History of the Internet: Part 10 – The Rise of Facebook
Welcome to Part Ten of the History of the Internet series, a journey through the past to learn more about how the Internet has evolved and the effect it has had on our lives.
In Part Nine, we looked at the early social media platforms, ending in 2004 with MySpace as the newly No. 1 social media network.
“TheFacebook” was created by Mark Zuckerberg while he was a sophomore at Harvard University.
It was the latest of his many social software projects. His first project was Course Match, a tool to help students decide which university courses to take based on who else was taking them. It was used by hundreds of Harvard students.
Facemash, a type of “hot or not” game for Harvard students, invited students to rate other students on their looks. Zuckerberg launched the site on Sunday, Nov. 2, 2003, and emailed out links to his friends. It immediately went viral, with friends recommending it to other friends. Two women’s groups—Fuerza Latina and the Association of Black Harvard Women (ABHW)—complained of sexism and racism, and the Harvard computer services department switched off Zuckerberg’s Internet access at 10:30pm the same day.
Many of the student photos had been taken from Lowell House with the aid of his friend Billy Olson, who gave Zuckerberg his login details. Zuckerberg downloaded digital images of students from nine of Harvard’s 12 houses without permission from the university.
This landed him in trouble with the administration board, who charged him with breach of security, violating copyrights, and violating individual privacy. He was put on probation and ordered to see a counselor.
Harvard’s student newspaper, The Crimson, concluded, “Much of the trouble surrounding the Facemash could have been eliminated if only the site had limited itself to students who voluntarily uploaded their own photos.”
Zuckerberg apologized to the women’s groups and offered to help the ABHW set up their own website. Relations between Zuckerberg and the ABHW improved, and the women’s group eventually decided (years later) to move their website over onto Facebook.
Zuckerberg’s next project was the Harvard Connection, a party guide and dating service that he worked on for Divya Narendra and the Winklevoss twins. Zuckerberg agreed to offer his programming services for this project on Nov. 25, 2003.
A few weeks later, Zuckerberg lost interest in the project and began his own social network project instead.
Zuckerberg registered the thefacebook.com domain name on Jan. 11, 2004. Facebook.com had already been registered by About Face Corporation, which sold a database publishing tool.
Four days later, Zuckerberg met with Narendra and the Winklevosses to tell them he didn’t have any more time to work on Harvard Connection. He did not tell them that he was working on his own social network, merely that he was working on other personal projects. Just three weeks later, he launched thefacebook.com service, exclusively for Harvard students.
It launched with a site logo based on a picture of a young Al Pacino. On its about page, it explained, “TheFacebook is an online directory that connects people through social networks at colleges and universities,” and described Mark Zuckerberg as “Founder, Master and Commander, Enemy of the State.”
A few days later, Narendra and the Winklevosses emailed Zuckerberg alleging that he had stolen their intellectual property and requested he remove his site. After Zuckerberg rejected this idea, Narendra and the Winklevosses complained to the Harvard administration board that Zuckerberg had stolen their ideas. In a long written response, Zuckerberg argued, “I’m kind of appalled that they’re threatening me after the work I’ve done for them free of charge.”
The Harvard Connection launched in May 2004 as ConnectU.com, and failed to achieve the same popularity as thefacebook.com.
Tyler Winklevoss told the press:
“You feel robbed…The kids down the hall are using it, and you're thinking, ‘That's supposed to be us.' We're not there because one greedy kid cut us out.”
The Harvard Crimson’s May 2004 article, “Online Facebooks Duel Over Tangled Web of Authorship,” explains Zuckerberg had the impression he was asked to give only six to 10 hours of coding work, but lost interest after he found the job to be significantly bigger.
Zuckerberg never had a written contract for his work on the Harvard Connection, but lawyers on behalf of the Winklevoss twins accused him, in a federal suit, of “copyright infringement, breach of actual or implied contract, misappropriation of trade secrets, breach of fiduciary duty, unjust enrichment, unfair business practices, intentional interference with prospective business advantage, breach of duty of good faith and fair dealing, fraud, and breach of confidence.”
