Meta

Transcript from https://podmenti.com/t/e411551d14bd8bec

Alright, so I was up late last night.
Late for me as a
Dad is like eleven PM.
But I'm sitting here at my computer in my dark basement, you know, pulling notes together.
David, what music did I have on? You have one guess.
Uh oh oh I know exactly what you had on. You had Trent Reznor social network soundtrack. It makes anything you're doing feel uh you know twice as important and twice as revolutionary.
And uh it just felt very apt for this episode.
Oh man.
So I have been listening in the last twenty four hours to
Fifty cent into club.
Because that came out my freshman year of college, same year as the Facebook dot com and like
Man, fifty cent.
Facebook dot com.
Can't get any better than that.
Perfect. Match made in heaven.
Well I'll check out our wall the wall from the old days and see if there are any posts about that.
Alright, let's do it.
Let's do it.
Who got the truth?
Is it you, is it you, is it you Who got the truth now?
Is it you, is it you, is it you?
Me down, say it straight.
Another story

Welcome to the fall twenty twenty four season of Acquired, the podcast about great companies and the stories and playbooks behind them.
I'm Ben Gilbert. I'm David Resenthal.
And we are your hosts.
Today we are studying a company.
whose products are used by more humans than any other company in history.
Meta.
Of course, formally known as Facebook.
So I figured I would contextualize these numbers a little bit.
Meta has four billion monthly active users.
And
Daily active users are over three billion.
Yeah.
Nuts.
There are only eight billion humans on Earth.
So as I started to brainstorm what the closest competitors could be to serving
Half of the humans.
I thought surely I can find it in empires or governments from the past, where there is some larger percentage.
Yeah, it makes sense.
Nope.
The Roman Empire at its peak.
Was only 40% of humans tops. You know, the data's a little bit hard to actually find from that period of time, but the British Empire, which we have a little bit better handle on.
at its peak was only twenty three percent of the global human population. So no government tech company
utility, etc. has ever addressed so much
of the world.
It's just wild. There's no other way to put it.
In the over twenty years since its founding
Meta truly has connected humanity through its apps, Facebook, Instagram, WhatsApp, Messenger.
And now threads.
So today we're gonna study how they did it.
There's been a lot of ink spilled writing about Facebook over the years, and for its first 10 years, most of that writing focused on the many benefits to society with breathless exuberance over milestone after milestone.
And for the past ten years, it's kinda seemed like Meta could do nothing right.
Reporting focused on its many stumbles, the massive mistakes, the incredible controversies surrounding the company.
And while we will of course discuss these events as part of our story and analysis.
Our goal today on this podcast episode is
is really to understand
How it is that meta became the dominant fabric that connects the human race.
And why they've been so successful at continuing to win over and over again.
No matter what you think of the company, it is undeniably one of the most important institutions in the world.
And their global scale is no accident.
It is the result of careful actions from some of the most motivated and brilliant people in the world.
who believe in one mission.
connecting as many people as possible.
I hadn't thought about this till now, but
Almost sort of tautologically, this is like
the most important episode we'll ever do to try and understand this.
The biggest company.
That has ever existed. It's the biggest thing that's ever existed.
Yeah, by these measures that we're talking about right now. Right.
Now, of course, the story of how we got here is nuts. It is the perfect acquired stew, like you're saying, David. They speed ran their startup phase. They swerved through multiple disruptive technology waves. They battled fierce competitors, they invented.
Or maybe discovered one of the greatest business models ever. And they're now trying to pull forward the next technology generation through sheer force of will with AR.
VR and AI. So finally, listeners.
We tackle one of the greatest corporate stories ever.
Facebook.
the Mark Zuckerberg production.
After this episode, discuss it in the Slack and check out ACQ Two, our second show, where we just had Clem DeLong, the CEO of Hugging Face on, to talk about his view on how the open source AI ecosystem will play out.
So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.
David
Roman Empire? Like what's our starting place here? No, man, we gotta start in nineteen eighty four, or we're never gonna finish this episode. And really
I mean
Where else can you start? I can make up, you know, Roman Empire, classics, Aeschylus, whatever t shirt saying Mark has this day of the week.
But
Facebook has always
Started and ended.
with Mark Zuckerberg. So we start
In May
Nineteen eighty four.
When Mark Elliot Zuckerberg
is born as the second of four children to Karen and Ed Zuckerberg in Dobbs Ferry, New York.
Small little suburban town, suburb of New York City.
Yeah.
And his mom is a psychologist and his dad is a dentist, is that right?
That's right.
Ed studied dentistry at NYU and
He was
Always like really into math and computers though, but
Growing up the son of Jewish immigrants in New York City
you know, the expectation was you're gonna be a doctor or a lawyer. So he goes to dentistry school

He meets Karen, they get married.
After Ed finishes dental school, they move up to Dobbs Ferry in Westchester County.
And Mark and his three sisters grow up as prototypical middle class suburban American kids in the nineties.
Life is good. Your grandparents worked really hard to make a bunch of sacrifices for your parents. Your parents are now professionals.
They're also working hard to give opportunity to you and the family is
kind of leveling up in America. It's the classic story here. You can play sports and you can hang out with your friends and play video games. Indeed. And
For Mark and for
Me growing up and maybe you too, like
It's kind of amazing. Like there's no reason not to just
Explore your passions.
And for Mark, those passions

