1. According to the case, what key characteristics does the social networking industry have?
2. How did Mark Zuckerberg manage Facebook’s growth over the years?
3. What are some of the challenges faced by Facebook?

14 Facebook I wake up and check my e-mail, then I go to Facebook. At night, I do the same thing. Facebook is like an ice cream sundae because you can do anything with it, and no matter what, it’s still fun. —Tiffany Chang, 17, student at University of California Davis1 Introduction In just over two years, Mark Zuckerberg had built the social directory Facebook from nothing more than an idea into a national phenomenon worthy of a reported $750 million buyout offer. It had become so vital to the university lifestyle that first-years were creating their Facebook profiles long before they even set foot on campus.2 By the end of 2005, college students all over the U.S. were spending countless hours every day on the addictive and rapidly growing website. Nevertheless, other well-funded, so-called “social networking” sites had come and gone long before Zuckerberg coded Facebook in his Harvard University dormitory. Was it just a fad that would disappear from the collegiate landscape as quickly and as vigorously as it had consumed it? Or would Facebook remain popular and overcome mounting competitive threats and intense media scrutiny? The organization had grown from just a few friends programming around a kitchen table to a full-fledged technology business with over 100 employees and 7.5 million users. Zuckerberg would have to develop an organization strategy that could allow the company to keep up with its underlying growth metrics, while ensuring Facebook’s user experience was better than its alternatives. The company’s core market—college students—were prone to switching and potential new markets— college students outside of the U.S. and high school students—were rife with well-funded entrants that were a step ahead of Facebook. Focusing the organization on the right objectives would be critical; getting the company to perform efficiently against those objectives would be a challenge for Facebook CEO and 21-year-old Harvard drop-out Mark Zuckerberg. Founder As an undergraduate at Harvard, psychology major Zuckerberg enjoyed building computer software applications in his free time. He had been programming since he was 10 years old, and his skills had, Mike Harkey prepared this case under the supervision of Professor William P. Barnett, Thomas M. Siebel Professor of Business Leadership, Strategy and Organizations, and Mark Leslie, Lecturer in Management, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. This case was made possible by the generous support of Mr. James G. Shennan, Jr. Copyright © 2006 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Stanford Graduate School of Business. C195 48567_28_case14_p195-210.indd C195 9/3/09 3:20:55 AM C196 Section A: Business Level Cases: Domestic and Global in his words, “reached a point where it went into my intuition, and I wasn’t really thinking that much about it consciously.”3 He added: I made a ton of random things when I was at Harvard, and most of them no one ever saw. A lot of them just weren’t meant for other people to see, and they were just things that I made for myself because I thought that they would be cool. I used to make stuff like a natural language interface to play my MP3s. Nevertheless, his work had not always gone unnoticed. In his senior year at Exeter Academy, Zuckerberg and his friend, Adam D’Angelo, created a software plug-in called Synapse that generated music playlists based on a user’s listening habits. Synapse soon found an audience that stretched far beyond the boys’ prep school campus when the technology website Slashdot.com carried a mention of the program. Shortly thereafter, Zuckerberg began fielding buyout offers from a number of companies, including a $2 million bid from Microsoft. In November 2003, he created facemash.com, a website that asked users to vote on the attractiveness of Harvard students, pitting two students’ photos against each other at a time. However, when reports of Zuckerberg’s handiwork reached university officials, he was put on probation and was asked to shut down his website. He obliged and by early 2004, he had moved on to another idea, a “facebook.” Facebooks Facebooks have been on college campuses for generations. In the past, facebooks were paper-based student directories that were distributed to first-year student mailboxes in the fall. They often contained an inventory of basic information about each newly matriculating student: hometown, high school, major, extracurricular interests, and, naturally, a photograph, ranging from formal high school graduation portraits to snapshots at the prom to action photos of students engaging in a summer hobby of choice. Ask any student on any college campus if he or she has finished Moby Dick, the Iliad, or Candide, and you might be surprised at the answer; ask the same students if they have studied their school’s facebook from A to Z, and you might be even more surprised. 48567_28_case14_p195-210.indd C196 Many had theirs committed to memory before the end of the first week of school. Part of facebooks’ enduring attraction can be explained by their merit-worthy functions. They can be a helpful resource for a student who is, say, attempting to learn the name of the person in astronomy class who has offered to start a study group, or for a student who wants to find someone who would also like to mountain bike or join a book club. Indeed, the first few weeks of college can be traumatizing for any student, and for decades facebooks have helped first-years to bridge the gap between anonymity and familiarity. Notwithstanding such honorable utilities, facebooks have achieved mass appeal because of their purely social applications. Ask any college student why they have heavily dissected their facebook, and you probably will not hear an explanation similar to those mentioned herein (unless, of course, you are that student’s parent or teacher); what you will hear, however, will probably have something to do with vanity and dating, i.e., college kids are very concerned with how their facebook profile appears to others and with identifying potential romantic partners. Located at the intersection of these two primal instincts, facebooks are as tethered to collegiate