“TheFacebook” began life as noncommercial software and Zuckerberg paid Manage.com $85 per month to host the service. Around Harvard, students used email to rapidly spread word of the new service, and by the end of the first week, around 1,000 Harvard students had signed up using their Harvard.edu email addresses. Many also entered their relationship statuses, courses, favorite books, and political affiliations.
Zuckerberg publicized thefacebook.com with interviews in The Harvard Crimson, saying he “hoped the privacy options would help to restore his reputation following student outrage over facemash.com.” The Crimson noted that it resembled the website Friendster, which was the most widely used social network at that time.
TheFacebook included the mysterious ability to “poke” other students; Zuckerberg described this as a “feature that has no specific purpose.”
Initially, only Harvard students were allowed to join, but soon after Stanford students were invited, followed by many other Ivy League universities.
Zuckerberg received an email from Napster co-founder Sean Parker offering to introduce him to investors in San Francisco. Zuckerberg was a huge fan of Napster, and he soon met with Parker for dinner in New York to discuss business plans. This led to Parker being hired as company president a few months later.
By the middle of April 2004, Zuckerberg’s business partner, Eduardo Saverin, set up TheFacebook as an LLC. By the end of April, thefacebook.com had reached almost 100,000 users, and Zuckerberg made his first TV appearance on CNBC’s Bullseye. The news host introduced TheFacebook as “a new form of cyber matchmaking.” Zuckerberg explained the product and said, “Who knows where we are going next?”
It turned out that where they were going next was Palo Alto, California. Zuckerberg moved into a ranch house with Dustin Moskovitz and Andrew McCollum. There he met Parker again and invited him to move in with them.
Zuckerberg was aware of how Friendster had stumbled, and he acknowledged the need to keep buying more servers to allow TheFacebook to continue to grow. They needed an investment of a few hundred thousand dollars, and met with PayPal co-founder and private investor Peter Thiel.
Thiel offered a $500,000 loan, which was intended to convert into a 10 percent stake in the company. This was one of the most profitable deals in angel investment history, eventually making Peter Thiel $1 billion. He also became one of the company directors, along with Zuckerberg and Parker.
The money enabled TheFacebook to continue its rapid expansion unabated for the next few months.
In November 2004, Zuckerberg launched a new product called Wirehog, which was described as “a social application that lets friends exchange files of any type with each other over the web.”
Wirehog did not catch on in the same viral way that TheFacebook did. It was too complicated for many users. Parker had previously faced many legal problems with Napster, which was sued by 18 record companies for infringement of their copyrights after users widely shared copyrighted music. Parker did not want to see the same mistakes repeated with Wirehog, so he argued that the service should be shut down. Although Wirehog had been set up as a separate company, Parker argued that it was still a legal risk for the TheFacebook, because TheFacebook provided the links to download Wirehog.
Sequoia Capital was nevertheless potentially interested in making an investment in Wirehog, until Zuckerberg and McCollum turned up late to a meeting in their pajamas and pitched the product extremely poorly, including a slide which read: “The Top Ten Reasons You Should Not Invest in Wirehog.”
One Million Users
Less than 10 months after its launch, TheFacebook registered its millionth user, and the team partied at Peter Thiel’s nightclub, Frisson, in San Francisco.
However, they still had a long way to go catch up with MySpace, which had reached over 5 million members in just two years.
Zuckerberg was more concerned with competition from other networks aimed and colleges. In addition to the ongoing commercial and legal battles with ConnectU, Zuckerberg faced competition and criticism from Columbia’s CUcommunity, as well as CollegeFacebook.com, which featured many schools that TheFacebook did not yet cater to.
Series A Investment—The Washington Post vs Accel Partners
Seeing the rapid success of Zuckerberg’s site, investors were now competing with each other for the chance to invest in TheFacebook.
The Washington Post offered a $6 million investment, valuing the company at $60 million. Zuckerberg had a good relationship with the chairman, Donald Graham, and provisionally agreed to this deal with him over the phone. One disagreement was Zuckerberg wanted Graham on the board, but Graham felt it would be a conflict of interest since he might be publishing articles about TheFacebook in the Post.