Threefold.
One.
Turn based strategy video games.
Most particularly Sid Meyer's civilization.
Two.
Programming computers.
And three.
As
You mentioned and everybody who watched our Chase Center show knows.
Ancient Greek and Latin history.
Classics.
The classics. And pretty much in that order of importance, both to him personally
And the future course of Facebook and Meta.
So let's start with civilization.
September nineteen ninety one. David, I toyed with the intro to this show being
And we are your hosts.
Civilization is a video game upon which but I decided not to
Right. I mean it's kinda laughable, but like no, this is really important here.
So
September nineteen ninety one, when Mark is seven years old.
Civilization or Civ as it's
Fans call it.
Comes out for PCs.
And young Mark gets hooked.
And for those of you who haven't played Civ
It is a
T.
particular type of turn based strategy game.
And is probably the foremost example of what is known as the four X.
genre. That's the number four
Letter X.
And four X stands for
Explore
Expand.
Exploit.
Exterminate.
And
Despite that sort of nefarious sounding nature to the last one there, especially
Civ in Forex games.
Well kinda this radical branch of video games at the time where
The action of playing and the way to win is
wasn't just about like killing all the enemies on screen.
It's a lot more like a board game or like risk, if you're familiar with that. It's about strategy.
It's about growing and marshaling your resources effectively.
And
Most importantly, there are multiple ways to win the game.
most other games out there you can win by defeating all the other players.
But you can
Also when
By completing
A technology development tree.
And reaching like the peak of technology which is in the game, launching a spaceship to go colonize a new planet.
So that's another way to win.
And in modern versions of the game, you can
Also when
By diplomacy by getting elected the leader of the UN.
You can also win
By dominating all the other players.
On either culture.
Or religious dimensions too.
So
It's
Kind of like this amazing
Simulation of what it's like to run one of the
Top ten market cap mega capitalization companies in the world today.
But
To your point, this idea that it's
turn based, you try to amass resources, figure out how to deploy your resources.
have multiple concurrent strategies so that you
As the
roll of the dice of the universe happens and things unfold before you and your and other players make their moves. Yep. Right.
to be able to effectively react to it all and use your resources to win in whatever way winning means to you.
It's kinda funny. This is way too simplistic of an analogy and, you know, not fair to Mark on any dimension.
But the whole
construct here sort of reminds me of the book Enders game, you know, where like it's these kids growing up playing this game and
They didn't realize all along it was actually the real game.
Uh so
Playing Civ and other video games when he's young, PC games.
Leads young Mark.
to want to learn how to program himself. So when he's ten, he has his parents take him to the local Barnes and Noble one day.
And
begs them to buy him C plus plus for dummies.
And he
Dives into the book.
Learns everything in there.
And
He's like I I need more, I need more. So after that his parents hire a local tutor to come and tutor him for an hour a week.
And
programming and learning how to write software.
And Mark has
This quote that he says later.
I'd go to school.
And I'd go to class and come home.
And the way I think about it was
Awesome.
I have five whole hours to just sit and play on my computer and write software.
And then Friday afternoon would come along and it would be like
Okay.
Wow, now I have two whole days to sit and write software.
This is amazing.
It really is astonishing as a ten year old to be learning C.
This is not basic. This is
a language where you are thinking very close to the metal, you have to be very aware of the constraints of your system of manually managing memory.
It's impressive for fourteen or sixteen year olds to be learning.
simplistic languages, this is a whole different ballgame.
As it always is with Mark.
So
While he's a kid here, you know, in Dobbs Ferry, he codes up all sorts of little projects, including a family chat tool for all the networked computers in the house.
And also his dad's dentistry office is attached to the house. So he builds this network
called Zucknet, which is family chap between all the computers. Very prescient here.
And then
Speaking of family and friends chat.
In nineteen ninety seven
When Mark is thirteen years old.
AOL
launches
Aim.
AOL instant messenger.
Ooh, I remember it well.
many, many, many hours lost to aim.
And uh warning my friends and
other dynamics of the AIM system to gang up on people and
To have other people gang up on me and Oh man, punting people off aim and
Yes. Having to create a new screen name and log off and log on and message someone and pretend you're someone else. I mean the whole
This was middle school.
This was middle school for all of us and
This was middle school for Mark Two. The crazy thing about AM
To go on just a quick little digression here.
I had no idea until doing the research.
It was actually like a rogue skunk works project within AOL. Did you know this? Hmm.
No.
Yeah, so it was a couple of engineers that just went off and built this.
Almost against the wishes of management.
It was not originally intended to really be for social use or for kids at all.
It was more like the idea they had was it was gonna be kind of like Slack, like chat for workplaces. Oh ended up using it.
internally at AOL to communicate.
And that's actually where away messages come from. So they came up with away messages because people would be in meetings or you know, this is the days of desktops. There's no cell phones, barely even laptops.
People would go out to lunch and they'd have to put up a message so that
when their colleagues were trying to communicate with them be like, No, no, I'm in a meeting, no I'm away
That's the origin of away messages. That's fascinating. And it is interesting how you ended up kind of using away messages after a while, even while you were there, just to indicate status. It was the ultimate emo teenager thing. It was like I am expressing my whole self through this one line away message.
So I mean for
People all of our age, Mark's age at the time, I mean, that completely changed our social experience when that came out.
So the other important thing about AIM
When it came out that
I had no real conception of at all as a kid.
Was that it was free.
So my family was
an AOL family, like we were AOL subscribers, we had the you got mail, et cetera.
But you didn't have to be a paying AOL subscriber to download and use AIM and join the network.
Aim.
Goes on to become
This total viral thing in North America. I mean kinda
Concurrent with Napster a little bit before Napster. It's the first piece of consumer viral
Software.
And so by two thousand one, a couple of years after launch,
It has thirty six million users.
Including
as we've been talking about, basically every middle and high schooler with access to a computer.
And
You know, thirty six million users doesn't sound like a lot today.
But you gotta remember the internet was way smaller back then.
Way, way, way smaller.
Not just in terms of number of people had access, but also just
number of people who were literate in how to use it.
Totally.
It's the early broadband era is that era we're talking about. And you're right.
Tens of millions of people, at least in the US, had internet access at this point in time.
Yep. And
Basically
All of them and certainly all the young people were on aim.
So
The other important thing about Abe and AOL here.
Is it was
Pretty easy to hack.
But like
Oh man.
There was just a
field day that kids and teenagers
Aimbots.
Punting software, wares, hacking programs.
If you were
someone like me, you're just downloading this stuff off of FTP servers on the internet and installing it on your machine and it let you
kind of be a punk and like
kick people off of AM by bombarding them with messages. You know, you could do some like teenage punk stuff.
But it also let you extend
The functionality of what
AOL and AIM was. You could add graphics, you could add emojis, you could draw pictures. Add lakes in your profile. Yeah. Oh, the ASCII art in your profile and your away message.
Totally. And like
This becomes such an important part of
teenage culture on the internet as we're growing up. It's like all this personalization of like
Hey, I don't want just what AOL gives me.
I want to control this.
So
For me, I was downloading and using this stuff.
You might have been writing it, although you might have been a little young. No, I didn't learn PHP until
I was fifteen or sixteen, so call it.
Two thousand and five.
Okay, so yeah, a little later. Yep.
Mark is one of the kids that's writing this stuff.
And you know, I think that's where he got his start. He was doing Zucknet, he was doing all these little projects, but like
You know, here's AOL this sort of
unintentionally infinitely hackable and extensible canvas.
That he can play around on.
So that's number two for Mark, you know, passion number two, computers and programming.
And then passion number three is
Classics.
So
Mark
When he enters high school, he'd gone to public school all through elementary and middle school in the Baron Dobbs Ferry in Westchester County.
He does
Two years.
At the local public high school at Ardsley High School.
And
After two years at Ardsley
Mark is like well
You know, a couple things. I'm not sure.
That this is the right high school for me.
for the rest of my high school career.
One.
I think I would enjoy just
being in a sort of like
better school. Like a
higher level of competition, higher level of learning. You know, he's definitely at the top of the class at Ardsley.
Two is you know, I'm really into
Latin and classics and like I'm gonna tap out on that.
Real fast here at Artsley.
There's gotta be a place I can go.
Where I can really study this.
And that takes us
To Phillips Exeter Academy.
In New Hampshire, right?
Yes, in New Hampshire.
And so Exeter is one of these.
private boarding high schools that have existed
Basically as long as Ivy League colleges have
And they're there just kinda as
feeder schools into
Ivy League colleges.
So Mark applies to Exter, gets in.
And the summer before he's about to go
The school hosts.
An event.
in New York City in the city for incoming two years to
Meet each other, get to know the school, get ready, et cetera.
And there
Mark meets.
Another kid who's a lot like himself.
Who also is really into computers.
Really into
Aim and everything going on there.
And Mark's like, Yeah, man, I really made the right choice. Like everybody here is gonna be just like
The two of us.
And that person
Is Adam.
Dantel okay.
Future CTO.
Of Facebook.
Amazing they met in high school.
Now the great irony of this story is that
Mark and Adam ended up being like the only two kids who are really into computers in the class. It was just the two of them.
They just happened to meet in New York City at the pre school event.
Which is probably one of the last few years that that would be the case. I'm sure if you went to this school today, it'd be
eighty percent of the class is really or a hundred percent of the class is really into computers.
Yes, I think in large part.
Because of Mark and Adam, it's quite different these days. Yep.
So the two of them, when they get to Exeter, become fast friends.
They work on all sorts of computer projects together, software projects.
And
By the end of their senior year.
To graduate from Exeter, you have to do a senior project.
And you know, most people do this like a mini college thesis or they do something in the community, et cetera, et cetera.
Mark and Adam are like
Now we're gonna build some software.
This is what we do.
So
Mark one day.
Is listening to music on his computer. I think
Probably on Winamp, which is
How everybody listened to
MP three's that you got from Napster back in the day.
I think I listened on Sound Jam, but it's just because I had a Mac. Oh yeah.
Future seeds of iTunes.
Yep, that's right. It got acquired by Apple and then eventually they I think built off the same code base and turned it into iTunes.
But everyone used Winamp. That was the aim of music players. And in fact, AOL, I think, would acquire Winamp a couple years later.
Bring it all into the fold.
So
Legend has it.
Mark is listening to a playlist in Winamp one day.
During his senior year.
And
He gets to the end of the playlist.
And he's like
Why did the music stop?
I listen to so much music all the time on Winamp, it should just
Know what I like and automatically
Pick the next song.
It should just be a DJ.
And then inspiration hits and he's calls up Adam and he's like
I've got our senior project.
We are going to build a
An AI DJ plug in.
For Wamp.
And they call this
Synapse and like
They did it, these two high school kids. They build an AI, you know, or AI wasn't called AI at the time, but like a you know, a recommender system that looks at the data of what songs you've consumed on Winamp.
And predicts
what song you're gonna like to consume next. I mean it's basically Spotify today.
What year is this?
This would have been spring of two thousand two.
Yeah, real early days.
So
They buy and then they
release it to the internet and people start using it. It
Starts getting some.
Adoption and um
A couple companies, including WinAmp.

Reach out to Mark and Adam and are like
Hey, do you want to come work here? Like, can we buy this? Yeah, and I think Microsoft was one of them too. It was for like
a million dollar acquisition offer or something like that. It wasn't, you know, crazy, but these are high school kids.
Right, in two thousand two.
Yes.
But yeah, this is really important'cause they're about to graduate.
Adam is gonna go off to college at Caltech.
Mark is gonna go off to college at Harvard in the fall.
But Mark is not just like
Any student coming into Harvard, he's like
I can build these things and they have value and
big companies are gonna be willing to pay me for them.
I don't need to be that worried about getting a job. Right. He sort of always knew he had a great fallback plan. So it kind of let him be risk on.
So Mark graduates, he goes off to Harvard.
It's
The natural choice on many fronts. I mean
One.
Mark, of course, aces his SATs. I think he gets a sixteen hundred on the SATs.
There's this great legend about um
You had to take SAT twos.
to get into college back then. I don't know if you still do, but I think you had to have a minimum of three
Mark.