life as final exams and spring break. New Venture For that reason, Zuckerberg could not understand why no one had thought to put his college’s facebook online. He said, “During my sophomore year, I decided that Harvard needed a facebook. It didn’t have one, so I made it.” In January 2004, Harvard had facebooks for different residential houses, but students could only search those to which they belonged. Zuckerberg’s idea was to create a collegewide facebook online, where students could access others regardless of where they lived. In just a couple of weeks, Zuckerberg had coded the original version of thefacebook.com and, on February 4, 2004, it was available for his classmates to access. The site was later renamed facebook.com. The response to Facebook at Harvard was huge and immediate, and by late-February, 10,000 users had registered for the website. Zuckerberg said: At Harvard, a few of my friends saw me developing Facebook, and they sent it out to a couple of their friends, and within two weeks 9/3/09 3:21:04 AM Case 14 Facebook two-thirds of Harvard was using it. Then, we started getting e-mails from people at other schools asking, ‘How do we get Facebook? Could you license us the code so we could run a version of Facebook for our school?’ But when I started it, there was no concept of having Facebook across schools. Nevertheless, by early March 2004, Facebook had launched at Yale, Columbia, and Stanford. Zuckerberg said: We started with the schools at which we thought the people at Harvard were most likely to have a lot of friends. We decided that those were Yale, Columbia, and Stanford. It was not really scientific; it was just intuition and probably wrong. At Stanford, half or two-thirds of the school joined Facebook in the first week or two. At Yale, there was a similar story. Columbia’s community, on the other hand, was a little more penetrated by an existing application, and Facebook didn’t pick up right away. A little later, when we launched at Dartmouth, half the school signed up in one night. By June 2004, Facebook was serving about 30 colleges and had about 150,000 registered users.4 Before long, Zuckerberg was so busy maintaining the website that he could not keep up with his studies. Consequently, he called upon his two roommates Dustin Moskovitz and Chris Hughes for help, and together the trio spent the rest of the 2004 school year trying to respond to the flood of demand for the service from students on college campuses nationwide. Zuckerberg said: Early on, we weren’t intending this to be a company. We had no cash to run it. We actually operated it for the first three months for $85 a month—the cost of renting one server. We had a network of banner ads, but it’s not like we were making money. Zuckerberg and Moskovitz agreed to spend the summer of 2004 in Silicon Valley because they had friends doing internships in the area, and also “because this was a place that a lot of startups had been from, and it seemed like a pretty fun place to be and someplace that it made sense for us to be at some point in our lives,” Zuckerberg said. Indeed, Facebook already had been a hit on the Bay Area 48567_28_case14_p195-210.indd C197 C197 scene, having raced through Stanford a few months earlier. Moreover, similar services had already been received with the local stamp of approval: venture capital funding and a jargon classification; Facebook and a large stable of online communities became known as “social networking” websites. Industry Overview Social Networking Websites Early Entrants Websites designed explicitly for the creation and discovery of social networks have been in existence since the late 1990s. In January 1997, SixDegrees.com was founded by Andrew Weinreich in New York City. The online service asked users to create a list of friends, family members, and acquaintances and allowed users to send messages and post bulletin board items to people in their first, second, and third degrees. In December 2000, the website had almost three million registered users in over 165 countries and was acquired by YouthStream Media Networks in a stock transaction valued at approximately $125 million.5 Weinreich said: From the beginning, our vision has been to create a vibrant, growing online community of members who are able to leverage the power of their relationships in a way that was never before possible. Over the last three years, we have been able to make this vision a reality for nearly three million members through our viral growth engine. However, after the stock market plunged in the early 2000s, many technology companies struggled to stay in business. In October 2002, YouthStream received a delisting notice from NASDAQ because it did not comply with either its minimum $2 million net tangible asset requirement or the alternative minimum $2.5 million stockholders’ equity requirement.6 In the end, SixDegrees.com failed to get traction after 2000. Communications Services Other web services were developed in the late 1990s to enable communications across social networks. In January 1997, Scott Hassan started an e-mail archiving service called FindMail which later became eGroups. eGroups enabled e-mail group communications 9/3/09 3:21:04 AM C198 Section A: Business Level Cases: Domestic and Global through mailing lists; each group also had a shared calendar, file space, group chat, and a simple database. In August 2000, the company had 18 million users and was purchased by Yahoo! Inc. for $432 million in a stock deal and became part of Yahoo! Groups. In 1996, an Israeli-based start-up created an instant messaging program called ICQ that enabled rapid communications between “buddies.” The tool became wildly popular and was acquired by AOL in 1998 for $287 million. In 1998, Evite launched to become a successful social-planning website for creating, sending, and managing online invitations. Business and Professional Services In 2003, Spoke Software, ZeroDegrees, Visible Path, Contact Network, and a number of other companies raised venture capital to help facilitate the creation of online business and professional networks. In November 2003, LinkedIn raised $4.7 million in a series A financing led by Sequoia Capital. LinkedIn CEO Reid Hoffman said: We are very pleased with the rapid adoption of LinkedIn among hiring managers, venture capitalists and executives from public companies in a broad set of