Kevin Efrusy at Accel Partners had been inquiring about investing in TheFacebook and was getting nowhere, so he decided to show up at their office and push for a meeting. This led to several meetings and a $10 million investment offer with an $80 million valuation. Parker and Zuckerberg played hardball and managed to get this increased to a $12.7 investment with a $98 million valuation.
Zuckerberg had become a millionaire, and despite not following through with the Washington Post deal, he remained good friends with Graham.
With $12.7 million at his disposal, Zuckerberg set about hiring more people. The first hire, Steve Chen, decided to leave after a few weeks to start a new company called YouTube.
Zuckerberg realized they were mainly in competition with Google for hiring the top talent. So he set up a card table at a Stanford computer science building with a sign that said: “WHY WORK AT GOOGLE? COME TO THEFACEBOOK.”
During 2005, the headcount rose to about 20 full-time employees, most of which were software engineers.
MySpace Taken Over
Chris DeWolfe and Tom Anderson met up with Zuckerberg to talk about the possibility of buying out TheFacebook. There are varying accounts of what was said in this meeting, but whether Zuckerberg offered to sell for $75 million (which seems unlikely given the earlier $98 million valuation, and Zuckerberg’s refusal of another $75 million acquisition offer from Viacom), or whether he told them he wasn’t interested, what is certain is the deal never happened.
In July 2005, MySpace was bought by Rupert Murdoch’s News Corporation for $580 million. At this time, MySpace remained the world’s most popular social network, with 21 million users. TheFacebook trailed behind at 3 million users and had yet to make any profit.
The team at TheFacebook celebrated the takeover news, assuming that News Corporation didn’t know how to run MySpace properly and would slow down its growth. But for the next few months, MySpace continued to grow rapidly, and News Corporation’s Ross Levinsohn invited Zuckerberg to Los Angeles to try to take over Facebook. In this meeting, he voiced doubt that Facebook could handle its rapid growth without News Corporation’s help.
Zuckerberg later sneered, “That’s the difference between a Los Angeles company and a Silicon Valley company. We built this to last, and these guys don’t have a clue.”
Dropping the ‘The’
In the summer of 2005, Sean Parker negotiated a deal to buy the URL facebook.com from About Face Corporation for $200,000. For a while, the site remained branded as “TheFacebook,” but in August it dropped the “the” and unveiled a new Facebook logo. On Sept. 20, the company officially became Facebook.
Acting Cool or Growing Up?
Sean Parker was determined that Facebook’s office needed to be the coolest place in Silicon Valley. He hired street artist David Choe to paint the office. But Parker also said:
“We knew we’d be successful when we were no longer cool— when we were such an integral part of people’s lives that they took us for granted.”
At the end of August 2005, Parker partied in North Carolina and was arrested (but never formally charged) with possession of cocaine. On hearing about this, Jim Breyer, Accel Partners’s board member pushed for his dismissal. Thiel also agreed that Parker should quit.
Although Zuckerberg did not want his friend Parker to go, he spoke with him, and Parker agreed to step down and give his board seat to Zuckerberg. By giving a second board seat to Zuckerberg, he protected his friend from investors having the power to take his company in directions that Zuckerberg did not want to follow.
Sean Parker remained a major shareholder and an important advisor to Zuckerberg after he stepped down. One piece of brave advice that Parker repeatedly gave to Zuckerberg was not to sell the company, as he expected the business would keep growing.
Peter Thiel introduced Zuckerberg to Netscape co-founder Marc Andreessen, who gave him advice on how to run a successful company. He advocated firing employees who were underperforming, arguing that all fast-growing companies sometimes made hiring mistakes and it was better to remedy those mistakes quickly.
Zuckerberg resolved to stop writing software himself so that he could focus on being the company CEO. He conceded, “The dynamic of managing people and being CEO in a company is a lot different than being college roommates with someone.”
He began reading management books by Peter Drucker, and flew to Washington, D.C. and New York, spending four days learning from Donald Graham.
