Facebook, Riding a Web Trend,
Flirts With a Big-Money Deal
As Big Companies Pursue
Networking Sites, Start-Up
Is in Talks With Yahoo
Youthful Audience Is Fickle
By KEVIN J. DELANEY, REBECCA BUCKMAN and ROBERT A. GUTH
September 21, 2006; Page A1
One popular use of social-networking site Facebook.com is to flirt with other members. As it happens, Facebook Inc., the start-up company behind the Web site, has been doing some serious flirting of its own.
People familiar with the matter say the company has held separate acquisition talks with Yahoo Inc., Microsoft Corp. and Viacom Inc. over the past year. Now, say some of these people, the start-up is in serious discussions -- again -- to sell itself to Yahoo for an amount that could approach $1 billion.
Behind the pursuit of Facebook is a high-stakes battle by big technology companies to extend their influence on the Internet. Sites like Facebook and rival MySpace have become the Web hangouts for a coveted market: young people. They gather there in large numbers to create Web pages with their own profiles and musings, look for friends, pick up strangers and send messages to each other.
Suddenly, social-networking sites, as they are called, are starting to look like the latest incarnation of the Internet's Holy Grail: an entry point onto the Web, where an owner can sell access to all the consumers that come there. In past years, that search has taken investors and marketers to Web browsers, to "portals" such as Yahoo that assemble a wide array of Web services and to search engines such as Google Inc. (See related article.)
Rupert Murdoch's News Corp. bought MySpace last year for $650 million and quickly set about turning it into a cash machine. The Murdoch empire now uses MySpace to promote music, movies, soft drinks and books, helped by features including video downloads and instant messaging. In August, Google guaranteed MySpace and some other News Corp. sites a minimum of $900 million in ad revenue over the next three and a half years.
The danger of building a business around networking sites -- which also include Friendster, Bebo and myriad smaller players -- is the fickle nature of their consumers. As the Internet has sped up the life cycle of success and failure, it is possible some of these sites will flame out as their young devotees flock to the next thing.
Two and a half years ago, Facebook was a college project run by an undergraduate. Today, in an echo of the 1990s technology boom, it is being chased by large companies with their wallets wide open.
During one series of talks with Microsoft, Facebook executives told their Microsoft peers they couldn't do an 8 a.m. conference call because the company's 22-year-old founder and chief executive, Harvard dropout Mark Zuckerberg, wouldn't be awake, says a person familiar with the talks. Microsoft executives were incredulous.
In an interview, Mr. Zuckerberg declines to comment on any talks. The young entrepreneur says he generally works late -- he recalls eating French fries recently in the parking lot of a local McDonald's restaurant at 3 a.m. -- and doesn't get to work early. "I'm in the office at 10:30 a.m. sometimes," he says.
These days, Facebook is wrestling with whether to sell or stay an independent concern. People familiar with the matter say some Facebook executives have considered following the example of Google, which countered critics and acquirers by going it alone. In the process it became a publicly traded juggernaut with a market capitalization of $120 billion.
"I would never say that at no point in the future would we go public or become part of a larger company...but what I would say is, it's not our priority," Mr. Zuckerberg says. "There's so much more to do here." People familiar with the matter say Mr. Zuckerberg holds a roughly 30% stake in the closely held Palo Alto, Calif., start-up business.
At some point, the venture capitalists who funded Facebook will want to see some return on their investment. Jim Breyer, partner at Accel Partners, says he and his firm invested around $13 million in Facebook in 2005. "Clearly we have had significant strategic discussions that have covered everything from outright acquisition to major strategic partnerships," he said. Mr. Breyer says his main focus is turning Facebook into a "major standalone business."
Based on online ad sales, Facebook will likely soon top $100 million in annual revenue, say people familiar with the matter. That is a level now considered the minimum for a high-technology initial public offering in today's difficult Wall Street environment for small-stock offerings.
Facebook may have a limited window of opportunity, having built much of its business on young, Internet-savvy students who could in time switch to using rival sites.
The company recently encountered the fickleness of its world when it rolled out features that enabled users to keep track of their friends' activities on the site. Hundreds of thousands of members joined groups protesting what they saw as a privacy invasion. Facebook added some privacy protections, but Mr. Zuckerberg concedes the company "did a very bad job of communicating" details about the original features to users.
Facebook originally limited membership to college students, later inviting high-school students and people who work for certain companies and organizations. Now, Facebook plans to allow anyone with a valid email address to join.
Some teenagers who once embraced social networking have started to shun such sites, saying they have become too popular and commercial. "It's like a bad party, where you've got too many people talking too loud and you can't enjoy yourself," says Carlo Montagnino, a 22-year-old living New York who killed his MySpace profile this summer. Mr. Montagnino says he was sick of reading the innermost thoughts of his 500 online "friends."
"I don't care about the food they ate that day, I don't care about the new poem they wrote, or the pictures of their birthday party," he says.
Facebook says its site is so integral to the lives of college students and others that it has become more like a service such as email, instead of merely a place to chat about parties and find dates.