industries. It is particularly gratifying to see that it took less than two months for LinkedIn to help hiring managers not only reach top talent through referrals, but also interview and hire them.7 Recreational Services In the early 2000s, a flood of web services were formed to create recreational social networks. In 2002, Jonathan Abrams founded Friendster, and it became a prominent dating website. Friendster asked users to create an online presence by filling out a questionnaire profile and uploading a user picture, and then defining a pool of friends. In September 2003, the site attracted 1.5 million unique visitors, up from 110,000 in April 2003. In October 2003, the company rejected a $30 million buyout offer from Google and instead raised $13 million in second-round financing led by venture firms Kleiner Perkins Caufield & Byers and Benchmark Capital.8 “They’re obviously growing by leaps and bounds and spending no money on marketing. That they’re using very powerful human relationships to connect is really at the core of what makes this for me quite compelling,” said board member John Doerr.9 48567_28_case14_p195-210.indd C198 In July 2003, Chris DeWolfe and Tom Anderson founded MySpace, which is described on the website as “an online community that lets you meet your friends’ friends.” In addition to its basic social networking service, MySpace also incorporated a wide-range of features into its platform, including groups, invitations, events, classifieds, and forums. However, the Los Angeles-based start-up became mostly known as a combination dating and music discovery destination, featuring music streams and downloads from both unsigned artists and major label acts like Weezer and REM. In December 2004, the company raised $11 million from Redpoint Ventures.10 Another prominent recreational social network was launched by the Internet juggernaut Google. Started by a Turkish-born Google software engineer in January 2004, the social network called Orkut restricted membership to invitation-only (only existing members could invite new users to the network). By the end of July 2004, the site had over one million members, and by the end of September, it had surpassed the two million mark. In November 2004, over 62 percent of Orkut’s users listed Brazil as their country of residence.11 Facebook Company Overview In 2004, Facebook was a free service and accessible to anyone with a “.edu” e-mail account, which limited its use mostly to college students. Members of the network were encouraged to create a personal profile including contact information (e.g., phone number, address, instant messenger ID, and e-mail address), interests, and current course schedule. Zuckerberg said: It’s essentially an online directory for students where [they] can go and look up other people and find relevant information about them— everything from what they’re interested in, to their contact information, what courses they’re taking, who they know, who their friends are, what people say about them, what photos they have. I guess it’s mostly a utility for people to figure out just what’s going on in their friends’ lives, [and those] people they care about. 9/3/09 3:21:04 AM Case 14 Facebook Unlike Friendster and MySpace, where divisions between various networks were not explicit, Facebook made its members’ school their primary network and offered only limited access beyond that. “What makes it so much better than Friendster is that it’s your peers rather than a random assortment of people,” said Sarah Williams, a freshman at Berklee School of Music in Boston.12 On Facebook’s customer support page, it read: Facebook was intentionally designed to limit the availability of your profile to only your friends and other students at your school. This simple but important security measure promotes local networking and makes sure that your information is seen by people you want to share it with, and not seen by folks you don’t. Additionally, Facebook put its members in charge of their own privacy settings. In some cases, members allowed only their friends to view their profile on the website. However, Facebook’s default setting was more open: everyone at a member’s school could see their profile. (See Exhibit 1 for Facebook principles related to privacy). Zuckerberg said: We’re not asking anyone to put anything out there that they wouldn’t be comfortable putting out there. We’re not forcing anyone to publicize any information about themselves. C199 We give people pretty good control over their privacy. Despite his company’s similarities to other so-called social networking sites, Zuckerberg did not believe that the term was accurate for describing Facebook. He said: The use of [Facebook] is definitely aided by . . . friends and people around you using it. But I think that it’s a utility and something that people use in their daily lives to look people up and find information about [them]. . . . In that way, maybe there’s some form of networking going on. Friendster, MySpace, and Facebook are all very different things, but you can apply the [term] social network to them because they have this model of having friends sending invitations [to friends]. I think that they all kind of use it to achieve the same result, which is getting people to come to the site . . . but then they kind of parlay that into different uses. We have this directory utility. Friendster was a dating site. Facebook does not, in any way, aim to be a dating site, even though maybe some of that goes on. Exhibit 1 Facebook Principles We built Facebook to make it easy to share information with your friends and people around you. We understand you may not want everyone in the world to have the information you share on Facebook; that is why we give you control of your information. Our default privacy settings limit the information displayed in your profile to your school, your specified local area, and other reasonable community limitations that we tell you about. Facebook follows two core principles: 1. You should have control over your personal information. Facebook helps you share information with your friends and people around you. You choose what information you put in your profile, including contact and personal information, pictures, interests and groups you join. And you control with whom you share that information through the privacy settings on the My Privacy page.