Growing and Expanding
Zuckerberg had a book of ideas for new features that he wanted to add, such as opening up registration to any type of user. But throughout 2005, Facebook still remained exclusive. It was only available in the United States, and students whose schools were not yet included were invited to join a waiting list. Once about 20 percent of a school had joined a waiting list, the Facebook team prioritized them for inclusion. This ensured that demand for the service was high along with take-up once a school was added.
The next step was to open up the service to high schools. As high schools did not have the .edu email addresses that colleges did, the high school version of Facebook was only available to high school students who had been invited by existing Facebook users.
In September 2005, the site was updated to read: “Now there are two Facebooks: one for people in college and one for people in high school.”
Zuckerberg soon decided that the two Facebooks should merge.
By October 2005, Facebook reached 5 million users, all of them either students, graduates, or teachers. Facebook launched a new photos feature: whereas users had been previously limited to only one profile photo, users could now create online albums and tag them with the names of the people who were in them.
In an interview with David Kirkpatrick, Zuckerberg openly admitted, “Our photo site lacks features anyone else would build. We don’t store high-resolution photos. The printing function is downright bad.”
Despite these shortcomings, it quickly became the most popular feature on Facebook, and emails telling users that they had been tagged helped to keep them coming back to the site regularly. It was far more popular than even Facebook had expected, and they risked reaching the point where the servers could no longer handle it. New servers needed to be rapidly added to their data center.
To Sell or Not to Sell?
Zuckerberg attracted Amazon’s Vice President of Worldwide Business and Corporate Development, Owen Van Natta, to come and work for him as Facebook’s chief operating officer. He started in September 2005, and part of his work involved inducing takeover offers from other companies.
Zuckerberg spent much of his time around other CEOs. Many other company CEOs were interested in purchasing Facebook, and although Zuckerberg wasn’t looking to sell, he took the time to meet anyway, even if it meant taking a day out to fly across the country and back just to say “no thank you.” He viewed it as a useful learning process for himself.
All of these CEO meetings unsettled his employees, because he didn’t tell any of them what they were about and rumors spread that he was looking to sell. Eventually, hiring manager Robin Reed confronted him about this:
“Mark—we’ve pulled together a team of thoroughbreds but they’re locked in their stalls. Nobody knows what’s going on. If you want to sell your company, then stop dicking around and say you want a billion dollars. Owen can go and get that offer. If it’s two billion, say that. If you don’t want to sell, then say that!”
Zuckerberg replied, “I don’t want to sell the company.”
“Then stop taking all these meetings with Viacom and Time Warner and News Corp! You’re sending the wrong message! You’d better take CEO lessons, or this isn’t going to work out for you!”
Zuckerberg began seeing an executive coach who taught him about being a more effective leader. He started taking the time to explain his vision for the company to his staff. But he also continued to spend time with flattering CEOs: Viacom’s Michael Wolf offered him a ride on a Gulfstream V, and he couldn’t say no.
When Zuckerberg remarked the plane was “amazing,” Wolf replied, “Maybe you should just sell a piece of the company to us, then you can have one for yourself.”
Wolf repeatedly pressed Zuckerberg, who said that he didn’t want to sell. Viacom thought that an actual written offer may change his mind, and sent him a letter offering him a $1.5 billion deal involving $800 million in cash. Zuckerberg disagreed to this offer, but agreed to meet up for further negotiations.
At this point, in February 2006, Facebook was two years old and yet to make a profit. But it had more than 6 million monthly active users and was the seventh most-visited site in the world.
Zuckerberg eventually blew off the Viacom offer, and in April he took a third round of financing, (Series B) from Greylock Partners and Meritech Capital, plus additional investments from Peter Thiel and Accel Partners. This gave him another $27.5 million to play with and valued Facebook at $500 million.
On April 5, 2006, basic password security was added to the site. Whereas previously all members’ passwords were sent to Facebook as plaintext, the site now had two login options: “Standard,” which sent the users password over HTTP, or “Secure,” which used HTTPS.
In May 2006, Facebook launched work networks for adults working in companies. This did not attract anything like the level of interest that the school networks had, although it did prove popular in the U.S. military. Facebook did not have the same professional image that LinkedIn had, and not many businesses even knew that Facebook had opened this new service.