He walks in the day of the test says I'm gonna take
All three that I'm gonna take on the same day. He gets eight hundreds on all of them.
College admissions was not gonna be a big deal.
And his older sister Randy was already there at Harvard.
So
Clearly.
Good to go to Harvard if he wants.
Yes.
And
I think he wants enough. Like I I don't know that it's that important to him, but he's like, Yeah, sure.
Harvard, it's the best. I'm gonna go there.
Yep.
In fact, there's a video of that. That's right. Have you seen this? His dad sort of filming his reaction and he's pretty measured about it. It's very, yep, got into Harvard and then
kinda goes back to doing something else on his computer.
Yeah.
No, I think
For most
Kids for most people in the world?
You would look at that and be like
What arrogance.
And look, it's not like eighteen year old Mark is not arrogant.
But I think it's also this is why all this stuff we've been talking about is important.
It's just not that important to him. You know, he likes building stuff. He likes making stuff. He knows it has value. He knows people will use it.
Whether he goes to Harvard, doesn't go to Harvard, goes to college, doesn't go to college
It's just not that big a deal to him, I don't think.
Yeah, reading in between the lines, it seems like the thing that he was most excited about is oh good, a challenging environment where I will encounter other really smart people like myself who are ambitious.
Yes.
I think that is totally right.
So Mark gets to Harvard in fall of two thousand two.
And
You know, like you said.
He goes to class, he does well, but
He wants to meet other people and be around other smart folks. He ends up joining the AE Pi fraternity there, like my co host here, my esteemed colleague Ben. Indeed.
Also my father while he was in college. Ah, I didn't know that.
Yeah, that's right. That's right. A pie.
Adam, meanwhile, of course, goes off to Caltech, you know.
three thousand miles away in the opposite corner of the country. Also, can I just say how crazy is it that
Adam D'Angelo
Would become
Facebook's
first CTO, they don't go to college together.
Right.
Well I was gonna get into this in a sec.
Adam has a very different experience at Caltech. He ends up graduating from Caltech, I think, um
They probably do not have the same uh generous leave policy there that Harvard does.'Cause Harvard's is weird, right? It's like you can leave and if you ever want to come back, you just it's like you never left.
Oh.
We're gonna come back to that in one sec. Put a bit in that.
But for Adam at Caltech, he still finds time while he's there to keep working on these projects. So
During his freshman year he builds
Something called buddy zoo.
Yeah, kinda building on
Synapse and the success that they had.
in their senior project.
Buddy Zoo.
Takes your buddy list.
From
Aim from AOL.
And
effectively turns it into a social network.
So you upload your entire buddy list to Buddy Zoo.
And then
You get your friends to do so too.
Buddy Zoo then analyzes
And gives you a list of who are the friends of your friends.
How many degrees of separation do you have to them?
It automatically identifies clicks.
of like, oh, who of your friends are part of these clicks and who are their friends. It measures popularity among users.
This is starting to sound pretty familiar here. And this is pretty advanced stuff for two thousand two, two thousand three.
Very advanced stuff, especially for a side project for a very busy Cal Tech student.
Yeah.
So
Buddy Zoo.
Pretty quickly in the months after Adam launches it.
Gets a couple hundred thousand users.
There's
gravity to this thing. It's becoming fairly big, especially given how small the internet was at the time. Yeah.
And Adam is like
Whoa.
Okay, this is interesting. So
This is kinda what scale looks like.
Synapse was cool and we had a bunch of people downloading it, but
This feels like something more on the order of aim itself. Like this is really interesting.
And the important thing with Synapse was it was a single user application, so it could analyze
my songs and tell me what to listen to. This is the first time
Adam, Mark, you know, particularly Adam in this case is discovering
a very different type of application that gets better as more people join it.
Yes.
Now, we say Adam and and Adam definitely built and launched it.
But
It's not like Mark wasn't involved.
They're staying in touch the whole time and collaborating and working through coding challenges together.
On
What else on aim? It's kinda serving its original use case, like they're collaborating through it across the country.
So that summer, two thousand three.
After their freshman year, Adam comes to Boston and gets an internship at the MIT Media Lab.
He discovers this thing called Friendster.
Another social network out there.
And Adam is like
Whoa.
This is a
Dedicated standalone.
kind of version of what I just built with Buddy Zoo.
This is like really interesting. And it's all on the web.
Now.
Friendster?

out here in Silicon Valley had raised money from Kleiner Perkins.
And benchmark, right?
Oh, benchmark too? I didn't know that.
Uh.
is what tied their hands and why they could not pursue an investment in Facebook.
Ha ha.
That's funny. Not that I think that was a real possibility anyway, because things were kinda moving so fast, but you never hear them in any of the discussion about who was pursuing and who was iced out. They just
They had a competitive investment.
That's right.
It's funny, I never even think about that because obviously
Matt Kohler would go on to become a partner. And of course Matt was an early executive at Facebook.
Yes, exactly.
Interesting.
So here's Friendster, this example of like a real standalone company.
Social network.
Growing virally, funded by venture capitalists.
Based in the San Francisco Bay area.
Adam's Lake.
Oh.
Maybe that's sort of what we should be focusing on.
And
By the end of the summer in two thousand three, Friendster had over three million users.
So like
Really interesting, growing really quickly. Friendster had real scale and grew really fast.
That is something that has kind of been lost to history. Friendster is like the butt of a lot of jokes.
But it
Exploded out of the gates.
Two.
So Adam's playing around with Fredster and
Frenster had this feature.
Called testimonials.
Which was kinda like a Facebook wall.
But
In the long run, one of the core problems with Friendster was
It positioned itself as a social network and about friends.
But really
It was kind of intended to be a dating site.
Underneath it all.
Absolutely.
That was
Wink wink not a dating site.
It was this idea that like well there's all these other things that are
dedicated to dating. So there's this weird stink about it. But if you just naturally meet a friend of a friend online through a thing that's totally not a dating site.
Then great.
There's no stigma around it.
Up.
So uh
specifically when it comes to testimonials. The purpose of testimonials was supposed to be like
why you should date somebody or why they would be a great partner. Which is funny. So
Adam while he's playing around with this and he's telling Mark about it.
He actually posts
On Mark's Frenster profile, a testimonial.
And he says that
Quote.
Mark.
gets way too lucky.
And he posted this.
In the summer of two thousand three.
And Adam was telling me this story and he was like, You know
I have thought about that post.
For twenty years since then. Because on the one hand, it was like a stupid throwaway, you know, double entendre that I put on there because it was a, you know, a dating site.
On the other hand
It is both.
Absolutely true.
About Mark that he always gets way too lucky and Facebook and Meta always gets way too lucky.
But it's not luck.
Yeah. It's actually
Mark, there's something very different about the way he operates.
And all the reasons that
Meta and Facebook get lucky over the years. Mark was always that way.
And it's always because of Mark. Mark is unbelievably good at positioning himself for luck to do its thing.
And specifically at this point in time.
Yeah, what Adam talked about is like
He was always looking around.
He was looking at Friendster, he was looking at what we did with Synapse, he was looking at what I did with Buddy Zoo.
He was looking about the projects at Harvard he did that we're about to talk about.
And he was always thinking like
How do I incorporate all of this?
And make whatever I'm doing better.
This was the stew.
that Facebook is about to come out of. So this brings us
The fall semester.
Two thousand three, two thousand four, Mark's sophomore year.
And the famous
Carklin House Sweet H
thirty three.
With Mark Zuckerberg.
Chris Hughes.
Dustin Moscowits.
And Billy Olsen.
As the four.
Roommates there. Three of the four of those names are names you may know as the founders of Facebook. Yes.
So Mark is focused heading into his sophomore year at Harvard.
And he's not focused on classes.
He's focused on projects.
And he's done like 10. I mean, this is something that again is kind of lost to history. People talk about oh, there's the one face mash thing that he did that led the Facebook.
He did like ten side projects. I mean, I remember being in this era of my life where you feel like you have superpowers as a programmer and you're
looking around and you're like, Oh, I can make a website for that, I can make a website for that. I had the same
thing where the world wasn't saturated with apps yet. And so you could just like
make things that made your life better or other people's lives better or cool ways to connect people.
And it
I distinctly remember feeling like
How come nobody else realizes you can just do this?
I know with that.
sort of feels like and I know that mentality he was in.
There were ten things that he had worked on even before face mash.
Yeah.
So
The first of which
right as they're getting back to campus that fall.
is Mark built a tool called Course Match.
Oh yeah, that's right.
And
This is as students are shopping for classes for fall semester.
You can upload which classes you're thinking of taking or which classes you've signed up for.
And you can see
Who of your friends have also
signed up for that class or are planning to sign up for that class. This is just text.
All this is is a list of classes.
And a list of people who sign up.
And
It takes Harvard by storm.
I mean
Think about it, right? Like it's obvious in hindsight. A bunch of college undergraduates, yeah, you want to take classes you're interested, but like
Really, you want to make sure you take the classes with the people that you want to be around. I was literally texting my friend yesterday who was at Harvard at this time.
And she said, Oh yeah, people totally chose their classes based on
Who is in them.
Of course, of course. So Mark sees this and he's kinda like
You know, again it's one of these learnings, an observation about the world. It's like wow.
People are spending a lot of time on this tool. It's literally just lists of people. You click on a class name and people would spend a lot of time just combing over that list of people.
Totally. There's nothing visually compelling here. So he's like, Well
Okay, now it's time for my next project. You know, people have registered for classes.
What if there was something visually compelling for people to spend time on?
What if I overstepped a little bit and uh
Yeah.
And this is Face Smash.
Well chronicled in all the many books.
Stories. The Stephen Levy book, the David Kirkpatrick book. Movies, you know, what happens. Movies. Movie
Movie. Mark
codes this up in one evening.
In his dorm in Kirkland House.
And it's basically the website hot or not.
for Harvard, with a couple of like actually interesting mechanical twists on it.
Now

