The Facebook Effect

by David Kirkpatrick

  In any case, Saverin’s business skills didn’t impress his colleagues. Saverin was getting a lot of business from Internet banner ad networks that bought space in bulk, but they paid very little, and would take months before they did pay. Even Tricia Black, who has a higher opinion of Saverin than the co-founders had, acknowledges that “there were situations where there wasn’t any follow-through or there were problems with advertisers.”

  When Saverin had an idea for Thefacebook, it didn’t always go over well with his colleagues. For instance, he thought it would be smart to change the process for requesting a new friend so that it required an additional mouse click. To Zuckerberg—fanatically devoted to making his service easy to use—that was apostasy. But Saverin thought it made sense because in the interim you could show the user an additional ad. There couldn’t be a worse reason to do it, in Zuckerberg’s opinion. Saverin argued strenuously with Zuckerberg and Moskovitz that Thefacebook ought to put a big banner ad at the top of the page. “We just thought that was the worst possible thing you could do,” says Moskovitz. “We thought we would make more revenue in the long run if we didn’t compromise the site.”

  Parker and the lawyer, meanwhile, were preparing to create an entirely new legal structure. They were filing papers to incorporate Thefacebook in Delaware. (Most American companies—including just about all Silicon Valley start-ups—incorporate there because Delaware’s laws are favorable for business.) Parker, managing the restructuring, was particularly concerned that the intellectual property (IP) that defined what Thefacebook was—that is, the company’s most critical possession—was not owned by the company. Saverin in setting up the LLC had not sufficiently defined what it controlled. (As the creator, most of the software and design was by rights owned by Zuckerberg personally, along with some owned by Moskovitz.) Legally speaking, there hardly was a company before this point. Saverin controlled the bank account, but the servers where the service actually resided, along with the intellectual property, were under the control of Zuckerberg, Moskovitz, and Parker. The Florida LLC was more or less an empty shell, and what it actually owned was unclear. Zuckerberg and Moskovitz signed over their portion of the LLC, plus the critical IP, to the new Delaware corporation.

  Zuckerberg won’t talk about this dispute now, but his legal filings say he told Saverin that because he refused to move to California with the rest of them and had not done work he’d said he’d do, he would subsequently no longer be an employee of the company. While his ownership interests would remain, they were inevitably subject to dilution (meaning they would represent a smaller and smaller percent of the total company) as employees were hired and given stock options, and as investors bought into Thefacebook. Zuckerberg and Moskovitz, by contrast, would be eligible to receive additional grants of stock based on their continuing contributions.

  The new corporate bylaws provided that Zuckerberg, with 51 percent ownership, was the company’s sole director. Saverin got 34.4 percent. Zuckerberg upped Moskovitz’s portion of the company to 6.81 percent in recognition of his increasing contributions. He also gave his new confidant Parker 6.47 percent. But apparently nobody’s loyalty could be taken for granted at this point, so the shares of both Parker and Moskovitz were to double if they stayed until the following year, which would significantly dilute Saverin’s share. Interviewed by the Harvard Crimson a few months later, Zuckerberg explained why he’d increased Moskovitz’s stake: “Everyone else was like, ‘What the fuck are you doing?’ And I was like, ‘What do you mean? This is the right thing to be doing. He clearly does a lot of work.’” The law firm got the remaining 1.29 percent.

  Saverin later claimed that he did not know the company was being reincorporated, or about several other aspects of this plan. But something he learned around this time must have made him a lot angrier because this is when he “attempted to hijack the business,” in the words of Thefacebook’s later legal filing. He froze the Florida bank account, making it impossible for the company to pay its bills. He said he wouldn’t release any money until his business demands were met. “It felt like we were negotiating with terrorists,” says someone who was in the Palo Alto house. This was just when it had become apparent that big purchases of new servers would soon be required. Saverin said he had prepared an operating agreement that described the respective roles the boys would play in the company, but he wouldn’t let Zuckerberg see it unless he promised to sign it without showing it to his lawyer or anybody else. Zuckerberg responded by creating his own document, which described the responsibilities he believed were appropriate for both of them, but Saverin would have none of it.

  As the negotiations continued, Zuckerberg had to spend his own money to keep the lights on at 819 La Jennifer Way and more importantly, to keep buying servers. Zuckerberg had tens of thousands of dollars he had saved from programming and website jobs he’d done in his summers and spare time. His dentist father and psychologist mother also contributed thousands. This was money, according to a later lawsuit, that had been intended for his college tuition. Zuckerberg and his family ended up spending $85,000 that summer. For twenty-five new servers alone, he spent $28,000.

  Chris Hughes didn’t return from France and show up at the house until the end of the summer. But even so, he played a critical part in Zuckerberg’s brain trust. Thefacebook’s Palo Alto geeks lacked confidence in their own judgments about how people would respond to the product. Humanities major Hughes had a better feel than they did for how users would respond to new features. Immediately upon his arrival Hughes was deluged with requests to look at this or that feature or page design. He talked a lot about privacy and simplicity. Even after Hughes left to go back to school for his junior year, master and commander Zuckerberg often wielded Hughes’s opinions when arguing a point with one of the others. Hughes remained Thefacebook’s public spokesman, fielding an ever-growing number of interview requests out of his dorm room, mostly from college papers around the country.