This first commercial failure raised a few worrying doubts within Facebook: Perhaps their growth projections were too optimistic? Maybe the business was heading for a plateau? In light of this, the board decided that if they could get a takeover offer involving $1 billion in cash, they would give it serious consideration.
In June, Yahoo’s executive team decided to pursue a takeover of Facebook and entered into discussions on a billion dollar deal. Negotiations continued at Van Natta’s house into July.
Accel Partners’s Jim Breyer was excited about the opportunity of making a 10-times return on his investment from just 14 months earlier, but Zuckerberg said to him, “Hey Jim, we can’t sell it if I don’t want to sell it.”
Zuckerberg told his sister, “This is a lot of money. This could be really life-changing for a lot of people who work for me. But we have so much more opportunity to change the world than this.”
Zuckerberg believed that a major new feature they were working on, a news feed, would drastically increase user engagement and drive further growth for his company. He also knew that if he was proven right, even $1 billion would undervalue Facebook.
Dustin Moskovitz was also against the idea of selling to Yahoo. He had a dim view of Yahoo, believing that it was “known for being kind of behind the times” and would lead to Facebook’s product suffering.
Takeover negotiations reached an agreement in principle to buy for $1 billion cash, but then Yahoo announced disappointing second-quarter financial results and their stock price dropped by 22 percent. Yahoo reduced their offer down to $850 million, and Facebook called the deal off. Zuckerberg was relieved. Ironically, Zuckerberg now views this period as one of the lowest points in Facebook’s history.
In August 2006, MySpace announced a $900 million deal with Google.
Rather than thinking of this as a loss, Facebook saw an opportunity. They knew that Microsoft had lost out to Google in that deal, and when they reached out to them asking if they were interested in doing a deal with them, they replied straight away, “OK, we’ll be down there tomorrow to iron it out.” This advertising deal gave Facebook their first profitable year.
The news feed launched on the early morning of Sept. 5, 2006. Facebook’s product manager, Ruchi Sanghvi, celebrated it with the headline “Facebook Gets A Facelift!”. But the development team was taken by surprise because the feature that they expected users to love actually created their first public relations disaster.
Early user feedback was fiercely negative, and Facebook was nicknamed “Stalkerbook.” Hundreds of protests groups were created over the news feed, including “Ruchi is the devil.” The group “Students Against Facebook news feed” gained over 750,000 members within just a few days.
Users found all the status reports on every minor change that their friends made was too creepy and didn’t like the fact their own information updates were being broadcast out to so many of their contacts. Many users felt that the feature amounted to a violation of their privacy.
Wittingly or not, protesters used the new news feed feature itself as a means to protest against it: as new protest groups were created, these were broadcast out to their contacts’ news feeds.
Late in the evening of Sept. 5, Zuckerberg responded with the post, “Calm down. Breathe. We hear you.” But his assurances that the team were continuing to improve Facebook were not enough to dissuade television news crews from turning up at their headquarters the next day and creating a media frenzy. Security guards were hired to escort frightened employees in and out of the building.
The Facebook team started an internal debate on whether they should censor news on protest groups from the news feed. Zuckerberg rejected these proposals on moral grounds. He also argued that the rapid emergence of protest groups as proof of the news feed’s ability to surface trends.
Over the next two days, some privacy features were written to give users some control over what appeared on their feed. For example, it allowed users to update their relationship status but suppress this from appearing on others’ news feeds. Zuckerberg announced these in more apologetic language in his next post, “An Open Letter from Mark Zuckerberg,” which began:
“We really messed this one up. When we launched News Feed and Mini-Feed we were trying to provide you with a stream of information about your social world. Instead, we did a bad job of explaining what the new features were and an even worse job of giving you control of them.”
Due to the ongoing controversy with the news feed, open registration was delayed by two weeks. On Sept. 26, 2006, Facebook was opened to everyone at least 13 years old with a valid email address. The same structure of anyone belonging to a particular network applied, but now any user who was not in a school or a workplace could join the network for their city.