Two big problems with it are
One, this is probably just not a good idea, or not like
Kinds.
Generally.
It is a head to head voting mechanic on
Which picture is quote unquote hotter than the other picture.
The other thing that is really not great.
is rather than having users upload their own pictures
Mark hacks into the
Kirkland House.
Servers and downloads the
Facebook.
Photos.
of all the students to populate.
The website.
Lowercase face.
Space lowercase book.
Yes. So
We should probably spend a minute and talk about what a Facebook was.
Before Facebook.
So my big question for you is did Ohio State
Have a Facebook.
It did not. It probably would have been like a telephone book size thing if they did.
I mean, I went to college in the fall of two thousand and seven and so
you could look up people's email addresses if you had their first and last name. You might be able to get some other
Maybe major, but it was a
Text blob. It wasn't a photo.
Well,
I think most, if not all, Ivy League schools back in the day had these. Princeton, where I went, certainly had these when I showed up on campus. In fact, Phillips Exeter had one. The private high schools did too.
That's right. That's right. So you had to
Give the university
Or in Exter's case, the high school.
Mm-hmm.
school photo of you when you were coming in before you matriculated.
And then they would literally make a book, like a printed book.
with the names and class years and photos
Of all the incoming students from the freshman class.
And I think if I remember right, at Princeton at least, they would republish the book every year, you know, for your class. Cause you know, some people would leave, some people would join, et cetera, et cetera. All right. So these are photos stored digitally that Mark then, while plugged into the campus network from his dorm room.
Is
Accessing, downloading
And then putting up on his own website that he is hosting.
Yes, called.
Face mash.
No, a couple of interesting things about.
Face mash.
One.
If Mark was
blown away by the
engagement of the Harvard population with course match
Face mash.
takes that to such a whole nother level that it actually melts down the servers in Kirkland House and the IT department at Harvard has to shut off internet.
within hours of it going live to
All of Kirkland House.
Lest this like continue to spread virally within Harvard and take down like
All of the servers. Oh, so maybe he didn't actually re-host the images. Maybe he was just pointing at the URLs that were hosted by Kirkland House. Oh, I didn't think about that. Yeah, that might have been.
But either way.
Dude knows how to make something that gets engagement.
Yes, yes he does.
So
The other interesting thing from Mark's perspective about face mash
Is that
It was the first time he was building
A rich web app.
as one of these projects, you know, fully built on the lamp stack. And he had probably used the lamp stack
Linux, Apache, MySQL, PHP.
For course match.
And so that to be clear, that's an operating system, a web server.
With
Apache, MySQL, the free open source database, PHP, the free open source programming language.
Yes.
But this is the first time that he's building like a real
Rich consumer grade.
web app on top of the lamp stack. Rich consumer grade.
It's the
Technical
requirements of course match, but with photos.
Well photos and voting.
Sure. Yeah, you have like an probably an additional table of information in the database or something. But
The big takeaway here is A, of course, the use case shouldn't have done it.
B
Wow kids engagement. C
This is training wheels of how to use these
New open source web technologies.
If you go back two, three, four years.
You're gonna have to go to Oracle, you're gonna have to go to Microsoft, you're gonna have to buy like enterprise grade super proprietary systems to do this. And this is all just like free and something you can cobble together and upload onto some Linux web hosting and boom.
There had to be a hundred times more, a thousand times more web applications created by the Mark Zuckerbergs everywhere in this period of time doing whatever random little project that they thought would be fun or funny or useful.
Yeah.
It's such a perfect example.
Despite its problematic nature.
Of
This is like the first time
in history where you need neither money nor permission.
To launch.
An application like this.
On the internet.
Totally.
Ten dollar domain, hundred dollar a year web hosting that includes the database, no licenses required, PHP is all free.
maybe the bandwidth would have been an issue, but this is on the order of a hundred dollars to do this.
Yeah. Well, clearly the bandwidth was an issue because they shut down internet to Kirkland House.
So David, this feels like a thing you should get kicked out of school for doing. Yeah. Harvard, as you imagine, is not pleased about this. They hallmark in front of the administrative board, which is a
disciplinary committee for students when things like this happen.
He and his fraternity brothers.
Pretty sure that he's actually gonna get thrown out of school for this.
So
The night before the ad board meets to make their final decision.
A Pi the fraternity through a goodbye Mark party that night.
And legend has it.
That this is where Mark and Priscilla Chan
Me for the first time and
Priscilla, of course, is
Now Mark's wife.
Yep.
So
Dabboard meets the next day and decides not to throw
Mark out of school, but to put him on disciplinary probation for the rest of the year, basically.
Don't do this again.
Slap on the wrist.
Slap on the wrist.
So Mark
Doesn't end up
Getting kicked out of Harvard.
But he does kind of end up becoming like
The Harvard computer celebrity.
Even before Facebook.
Right.
I mean, this is a big deal. Everyone on campus knew about face mash.
A lot of people already knew about course match anyway, so he's now
The guy who can make websites and web applications.
Here at Harvard.
that people use.
Yeah.
And it just so happens that there's a group of upperclassmen at Harvard
led by two twins, the Winklevoss twins.
Who
Have an idea to
Digitize Harvard's
Facebook.
And build.
an online version of it that they're thinking of calling the Harvard Connection.
And they think maybe we could actually take that to
Other schools too and call it Connect You as sort of the broader version.
This was not at all a unique idea. Not at all. Lots of people at lots of schools
Had this exact same idea.
In fact, Harvard itself had this idea.
The IT department at Harvard had been promising for years and talking about how they were gonna build a digital version of
The Harvard Facebook.
and friendsters out there, and I looked it up. Stanford had Club Nexus, Columbia had CU community, Yale had Yale Station.
I'm sorry, there's a whole movie made about the drama of how novel this idea is.
It's not.
Totally not. I'm pretty sure Princeton had one too when I was there.
Pre Facebook. Yeah.
Totally not a novel idea. Lots of people have it.
No.
The Winkleblast twins, though, you know, Mark is now this celebrity on campus. They need somebody to be a programmer.
to write the site. So they talk to Mark.
And Mark agrees that he's gonna help them out and help code this site that they're
Thinking about.
Also
Again, the Hutzpa.
to say we have this idea, you are a programmer.
You will program our idea.
Clearly, Mark can come up with his own ideas that get people
excite enough to use the stuff he builds. Now, so far it's been a little unsavory, but he doesn't have a problem coming up with ideas with product market fit and executing them end to end. The only thing he hasn't done so far is made money, made anything as a business.
But
What other pieces of the puzzle does he really need from some people with an idea?
None. It's funny. I was gonna save this for a little later, but let's talk about it now.
In addition to
technically because of open source and the lamp stack.
And also socially because of AIM and everything going on, the world sort of for the first time
Something like Facebook being able to be built.
For
No money and no permission.
Also, this was the first time
That a technical person because of this.
could just do everything. Like Mark didn't need anybody. Mark didn't need a non technical co founder. Mark didn't need a CEO. He was the CEO. I remember thinking the same thing when I ship my first app to the app store.
Co-founder Ian and I in two thousand and nine, I think, made something called Seize the Day, got over a million downloads.
Two programmers uploaded somebody to the app store.
It's a slightly different era'cause that's mobile, not web, but I remember looking around being like
Whoa, we like didn't need a business guy.
Right. That's the craziest thing.
You can make stuff and you can put it in the world.
Totally.
So this takes us to Harvard's Christmas break. Now at the time
Harvard did final exams for the fall semester.
after Christmas break in January.
So the idea is all the students go home for Christmas break, you come back in January
And then there's a week of reading period where you refamiliarize yourself with all the material from your classes.
Then you take final exams.
Then there's a little break, there's a course shopping period for spring semester, and spring semester starts in February.
So Mark has a few weeks to
program a new idea. Exactly. To not study and program a new idea.
And
During Christmas break he had actually come out
to Silicon Valley to the Bay Area.
to hang out with some friends out here.
And
seeing, you know, the physical embodiment of all these great tech companies, Yahoo, early Google, et cetera, drove by them all.
And so he comes back and he's like
Extra.
Extra motivated.
You know
This digital Facebook idea.
I think this is something that a lot of people want.
I bet I can code this up in
A week and just launch it.
And again, not a business.
Just like a project. He has this gut feeling.
that people will use this if he makes it.
Totally. Now importantly though
All the stuff he'd been doing throughout the year.
He's like, Well, I can incorporate that
Into
This project too.
It'd be pretty boring if it's
Just a digital Facebook. Like I don't think people want that, but I've made all this other stuff that people really, really like and engage with. And when you say just a digital Facebook, you mean like essentially the profile page would just be a photo and a name.
Right. Just like the physical version of like
Here is a list of all the students in the class and here is their, you know, stock profile picture. Yeah.
So later.
After the Facebook.com.
Blew up.
Mark told the Harvard Crimson in an interview.
I don't really know what the next big thing is because I don't spend my time making big things.
I spend time making small things, and then when the time comes, I put them together.
That's the kind of stuff I do.
Small little projects.
And eventually they all
Fit together.
And that's what the Facebook.com
Ends up being.
So Mark gets back from reading period. Instead of studying he dives in.
He IMs his friend Andrew McCullum, who he knows from C S classes.
And asks Andrew to do the page design.
Angie says
Yeah, sure thing. I'll help you out.
Andrew goes and fires up Photoshop.
He find an image on the internet of some guy who looks kinda cool.
And uh puts it in the header of the design for the site.
behind a cloud of ones and zeros because it's cool. It's like the matrix. Yes. It's gradiented, you know, it's sort of white on the left, blue on the right.
And for like
You know, a year or two, however long the Facebook guy was at the header, everybody's like
Who is the Facebook guy? People think it's Al Pacino, people think it's a student.
Do you know?
who the Facebook guy was. I totally do. I looked this up. I spent like two hours trying to figure this out. Really? Yeah. It's amazing. Because everyone always said it's Al Pacino. And I'm like, it doesn't really Al Pacino must have looked really different when he was younger. And it's not.
Tell me your answer. I'll tell you if it matches mine. All right.
So
There was an eighties song that got really big called Centerfold. Oh yes.
This is it. And the images of Peter Wolf.
Yep, who is the lead singer of the Jay Giles band.
We'll link to the image. There's this great Quora post, which we should say.
Adam D'Angelo.
Founder and CEO of Cora.
After Facebook.
There's a great core post about this where there's unmistakably the photo of Peter Wolf that Facebook Guy is based on. They just sort of pixelated it and, you know, made it duotone instead of the original photograph.
So great.
Yeah. So great.
So
On the evening.
February fourth.
Two thousand four.
After final exams.
Right.
When students are
Coming back.
getting into the mode for the new semester, starting to shop.
For spring semester courses.
Mark Zuckerberg.
Launches
The Facebook dot com.
And right off the bat, from the moment somebody logs in.
The functionality is like
Awesome.
So
The registration page reads you can use the Facebook to
Search for people at your school.
Find out who are in your classes.
Course match. Yep. Look up your friends' friends.
Buddy Zoo.
See a visualization of your entire
Social network.
Buddy Zoo plus graphics.
And then at the bottom