  At summer’s end, Thefacebook had over 200,000 users. Zuckerberg and Moskovitz were planning to launch at seventy more campuses in September. Parker was well along in continued discussions with investors who the guys hoped would give them the money they needed without too many strings. Negotiations with Saverin continued.

  Some weeks earlier, Zuckerberg and Moskovitz took about five minutes to decide they wouldn’t return to Harvard. Earlier they had thought they’d be able to run Thefacebook from their dorm room again, but signs were that this could be an explosive school year for the service. They didn’t want to mess it up. D’Angelo and the interns returned to school, as did Saverin. Zuckerberg, Moskovitz, Parker, and Halicioglu were, for now, Thefacebook. McCollum stayed on to work on Wirehog.

  On September 11, the owners of the house stopped by to check on its condition. They did not like what they found. Zuckerberg had sublet it from tenants for the summer. In a later court case, a memo the owners subsequently wrote was entered in the record. “The house appeared to be in total disarray and very dirty,” they wrote. “Furniture out in garage—unsure about what is missing and/or broken…Ashes from bar-b-q dumped—some on deck and some in a flowerpot out in back yard. Broken glass all around yard and some on deck…An antique Indian basket…had been taken outside and left on top of the built-in bar-b-q. It was broken and burned.…” They also complained about damage to the chimney from the zip line, repair costs for the pool filter damaged by pieces of glass, a broken laundry room door, etc. College shenanigans had been extensive at Thefacebook’s corporate headquarters.

  In early September, even as he was still wrestling by phone with Saverin, Zuckerberg was served documents informing him that Tyler and Cameron Winkelvoss and Divya Narendra had filed suit in federal court. They contended that Zuckerberg had stolen the idea for Thefacebook from them.

  3

  Social Networking and the Internet

  “Every capitalist out there wants a piece of the action.”

  The concepts of social networking are not ne
w, and many of the components of the early Facebook were originally pioneered by others. Zuckerberg has been accused several times of stealing ideas to create Facebook. But in fact his service is heir to ideas that have been evolving for forty years.

  Something like Facebook was envisioned by engineers who laid the groundwork for the Internet. In a 1968 essay by J. C. R. Licklider and Robert W. Taylor titled “The Computer as Communication Device,” the authors asked, “What will on-line interactive communities be like? In most fields they will consist of geographically separated members, sometimes grouped in small clusters and sometimes working individually. They will be communities not of common location, but of common interest.” The article crept further toward the concept of social networking when it said, “You will not send a letter or a telegram; you will simply identify the people whose files should be linked to yours.” As a key employee in the Advance Research Projects Agency of the Department of Defense, Licklider helped conceive and fund what became the ARPAnet, which in turn led to the Internet.

  A decade or so later, a few pioneers were beginning to spend time in such online communities. The first service on the Internet that captured substantial numbers of nontechnical users—long before the invention of the World Wide Web—was the Usenet. Begun in 1979, it enabled people to post messages to groups dedicated to specific topics. It functions to this day. In 1985, Stewart Brand, Larry Brilliant, and a couple of others launched an electronic bulletin board called The Whole Earth ’Lectronic Link, or Well, in San Francisco. In 1987, Howard Rheingold, a big user of the Well, published an essay in which he coined the term virtual community to describe this new experience. “A virtual community is a group of people who may or may not meet one another face to face,” Rheingold wrote, “and who exchange words and ideas through the mediation of computer bulletin boards and networks.”

  More and more people became familiar with electronic communication, initially by commenting in online groups and chat rooms. The French postal service was the first to bring these concepts to a mass consumer audience when it launched a national online service there called Minitel in 1982. Then America Online started in 1985, initially under another name. In 1988, IBM and Sears created an ambitious commercial online service called Prodigy. Shortly, however, AOL came to dominate the business in the United States. On these services people typically invented or had assigned a quasi-anonymous username for themselves, which they used for interacting with others. I was Davidk4068 on AOL. By the early 1990s, ordinary people began using electronic mail, again typically using addresses that did not correspond to their names. Though they maintained email address books inside these services, members did not otherwise identify their real-life friends or establish regular communication pathways with them. Later in the decade, instant-messaging services took hold the same way—people used pseudonymous labels for themselves, not their names.

  In the early days of the World Wide Web, the notion of an online community advanced a little further. Services like TheGlobe.com, Geocities, and Tripod emerged and enabled users to set up a personal home page that could in some cases link to pages created by other members. Mark Zuckerberg’s first website was one he created on Geocities when still in junior high school. The popular fee-based dating site Match.com launched in 1994 filled with personal information, but for a very specific purpose. Classmates.com debuted in 1995 as a way to help people, identified by their real names, find and communicate with former school friends.

