the internet continues to grow, it is only right for the people who make decisions that affect millions of people account for their decisions and are just as open and transparent with us as they want us to be with them. Anyone who has a Facebook account or who knows someone who has a Facebook account should read David Kirkpatrick's book, The Facebook Effect – an invaluable introduction to one of the world's most important companies, told with style and - Enhanced Network Effects - Keyword description


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