is the famous copyright two thousand four the Facebook.
A Mark Zuckerberg production.
Yeah.
Awesome.
I feel like it's like one of the most infamous screenshots is the screenshot of that original homepage.
So
So great.
So importantly, things that did not exist here yet.
Messages.
Wallposts.
Even
I don't think poke were in the original very first version.
That's a good question.
If they weren't in the very first version, they launched pretty quickly thereafter. Yep.
But no Facebook events, no photos other than your profile photo.
I mean no, I don't even think status updates.
We're in the very first one.
I don't think status updates were there yet, no.
But all the lessons from all the other projects, all the elements of them are coming together here. So
Once again.
registration is limited to email addresses on the Harvard dot EDU.
domain. That was part of the magic of what had made all the other projects so successful is like it's not Rando's in here.
It's other people at Harvard. It's your classmates. It's the people you care most about. Yep.
And by the nature of that, it's their real identities.
And that's what makes it different than all these other social networks. My space
Existed.
Friendster existed, but anyone could sign up for these, and in part
That meant that they had more explosive growth because there was no governor on the growth.
And we'll talk about all the problems that sort of come from
Anyone anywhere can sign up at any time, but
the very core thing here is authenticated people.
The people who are signing up
For Facebook.
At the start.
Are people you know go to the same college as you and have to use their real name matched against a university issued email address?
identity.
An authentic identity is a part of the company from its first moment.
Yeah.
Coupled with
Super important learning number two from Face Mash.
It's all user submitted content.
So
No prepopulation with anything from Harvard, you know, no scraping from Harvard servers, et cetera.
And like, yeah, on the one hand, that prevents Mark from getting into trouble.
On the other hand, though
It sets the expectation
And the requirement and trains the behaviors of the users of you gotta enter all the content into this site yourself.
You put in your aim screen name, you put in your cell phone, you put in your interests, you put in your classes.
Also, you isn't it crazy that they displayed cell phone numbers for the longest time.
Right.
Well again.
Think about the functionality and the utility to the users.
On the one hand, you would never disclose your cell phone number to the general public.
On the other hand
other students and your friends at Harvard knowing your cell phone number. Well, that's actually pretty useful for getting in touch, for going out, for going to parties, for planning things, et cetera, et cetera.
These are all people you would give your email and phone number and maybe even birthday to if they just asked.
Totally.
You would
probably also give them your relationship status, which is in there. Formalizing your relationship status for the first time here on thefacebook.com.
You can add a photo of your own choosing.
As your profile picture. So big difference from
old school Facebook where it's whatever the university chooses, or it's a stock school photo or whatever, like
No, you get to express your personality. You get to Photoshop it as much as you want. And you can update it whenever you want.
And you can update it whenever you want.
So
It is amazing how much
Of
the next billion plus
people's source of value.
comes from this founding moment.
The Facebook
grows tremendously in functionality over time.
But everything is like a natural outcropping out of
Authentic identity.
user submitted content.
Trust.
that the people who are seeing this content are people in your sort of private network.
The whole thing is here in this first few weeks of coding that got done and then threw up a landing page.
I would even go one step further than that.
The actual nature of the seeding of the network here.
is maybe the most important thing.
And here's what I mean by that.
Once you
Mark launches this, it takes off like wildfire within Harvard. Of course, he's already a celebrity.
already known for launching these projects. People are
Tuned in waiting for the next Mark Zuckerberg production.
Within the first twenty four hours
Six hundred and fifty people join.
There's only two thousand people in a class at Harvard.
So I think there's about seven or eight thousand undergraduates total.
Видин тіс
Over half of the entire undergraduate population is active on Facebook.
So now
Here's what I mean and why the seeding is so important.
This initial network.
Is super dense.
Super engaged and super active.
That not only sets the norms for how you're gonna behave on Facebook going forward.
It also means that as the network grows virally, it radiates out from this like
nuclear reactor of a base.
contrast that with an approach of something like Friendster.
That's default open to everybody, backed by Silicon Valley Venture Dollars, trying to grow. They're doing marketing.
Okay, let's say somebody in
Ohio.
Here's about Friendster somehow, maybe they see an ad for it.
They sign up.
When they join the service, there's no friends there.
There's nothing to do. Right. There's no functionality. It's not alive.
When you join
The Facebook, even though it's limited to just Harvard students,
You sign up and you're like
Blown away.
By how alive this site is right. Almost nobody can use the Facebook, but for the people who can, it's an unbelievably great experience.
As they expanded, that stayed true.
It was either you're not allowed to use it.
Or if you are, it's blow away grape.
Instantly.
That's
Basically always true.
And the moments when Facebook stops growing is when that's not true. And then they sort of refocus on it.
And then that gets the growth back.
Yeah.
Here's another thing that I think was really important about this seeding of Facebook.
Was actually that it happened at Harvard.
Harvard is
The top
global brand among universities. Whatever you personally think about Harvard, it's undeniable, especially back then.
That it was like
The top.
If you were a kid or a family pretty much anywhere in the world
You knew what Harvard was.
This was really important as Facebook expanded because it had this
It was like elite.
Especially as they grew. There were clones, there were lots of other
Facebook.
Copies out there.
And even if they were as good as what Mark had built.
They didn't start at Harvard.
It's kinda like civilization. Nobody else could ever invade Facebook's turf.
But they could invade other people's turf.
So somebody put it to me in the research, like there was a fairly big competitor in Germany, I think maybe called StudyVice or something like that.
Facebook could really easily go into Germany.
And people in Germany would be like, Oh, Facebook, I've heard of that. This is interesting.
Study Vice could never go into Boston, like ever.
Mm.
Interesting.
Yeah, it's a great point.
Okay, so
Like weeks go by and they've saturated Harvard. And not only that
You start seeing this thing happen, which
Just to level set with listeners, this stayed true for several years. This is a crazy stat.
Seventy percent of people who ever signed up.
were active.
That day.
There are not
user engagement retention metrics better than that in the world. The fact that
As they grew,
It didn't matter how many more people they added.
It was still the case that seventy percent of users ever
We're daily active.
And so you have this crazy situation at Harvard where it's just like
To your point, nuclear reactor levels engaging. In fact, this term wouldn't get coined
till later in the summer, but this is from the Facebook effect, David Kirkpatrick's book.
They had coined a term for how students seem to use a site.
Zuckerberg, Moskowitz, and Parker, Sean Parker, who we'll talk about who comes in.
Called it the trance.
Once you start combing through the Facebook, it was very easy to keep going.
It was hypnotic.
You just kept clicking and clicking and clicking from profile to profile.
viewing the data.
And every single one of those clicks.
Is
A page view.
So
Yeah.
hits Harvard like
An earthquake.
It's face mash all over again, except a good problem, not a bad problem. It's all legit.
The servers are melting down.
Even Mark is blown away by how big this thing gets so quickly.
Yep, right away they add the wall.
So there's a way to publicly post uh things like testimonials.
on your friend's walls.
Uh you could view a wall to wall, so you could see the public posts that you were making back and forth to each other.
So that you've got your profile information, wall posts.
And that's it.
Yeah.
But to your point.
Very quickly, Mark is adding features, adding functionality, adding things to do to the site.
The other thing that he does right off the bat is say
Okay, we're taking this to other colleges too.
So he recruits his roommates.
Dustin Moskowitz comes on to help maintain the site.
Dustin was actually an econ major. He had no idea how to code.
He goes out and buys Pearl for Dummies. And Mark's like, uh, that's great that you read that. The site is written in PHP
So Dustin goes and learns PHP too and helps.
with coding the site and keeping up with everything. You know Pearl, you can learn PHP. It's much easier.
Chris Hughes joins too.
Angie McCullum joins
And then they need to keep
buying servers to keep up with the traffic or else everything is gonna melt down.
So one of Mark's fraternity brothers in A Pie is a guy namedo Savarin.
And Eduardo was I think part of the business and investing club at Harvard. So they recruited Eduardo in.
And Enuardo invests a thousand dollars.
in infrastructure for the site.
Mark invests another thousand dollars. So together there's two thousand dollars of investment in the Facebook.com.
And the deal they strike is that Mark gets two thirds of the company.
And Eduardo gets one third of the company.
And in Wardo.
sets up a business entity to formalize all of this as a Florida LLC, Eduardo was.
From Florida.
Right away, as we were saying, Mark's like great.
This is not just a Harvard thing. We need to bring it to other colleges. And he specifically chooses Columbia because, Ben, as you said, there was an existing
competitor there and he's like I wanna see
How Facebook competes.
And like I wanna know right away, can we
Displace it.
It's so interesting he doesn't go to the schools where there's nothing. He goes to the schools where there is something and wants to be better than it.
Which is so counterintuitive to how most people would think. They say, like, Oh no, this is a race. I'm gonna go to the white space, I'm gonna gobble everything up and then wait to
Take on competitors when I'm bigger and stronger. Like
Mike's like nope.
Right away. This is a ear mindset of we are gonna be globally dominant.
If you're okay splitting the market, you go for the white space and then you say, let's see how much of the low hanging fruit we can easily get.
But if your Facebook
You're gonna say, let's go to the hardest possible competitor.
extinguish them. Yes. And then and then we uh we'll have a better shot at owning the whole market and we can get to the low hanging fruit later. By the way
Their strategy once they did win at a school like Columbia was to go figure out all the schools that were like closest
to Columbia.
in terms of network connections and then win there too to kind of like build a moat around their victory.
Yeah.
So
There we have the initial crew.
Mark.
Dustin.
Chris.
Andrew.
Eduardo.
The five co founders of Facebook.
The other interesting thing about
Going to Columbia.
Which they do
Three weeks after the launch at Harvard, twenty two days. It was the same month, all within February 2004.
They set up Colombia.
As a completely different network.
Than Harvard.
So
If you join
The Columbia Facebook
You can't then go access all the profiles.
Of Harvard students. Right. At first there was zero connectivity between the two.
Which is another sort of counterintuitive thing. You'd think like, Oh, great, I want to build this as big as possible. Mark clearly wants to conquer all these other schools.
The best way to do that.
is to have all this alive content come right.
Two them from Harvard.
I think he realized that had he done that, it would have socially inhibited sharing.
Within Harvard.
Yeah.
The scarce commodity is trust.
That is the important
lesson here.
It's also
A very convenient
infrastructure
Decision.
Where
If these two systems truly don't need to talk to each other.
That's great.
Put different servers in different data centers.
Don't worry about overloading the database. Don't worry about number of writes per second and reads per second. It's great. If every school gets its own server rack.
you'd end up not having some of these issues that the other social networks have.
friendsters out there trying to compute second degree friends of friends
Which is this crazy hard computer science problem.
especially as the global number of people growing, it's an n squared problem.
And Facebook is over here, or the Facebook at the time.
in the land where they're keeping n small. So even anything that's n squared is
Contained.
within that school
And their servers aren't falling over and taking 20 plus seconds to load pages the way that the Friendsters of the world are.
This is such an interesting point.
Because
technology infrastructure advantage has
always been a core part
of Facebook even back to this very beginning.
What's interesting is that
It flips at some point.
As
Facebook grows and eventually becomes open to everybody.
their competitive advantage becomes
their tech is so good and their infra is so good that they can do
Everything you were just talking about that Friendster couldn't do and that MySpace couldn't do.
But in these early days, their competitive advantage is actually like, no, we're scale out, not scale up.
And then Mark was totally willing to just flip the bit later. Right. It's effectively counterpositioning. They're building the Facebook in such a way that the use cases don't require incredibly sophisticated technology to accomplish those feature sets.
There's this funny chicken of the egg thing here, and I think the answer like many chicken of the egg is both.
Mark
At the moment he conceives of an idea.
Thinks through the technical
Requirements.
And the user experience.
And they're sort of
commingled in the product development process.
And so I really do think even at age nineteen
He was sort of aware of the scaling benefits in addition to the user experience benefits of launching in this way.
Totally agree.
Okay, fun bit of trivia.
about Harvard's leave policy that we referenced earlier.
Do you know what
else.
Mark does.
On the same evening that they launch Columbia.
No idea.
He goes.
To hear Bill Gates.
Speak on campus. That was the same night.
The same night.
During which
Speech.
Bill mentions
that he actually felt comfortable dropping out of Harvard because he discovered that Harvard had this really generous leave policy that you could take an infinite leave of absence and pursue something else and come back anytime you want. And Mark would actually say later
That Bill saying that at the event was part of what got him comfortable doing the same thing.
Unbelievable.
It is crazy. Tying this back to our Microsoft episode, this would have been what, early two thousand and four?
And so this would have been right after Bill
stopped being CEO, handed the CEO reins to Steve.
He was still the chief architect and still chairman of the board.
But it's sort of like
Post DOJ time for Microsoft where Bill is just technically focused and can do things like Go Speak at Harvard.
Yeah.
It is
Amazing.
how much influence Microsoft had.
On Facebook.
And on Mark.
We have a lot more to talk about on that front.
So next couple of days after Columbia launches, Facebook launches at Stanford.
At Yale.
By the end of the semester they're in over a hundred schools in like
you know, what, three, four months? Like the speed they're moving with.
It's crazy. And they start building these wait lists. I mean, this is the other th there's so many
Common.
startup things that Facebook kind of invented.
They built
tremendous demand.
before they would light up the network. They knew that
as soon as you're in Facebook, you want to quickly
get to seven friends or 10 friends or whatever the metric is to create that sort of magic moment where you're like, oh yeah, Facebook now works for me. So they wanted to wait until they had sufficient demand to boom open that school. And then once it's open,
Everybody should have the best possible experience. And so you're seeing
Facebook basically say, Okay, wherever there's really strong demand, that's where we'll open next. And we're not gonna open anywhere where we see like
you know, middling demand for our product.
Yep.
Totally.
Meanwhile
Here we are at the end of the school year. The Winkelvoss twins take the whole connect you situation to Harvard's president, Larry Summers, to
Adjudicate this dispute between them and Mark.
Larry says, Hey, Harvard is not gonna get involved here. This is a business dispute between
Students.
Eventually
The two twins, Sue, Mark, and Facebook.
They settle for sixty five million dollars.
Forty five million of which is paid in pre IPO. Facebook stock
Obviously that
Gros.
A large portion of that then I think they sell and put into Bitcoin and like
twenty eleven, twenty twelve time frame. So
They end up pretty pretty fine out of all this.
They did great.
They take it.
But here we are at the end of the school year.
summer comes around and
Andrew McCullum.
has some connections out in the Bay Area. He had interned at Electronic Arts.
Adam D'Angelo is gonna be spending the summer from Caltech.
So the crew all decides like
Hey, great. Let's not get internships.
Let's go rent a house out in Palo Alto.
move to Silicon Valley and work on Facebook there for the summer.
And see what happens.
And
Yes.
The house did indeed have a pool.
Yes, they did indeed install a zip line off the chimney. That was not fiction in the movie. That did actually happen.
And it is important to know.
To this point.
It is a project.
Mark and Dustin and Chris and everyone who moves out.
They are there to work on a project that they think is cool.
And seems to be working and get exposure to Silicon Valley.
And venture capitalists for when they start their startup.
having a network.
That is literally the mentality. Facebook is live at how many schools, David?
A hundred.
A hundred schools.
And they are
going out not with the intent to make this a company, but to contemplate
what company they could start and meet people that can help them with that.
Yeah.
Now when we say crew who moves out.
That crew did not include Eduardo.
Eduardo had an internship in New York.
And decided that he was not gonna move out for the summer.
Yeah.
Tough decision.
Not a great decision. On the other hand, he ends up with two percent of Facebook, so
He's also fun.
Yeah, so
To make a long story short
Yes, everything you saw in the social network around this, the result is effectively correct.
that Eduardo Savarin goes from owning a third of this Florida based LLC to something like two percent.
Of this
C Corp.
That is a Delaware C corp based in California that goes on to become
Or is Facebook Inc.
And the justification that they effectively use in changing this structure is
Hey.
A bunch of us moved to California to start a company together.
You stayed back and yes, you sold some ads in the meantime, but like
You didn't come start the company with us.
Listener, we leave it to you to sort of decide at how that should have played out and what's fair. None of us were there.
He was a co founder of Facebook.
And then
ended up with two percent and lived on a different coast.
Okay, so they're in California. They get
really serious about the Facebook. They actually are still working on something else called Wirehog concurrently within the same team.
But they're starting to realize okay, this the Facebook thing really, really has legs.
And
As they're sort of contemplating the next move.
They literally run into someone on the street.
Who will change everything. David, who is this person?
That person.
Is
Co founder of Napster.
Sean Parker.