  The era of modern social networking finally began in early 1997. That’s when a New York–based start-up called sixdegrees.com inaugurated a breakthrough service based on real names. Two Internet sociologists, danah boyd and Nicole Ellison, articulated in a 2007 paper the salient features of a true social network: a service where users can “construct a public or semi-public profile,” “articulate a list of other users with whom they share a connection,” and “view and traverse their list of connections and those made by others within the system.” You establish your position in a complex network of relationships, and your profile positions you in the context of these relationships, usually in order to uncover otherwise hidden points of common interest or connection. Another element must be added to explain the trends that led to Facebook—an online profile based upon a user’s genuine identity.

  The sixdegrees service was the first online business that attempted to identify and map a set of real relationships between real people using their real names, and it was visionary for its time. Its name evokes the speculative concept that everyone on earth can be connected through an extended chain of relationships that begins with your immediate friends, proceeds to the next “degree”—the friends of your friends, and on until the sixth “degree.”

  Andrew Weinreich, sixdegrees’ founder and a lawyer, was himself an inveterate networker. The World Wide Web was just beginning to get traction among ordinary people. At sixdegrees’ launch in early 1997, Weinreich invited several hundred people assembled at New York’s Puck Building to join immediately at one of the twenty PCs set up there in the room. “It no longer makes sense for your Rolodex to live on your computer,” he proclaimed. “We’ll place your Rolodex in a central location. If everyone uploads their Rolodex, you should be able to traverse the world!”

  Members normally joined sixdegrees after receiving an email invitation from an existing member. This method of recruitment would be imitated by many subsequent social networks. It sounds obvious to us now, but at the time it was revolutionary. The service allowed you to create a personal profile listing information about you and your interests, based on your real name. Then it helped you establish an electronic connection with friends. You could search through profiles and ask friends to introduce you to interesting people you found. There were two key features on sixdegrees when it launched. The first was “connect me.” If you put in someone’s name, it would create a map of your relationship to them through the service’s various members. The other was “network me,” which enabled you to identify certain characteristics you were looking for, so the service could identify members who matched those qualities. A doctor in Scarsdale who likes chess, perhaps?

  But, as Weinreich now ruefully concedes, “We were early. Timing is everything.” The service was hugely expensive to develop and operate. It hired ninety employees, bought lots of expensive servers and database software licenses from Oracle, and paid Web-development firms Sapient and Scient millions to develop features. And what did all this expense make possible? A service that most people used at a painfully slow speed on a dial-up modem. And there were other severe limitations. Profiles may have had your name, career data, and favorite movies, but they lacked photographs. After all, few people back then had digital cameras. The lack of photos was such an obvious problem that in 1999 Weinreich seriously considered asking members to send in photo prints of themselves so interns could upload them assembly-line style.

  It was unclear to people—members and nonmembers alike—whether sixdegrees was intended as a dating service, a business networking service, or both. Nonetheless, by 1999 sixdegrees had reached 3.5 million registered users and a larger company bought it for $125 million. But it never generated much revenue, and in the wake of the dot-com bust its new owner shut the money-losing company down in late 2000. Figuring that this was the beginning, not the end, of social networking, lawyer Weinreich and his partners had the foresight to win a very broad patent covering sixdegrees’ innovations, a patent that would later figure in the history of Facebook. Weinreich talked about networks like his as the “operating system of the future.”

  Though sixdegrees broke the ice, it took years before others ventured into the waters and built what can be considered genuine social networks. In 1999, two ethnic-focused sites, BlackPlanet and Asian Avenue, launched with limited social networking functions. A Swedish social network for teenagers called LunarStorm launched January 1, 2000. Cyworld, a hugely popular service in Korea, added social networking capabilities in 2001.

 
• • •

  It wasn’t until 2001 and 2002 that the social networking bug hit Silicon Valley and San Francisco. Most of the entrepreneurs and venture capitalists there were still in shock following the precipitous slide in valuations and revenues for Internet companies that began in early 2000. Companies were closing and the mood was grim, especially for consumer Internet companies. New ones were hardly receiving any investment money in 2001 and 2002. But a few hardy souls recognized that sixdegrees might have simply started too soon.

  Plaxo, the Internet company that Sean Parker founded with friends in 2001, wasn’t a social network, but it had a lot in common with them. Plaxo was a contact management service. After new members uploaded their contacts, it relentlessly peppered those people with requests to update their information, always pressing them to join as well. It was obnoxious, but it worked often enough. Parker was thinking much like Andrew Weinreich at sixdegrees—put your Rolodex in a central location and let us manage it for you. Parker liked the Plaxo concept because it was viral—one user could lead to an entire chain of users. Plaxo also foreshadowed a crucial aspect of Facebook—it maintained unique identifying information for individuals based upon that person’s network of contacts.

  In late 2001, an entrepreneur and local pioneer named Adrian Scott launched a social network called Ryze. Scott aimed to eliminate any uncertainty about Ryze’s purpose. It was not a dating site. It was for businesspeople. Its name was intended to evoke the way members could “rise up” by improving the quality of their personal business network. Members’ profiles focused on work accomplishments and they networked with co-workers and business contacts. It planned to make money by charging employers and others to search its databases for prospective employees, consultants, etc. Though it never much took hold except among San Francisco’s tech cognoscenti, it inspired and set the stage for many developments that followed.