Mr. Zuckerberg started Facebook while still a Harvard University student in February 2004. The native of Dobbs Ferry, N.Y., intended the site to assume some of the functions of printed "facebooks" with students' photos and contact information. Mr. Zuckerberg added features enabling students to customize their pages and communicate with each other. Members can "poke" each other, a message sent from one user to another that is sometimes considered a form of flirting.
Facebook quickly spread to other universities. By early 2005, the site had 1.6 million monthly U.S. visitors, a number that soared to nearly nine million last month, according to research firm NetRatings Inc. Facebook users spent an average of more than one hour a month on the site in August, a long time by Internet standards and more than double what they spent a year earlier.
As Facebook's popularity swelled, Mr. Zuckerberg, who wears Adidas sandals to work many days, dropped out of Harvard after his sophomore year and moved to Palo Alto. The former computer-science and psychology major quickly set a brash tone, joking with colleagues about Facebook's goal of "world domination" and once distributed business cards that read, "I'm CEO...bitch." A Facebook spokeswoman says the cards were a joke.
News Corp.'s July 2005 announcement that it was buying MySpace raised Facebook's profile among Internet and media industry deal makers. Yahoo, of Sunnyvale, Calif., for one, began negotiating to take a minority stake in Facebook, with a deal that would have given the start-up company a $750 million valuation, according to a person familiar with the matter. The deal never worked out.
Facebook entered discussions with Viacom, of New York, in early 2006 to be acquired for a total that could have exceeded $1 billion if Facebook reached certain targets, say people familiar with the matter. The talks broke down over valuation and other disagreements, according to those people.
Yahoo, meanwhile, continued to pursue its Facebook aspirations. The Web company has roughly 500 million users world-wide but largely missed the boom in social-networking sites.
Around March, Yahoo was weighing a roughly $1 billion offer, according to people familiar with the matter. Facebook's Mr. Zuckerberg met with executives at Yahoo's headquarters in late March to discuss a possible deal.
At one point in the Yahoo negotiations, the talks extended into the weekend, says a person familiar with the matter. Mr. Zuckerberg, this account continues, said he couldn't take part because his girlfriend was in town. Others pointed out they were closing in on a billion-dollar deal. Mr. Zuckerberg said it didn't matter: his cellphone would be off, this person says.
Mr. Zuckerberg says he doesn't "remember anything like that." He adds: "I have a girlfriend; when I'm hanging out with her I tend to not be that engaged."
In April, Facebook announced $25 million in a third round of financing. That valued the company at around $500 million, according to a person familiar with the matter.
Microsoft soon got word that Facebook had suitors and contacted the company, says a person familiar with the matter. Microsoft Senior Vice President Hank Vigil was one of the main drivers behind starting acquisition talks. After several weeks the talks faltered, largely because Facebook told Microsoft it wanted $2 billion, according to one version of events, a number that had been touted by some investors. That was too rich for Microsoft, which was thinking of a figure in the hundreds of millions of dollars, say people familiar with the talks.
Microsoft also faced internal challenges. The talks with Facebook were being driven by Mr. Vigil and the corporate mergers-and-acquisitions team, not its MSN online business. Without full backing of the online group, Microsoft couldn't justify a deal, say people familiar with the talks.
In July, Yahoo formally offered roughly $1 billion for Facebook, say people familiar with the matter. Shortly after, a new batch of traffic numbers for Facebook indicated the site wasn't growing as quickly as Yahoo had expected. At the same time, Yahoo stock fell sharply after it announced a delay in a key corporate initiative. The company dropped its offer closer to $800 million, say people familiar with the talks, which Facebook rejected.
Facebook's whipsawing series of talks took another turn in August when Google announced it had agreed to broker ads for MySpace and other News Corp. sites. The size of the guaranteed revenue spurred Facebook executives to put any acquisition talks aside and pursue a similar deal, first with Google, then with Microsoft. The deal with Microsoft was signed and sealed in less than a week. Microsoft has promised to deliver ads valued at a minimum of $200 million over three years, according to one person familiar with the deal.
Although it has joined forces with Microsoft, Facebook signaled to Yahoo that the advertising deal didn't preclude further acquisition talks, according to people familiar with the matter. The discussions are at an advanced stage, although it appears the two sides still differ about valuation. If a deal goes through, Yahoo could use Facebook to boost advertising revenue and pitch Yahoo services -- which range from email to music and online dating -- to Facebook's young member base.
Mr. Zuckerberg says he isn't focused on making money or using his position at Facebook to become a media tycoon. Still, he has met media luminaries such as Donald Graham, the chairman and chief executive officer of Washington Post Co.
"I do feel like I share a lot of values with folks like Don. He's very into building a long-term business and focusing on that," Mr. Zuckerberg says. He describes Mr. Graham as "a bit of a mentor."
--Matthew Karnitschnig and Vauhini Vara contributed to this article.
Write to Kevin J. Delaney at email@example.com, Rebecca Buckman at firstname.lastname@example.org and Robert A. Guth at email@example.com