But very, very large.
Impact on the company.
Yes.
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Okay, David.
Sean Parker enters the picture. Here we go.
So Sean Parker had of course
Started Napster with Sean Fanning.
Back in the late.
Nineteen nineties.
And after the whole Napster saga.
Parker ended up starting the email contact list company.
Called Plaxo.
Which was kind of its own.
Proto social network and
Pioneered.
Email address book exploitation and uh exporting.
Which is how every social company got its start.
Facebook did a ton of this.
LinkedIn did a ton of this. WhatsApp did this. Exactly. It pioneered
the first bootstrap viral social network mechanic.
Hey, let me see who all the people you know are so that on this new thing that you want to be connected to all the people you know.
You're connected to all the people you know.
Oh, by the way, we might also invite all the people that uh you've ever contacted. Yep.
So
Sean and his co-founders at Plaxo raise money for Plaxo from Venture Capitalists.
And not just any venture capitalists.
The best venture capitalists from Sequoia
Capital.
And all is going well, Plaxo's going fine.
Sir Michael Moritz is on the board of the company.
Anyway, after a couple of years.
Sean Parker ends up getting kicked out of the company.
By the board.
Now
Sean wasn't exactly the most, like, reliable employee and uh
Definitely was um
Quirky.
But the result of this is Sean's
Everlasting enity.
For Sequoia.
and paranoid distrust of all venture capitalists.
And company boards.
This is gonna become very, very
Very important here in a sec. So
Rewind slightly back to the spring of two thousand four.
When the team is still at Harvard.
Sean is living in Palo Alto.
And
One of his housemate's girlfriends
who's, I believe, a student at Stanford.
Pulls up.
The Facebook dot com.
On her laptop.
And it's
Kinda like the scene where this happens in the social network movie.
Sean is like
Holy crap.
This is it.
This is the winning
Social network.
And Sean, I believe, had actually been an advisor to Friendster as well. So he was like between Plaxo and Napster, uh Frendster
really believe social networking was going to become a thing.
Totally. And y it is kinda crazy to think about
Unless you had a student.
show you on their computer this is what Facebook is. There's no real way for you to know other than the sign up page.
Right.
Which you can't get past it and see how alive the thing is. Yep.
So
Sean.
being the enterprising person that he is.
He cold emails the company's

