The new face of Facebook

How to win friends and influence people

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

Apr 9th 2016 | SAN FRANCISCO |

http://www.economist.com/news/briefing/21696507-social-network-has-turned-itselfone-worlds-most-influential-technology-giants

A HUGE thumbs-up, Facebooks like symbol, greets visitors at the entrance to the
companys 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 Suns 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 illmanaged initial public offering in 2012the firms share price sank on the first day
of tradingseemed to confirm those doubts. But those betting against Mr
Zuckerberg were wrong.

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 industrys 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 photosharing 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
Zuckerbergs 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 missionfocused technology company. That puts it in direct competition with other techindustry 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.
Im 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 firms technology infrastructure is not visible, but that is probably what
we have spent most of our time on, says Mr Zuckerberg.

Status update
The companys 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 engines
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 Twitters, largely because it has more users who
spend more time generating more data. But it is also a result of Facebooks 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 doneunlike
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).
Facebooks 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
Facebooks 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 Googles 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 Zuckerbergs big acquisitions have helped to defend his firms 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.
Instagrams 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 Facebooks market cap.
Aside from the blockbuster acquisitions a little-noticed deal has also proved
shrewd. Facebooks 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 concernpresent in many real-life social networks toothat
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

Facebooks plan is to embed itself deeper into peoples 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 firms 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 peoples
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 peoples 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 peoples 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 Microsofts Cortana also offer help from a smart
secretary, which employs clever algorithms to anticipate peoples 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.
Facebooks 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 Facebooks 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 Zuckerbergs 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. Facebooks 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
firms 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. VRs 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, Googles parent
company, has an investment.
Friending the world

Facebooks most audacious and controversial scheme yet is to take a role

connecting the worlds 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. Facebooks critics are fearful that it might control poor
peoples 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
countrys 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 Facebooks mission to
make the world more open and connected. He has hired aerospace engineers
from NASAs 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 Earthover users time, advertisers dollars and the best
engineering talentis 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 Facebooks
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 Zuckerbergs 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 Facebooks 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 Valleys 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 Americas
government, is looking at how Facebook uses and stores that information. In March
Germanys competition authority launched an inquiry into Facebooks 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 peoples 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 firms reputation for
protecting users.
Facebooks 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, Facebooks chief product officer, says the main
misperception about the company is that it sells peoples data. In reality, it matches
advertisements to users while keeping that information to itself. But users remain
wary that Facebooks 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 Facebooks 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 Zuckerbergs first big test, but it may
be the defining challenge of Facebooks adulthood.

From the print edition: Briefing