Another feature for driving new members was the ability to share your email address book with Facebook and find out who was already on Facebook. If they weren’t on there already, you could send emails to them inviting them to join.
The combination of these two new features increased the rate of new users from 20,000 per day up to 50,000 per day by the second week of October.
By the end of 2006, it had reached 12 million users.
The next evolution of Facebook was the Facebook Platform, which enabled developers to host their own applications on Facebook and give those application deep integration with Facebook users’ data.
The first F8 developer conference was held on May 24, 2007 at the San Francisco Design Center. Zuckerberg announced, “Until now, social networks have been closed platforms. Today, we’re going to end that.”
Users were given the option of removing the official Facebook versions of its applications and replacing them with a third-party version. For example, there were many alternatives to Facebook Photos for users to choose from.
On Nov. 6, 2007, Facebook launched two new features. The first was called Facebook Pages. It replaced the old sponsored page business model with free pages on Facebook for any business or other commercial entity. Instead of becoming a friend of these organizations, users could become a fan of them, and news of them becoming a fan would be spread to their Facebook friends. This was popular and remains a part of the Facebook product to this day.
On the same day, a service called Facebook Beacon was launched. This service sent data from 44 external partner websites to Facebook, for the purpose of allowing targeted advertisements and allowing users to share their activities with their friends. Activities on partner sites were published to the Facebook user's news feed.
On Nov. 20, 2007, civic action group MoveOn.org created a Facebook group and online petition demanding that Facebook not publish their activity from other websites without explicit permission from the user. In fewer than 10 days, this group gained 50,000 members.
Sean Lane purchased an intended surprise diamond ring from Overstock.com (one of the sites using the Beacon service) for his wife. Without his knowledge, this purchase was broadcast to hundreds of people in his Facebook network, including his wife.
Lane was one of 19 people who filed a class action complaint for violations of the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, and the Video Privacy Protection Act.
Lane represented the class of Facebook users who had visited Beacon sites as the plaintiff.
The main complaint alleged in the lawsuit was that Facebook had not obtained the users’ consent for its use of their data. Facebook used an “opt-out” system where it assumed users’ consent unless explicitly told otherwise.
On Dec. 5, 2007, Facebook instituted new privacy controls replacing the opt-out system with an improved system that required its users to grant it permission to use their information. The lawsuit concerned the period before those easier-to-understand controls were implemented.
The Beacon service was shut down in September 2009.
There were two other privacy controversies in 2009. The first was on Feb. 4 when Facebook revised its terms of service, asserting Facebook’s retrospective rights to all user information, even for accounts that had been deleted. After a public backlash, Facebook reversed this decision.
In September, two students at the Massachusetts Institute of Technology (MIT) announced the results of a Facebook experiment. They had written a computer program (called “Gaydar”) to make predictions of Facebook users’ sexuality. It looked at profile information from profiles of 1,598 men who included their sexuality in their profile, as well as 947 men who did not report their sexuality. Although the researchers had no way of confirming their predictions for most of the 947 men, they privately knew that 10 of them identified themselves as gay but did not say so on their Facebook profiles. The program correctly predicted the sexuality of all 10.
“Gaydar” was able to make these predictions by analyzing the profiles of the users’ friends, and the researchers warned this revealed an example of how “information can be inadvertently shared.”
The consumer privacy group Electronic Privacy Information Center (EPIC), filed a complaint with the U.S. Federal Trade Commission in 2010, alleging, “These changes violate user expectations, diminish user privacy, and contradict Facebook’s own representations.”
Regardless of the many controversies, however, the majority of users maintained their trust in Facebook. A September 2009 survey of more than 6,000 consumers found Facebook to be the 10th most trusted online company, ahead of Apple, Microsoft, and Google.
In April 2008, Facebook overtook MySpace in the number of unique worldwide visitors, giving it its first claim for being the most successful social media company in the world.
Over the years there have been many serious competitors aiming to knock Facebook off from its throne, but as we shall see in future episodes of this series, all of them failed where Facebook succeeded.
Today, in 2018, there are more than 2 billion Facebook users all over the world. Despite its many controversies, Facebook is more popular than ever.