And asked to set up a meeting.
And Eduardo Savarin replies to Sean, is like Oh, cool.
You're the co founder of Navster, yeah.
They set up a dinner in New York City. This is while the spring semester is still going on.
At Harvard.
And Mark and Eduardo and Sean all get dinner together and
Mark and Sean really bond. Mark is super pumped to meet him.
But that's about it. Like there's no, you know
Discussion about, you know, what's cool, a billion dollars, you know, et cetera, et cetera, as dramatized in the movie. That doesn't happen.
They kinda think that they're just
gonna go their separate ways. Right. Nice to meet you.
I don't think even Mark knows yet that he's moving to California this summer.
No, totally not.
So here we are now in June.
The Facebook crew has moved out to Palo Alto.
They're walking down the street one evening
Sean is also walking down the same street in Palo Alto.
Sees them.
And is like
Hey.
It's the Facebook guys. And at this point
Sean Parker was
Living in a different house
Specifically
the house of his girlfriend's parents. Not a good situation.
And he makes a split second decision right there on the street.
To insert himself.
Into Facebook.
And is like hey
I'm actually looking for a place to stay. Do you think I can crash with you guys in the crash pad for the summer? And he joins the crew.
Uh this is how it all starts.
That is wild.
Yeah. It's like a
You ever play old school like Super Nintendo?
role playing games like Japanese RPGs like Final Fantasy or whatnot.
Uh, it's been a while. I mean, it's just like you meet somebody on the street and they join the party and like you know, you always know the character on the street that's gonna join the party because their pixel sprite is more highly detailed than the regular MPC pixel. I mean, this is exactly what it is like here. Sean Parker had a very detailed pixel sprite.
Yes.
So while he's there, you know.
living in the house, uh crashing with the college students.
He basically takes Mark aside and he's like
Look.
You've got something really special here.
I have been in your shoes.
Let me tell you
Exactly what is gonna happen this summer.
You have created something magical. You're now out here in Silicon Valley. You are going to be
The bell of the ball.
All the venture capitalists out here.
All the big companies, they're gonna whine and dine you, they're gonna court you, they're gonna tell you you're great.
And they're gonna wanna invest.
in your company.
And then they're gonna turn around and they are going to screw you.
They're gonna take control of your board.
They're gonna force you to bring in quote unquote professional management.
They're gonna kill all the magic.
Growth is gonna slow.
then they're gonna blame you and then they're gonna fire you and then they're gonna put the company up for sale.
And here's the thing.
To this point in history.
He really wasn't wrong.
He was absolutely right.
There wasn't founders fund yet. There wasn't A16Z yet. There wasn't like the notion of founder friendliness. What venture capitalists did is they invested in founders' companies.
And then
Brought in management.
to take them to the next level.
It's what happened at eBay. It's what happened at Google.
This is a pattern that happened over and over and over again. And usually they would try to do it with the sort of help and support of the entrepreneur to build this like really great team together, but oftentimes that backfired and they just hot swap the CEO with a big grown-up manager in a nice suit.
Yep.
And
That was
Not the wrong playbook.
until this moment in time. Because as we've been talking about
Until now, if you wanted to scale something
You needed money.
You needed permission, you needed business people, you needed deals, you needed contacts. Yeah, that's true. The open web kind of changed.
the hard requirement on that.
Yes. And I think
Sean.
As bitter as he was about his own experience, I think he probably also recognized that.
And recognize that
The Facebook and Mark.

to start a new paradigm of how to do this differently.
So Sean says to Mark, look, if you just go out on your own, that's what's gonna happen.
I am going to take you under my wing and make sure
That that does not happen.
And I'm gonna help you reset up the company.
So that you permanently control the board.
And no one can ever fire you because you are what is important here.
And
I'm gonna help you
Go about fundraising.
But I'm gonna make sure we find
the right people
Who are cool with that stipulation number one.
Because if you go try and do it by yourself, like you don't know enough. You don't know these people.
You're not gonna find the right folks.
And it's kinda wild. I mean
Sean was
also in a position to take advantage of Mark and the company.
And
He didn't.
There was some nice self interest in all of this. It's not like this was like charitable. He ends up being the president of Facebook. And he ends up with a pretty decent chunk for a non founder, and he ends up with a board seat. Now, granted, it's technically Mark's board seat.
But
You know, Sean's the one sitting in it.
Totally.
But it would have been really easy for him to do one of two things, you know.
One, obviously take advantage of Mark and the company.
And get a lot more for himself.
Two.
I think
He also could have been so jaded by the Plaxo experience to say we shouldn't raise venture capital at all.
But actually what he counsels Mark to do is the right thing.
No, we should raise venture capital.
We should professionalize.
And the whole Silicon Valley machinery
really can help us.
But we're gonna do it in the right way on our terms. Yep.
I think he just really wanted to help Mark
Win the game. I think you're right.
The other thing that Sean does, by all accounts, is
He makes sure that everyone in the house that summer
gets equity in the company.
Okay, so what's Wirehog? What's good what's the second project that's going on here?
Yes.
I really would love to know what Sean thought when Mark and the crew told them about Wirehog.
Wirehog was basically going to be
A captive Napster.
to Facebook.
Everybody on Facebook in these private networks, walled gardens.
what is something that college students really, really wanted to do and was happening internally on college servers all the time.
Share files, share music, share movies.
Wirehog was gonna be a product.
To make this happen.
And actually legend has it, I think in Stephen Levy's book.
While they're talking about this, Sean Parker actually comes up with a name for the product.
Uh it is like oh
If you launch this, you should actually call it Dropbox. No way. Yeah. Like a year before Dropbox, the actual company, gets founded. That's so funny.
But they really are sort of thinking of themselves as this almost like incubator lab.
I don't really understand how this is true, but they really did convince themselves that their current frontrunner for the product they were most excited about was Wirehog.
And Facebook might be like a good distribution vehicle for it.
Or maybe at some point they don't even focus on Facebook anymore and they go all in on Wirehog and they're actively talking about
This insanity.
While
speaking with investors about raising capital.
Yes.
So to the investors.
That's
Sean goes out.
And helps them find.
Sean at this point knows.
Basically everybody in Silicon Valley.
And he's like
Okay. I need the pretty tight window of people who A have money
B know what they're doing.
And C are okay with our terms that Mark is gonna control the board and control the company. So we need an individual, not an institution.
So
He calls.
Two
Angel investors.
who he knows pretty well and he thinks might be the right fit.
One.
Is Reed Hoffman.
who Reed had been running LinkedIn.
And Sean had been in this early social networking thing. And he just started LinkedIn. They actually knew each other because Reed was an early investor in Friendster.
So Sean calls up Reed.
And he also calls up Mark
Pincus.
Mark?
had been Sean's boss
at an internship that he had in high school. And then Mark had gone on to invest in Napster when they started Napster as a company.
And we should say who Mark Pincus is, for anyone who doesn't know, Mark would eventually start Zinga.
Yes.
Could become a very important person and company in the Facebook ecosystem. The maker of Farmville. Yes.
So
Pincus and Reed.
Meet up with Sean and Mark and they're just
Blown away.
By the Facebook.
Then as you say, Mark starts talking about Wirehog and apparently Reed is like No no
Stop talking about this wire plug thing. Like I'm running LinkedIn.
I can tell you this is special, like
Do the Facebook thing. Not only do the Facebook thing, but like
Music is kryptonite as a space right now.
Because of what Napster did.

How is Sean not the one being like
Stay a thousand yards away from music, my God.
I mean, amazingly, a couple years later, you know, Sean
being so open minded. I mean he was the one of the ones who really helped Spotify get going.
Yep.
And really brokered the relationship with Mark for Daniel and Mark to hit it off and obviously Spotify to have a
Huge amount of growth on Facebook.
Totally.
So okay, read
Really excited. He's like, No.
The Facebook. Focus on the Facebook. Your user numbers are what? Your engagement is what? Your attention is what?
Your Dow Mao ratio is what?
Oh my god!
So Reed's like look.
I'm running LinkedIn.
Pincus and I don't have that much money together. We'll give you some, but we can't like
fund a whole, you know, round for you. And they're kind of conflicted.
Both with Friendster and LinkedIn.
But he's like, I think I know the perfect person.
Who can put this together. I worked with this guy at PayPal.
My old colleague from PayPal, who actually, as luck would have it.
is thinking about starting his own venture capital fund.
This could be a really good fit.
Why don't you meet
Peter Tiel. And Peter, yes, indeed, was just in the process of starting what would become a
Founders fund.
Ben, you already alluded to this, but like
Founders fund
was such a radical idea.
When Peter started it.
The idea being baked into the name that they will always side with founders and never push a founder out of a company.
I was shocked. I mean it it just
It's so easy to forget this, but it was just twenty years ago. The idea that a venture capitalist makes an investment.
in a company and they are not the controlling shareholder.
was blasphemous.
Just twenty years ago.
Totally blasphemous. And of course PayPal has its own
crazy history where you can understand why Peter would arrive at this.
Conclusion.
But he really was like
Maybe the only person in Silicon Valley that hit that Venn diagram
that I talked about a minute ago of like super legitimate.
would actually help the company and help them navigate
Silicon Valley.
had money because the PayPal exit had just happened.
And was going to be cool.
With Mark controlling the company.
Yeah.
It's a one of one intro to make.
I mean it it probably would have had to be someone else in the PayPal Mafia that kind of fits that.
Yeah.
But I don't think at that time.
You know, Elon wasn't doing investing.
I don't think there was anybody else who really could have done it.
Yeah.
That's a crazy counterfactual thinking about if Elon had invested in Facebook instead of Peter Tiel.
Right. What if Elon
Hadn't started SpaceX. He was in just as good a position. Totally.
Had Rulov gone to Sequoia yet?
If he had, he would have just started. This is effectively the pool of financiers who could have done this deal.
Right. But Sequoia wasn't gonna do this deal under those terms.
So Rulov couldn't have done it.
Yep. It was maybe one of two with the other one potentially being Elon. Wow, that would be a really different world that we would be living in today. Yep.
Okay.
So
They take the idea.
To Peter.
In the meeting, Reed brings along a young guy who's working for him at LinkedIn named Matt Coller.
And to come help, you know.
Talk to Peter, evaluate this from an investing standpoint.
They strike a deal.
That's
Peter's gonna lead around.
Of five hundred thousand dollars.
Reed and Mark Penkis are each gonna invest thirty seven thousand five hundred
Peter's gonna do the rest.
At a five million dollar pre money valuation.
So five point five million post.
Which you know, on the one hand is like laughable now.
On the other hand
At this point in time.
For a bunch of kids
Who started this a couple of months ago
It's crazy that this would be worth five million dollars.
out of five million dollar valuation.
The multiple since then has been about two hundred and fifty thousand X.

So that takes us
To the end of the summer.
So
Everybody now has to make a decision.
Do they
Day in Palo Alto.
And keep working full time on Facebook.
Or do they go back to school?
So
Eduardo never came out in the first place. So he did his internship in New York. He goes back to Harvard and starts his junior year.
Chris Hughes.
Also goes back to Harvard.
starts his junior year.
graduates in two thousand six and then rejoins Facebook.
After graduation.
Andrew McCullum.
Stays in Palo Alto for a couple of years.
And then goes back to Harvard later and completes his degree. He takes the uh, you know
Bill Gates Road Not Traveled option.
Dustin.
Never goes back.
stays with the company until two thousand eight, when he leaves to start Asana.
And
Mark, I think.
Probably never really even considered going back.
Yeah, at this point.
The seventy percent stat keeps being true, despite the fact that they keep opening all these new schools.
it keeps being true that seventy percent of people who have ever signed up are daily active users. So
I think Mark realizes oh I have created one of the most engaging technology applications ever.
Yes.
And certainly at this point, the combination of
Sean.
Peter.
Read.
Mark Pincus.
Um
advising and being part of the company.
They know. And
They have
Certainly helped him realize that.
Yeah.
Adam D'Antelo does go back to Caltech.
And then through AIM, I guess, remotely helps collaborate with the company.
Until he graduates and
In two thousand six and become CTO officially?
Got it.
Sean.
Like we said, his impact on the company
was huge. I really want to underscore this again.
Mark.
having full control over the company, as we are gonna see time and time and time again as we go through the story here.
Makes all the difference in the world.
And that is one hundred percent because of Sean Parker.
Yep. So how long is Sean at the company?
Not very long.
Because
At some point in time the next spring. So it's like nine total months of the company. Yeah, I think about nine total months.
Sean ends up.
Leaving the company after charges get filed against him as a result of some drug incidents at a house party
During a trip to North Carolina.
Charges do eventually get dropped.
But in the meantime, the decision is made, hey, this is not something the company's gonna get sucked into.
Yeah.
He immediately joins
Where else?
Founders fund which Peter.
partially on the back of this Facebook investment has now set up and raised officially and
Like we said.
Sean goes on to find and fund and really help
Narcher.
Spotify.
There is Roll of Founders fun.
Yeah.
It's kind of amazing thinking about founders fund.
raising capital off the on the back of this investment.
One pitches.
We invested in Facebook.
The flip side of it is
We just invested in a company.
We're currently holding it flat because there's been no markup yet from any other investors.
And they're not generating any revenue.
Well let's talk about uh other investors.
By this point.
kind of towards the end of
Spring semester two thousand five.
Facebook had now dropped.
The da.
Become
Just Facebook.
That was one of Sean Parker's
Final
impacts on the company is he actually negotiated
The domain name purchase of Facebook.com I didn't know. Yeah. I believe they bought it for two hundred thousand dollars.
Hm.
Which actually was a
Good chunk of that venture money that they raised.
Right.
'Cause it was five hundred K that they raised before. Five hundred K. Yep.
And they're actively spending that.
The company has never consumed that much capital, but they are having to spend it on servers. As they stand up new colleges, they are having to go into data centers and rack servers or rent servers on a monthly basis and
The server bills are starting to add up.
Especially as they scaled to how many schools were they at in the fall of two thousand and four?
Several hundred.
Well, Sean Parker introduced
Mark.
to Western Technology Investment, WTI.
The debt fund, yeah. Yeah. And so they basically invented venture debt.
And so they make a three hundred thousand dollar loan.
It's like I think like a revolving credit line.
In the fall of two thousand and four.
And that comes
with warrants.
that if the company ever goes public, that they can then exercise.
They do a deal again the next spring for another three hundred thousand dollars. So they're in for six hundred thousand dollars.
I uh spoke with someone years ago who told me this ended up being
phenomenally, phenomenally successful. And the warrant exercise on this, I think is the greatest venture debt deal of all time.
Has to be.
Nice.
Spring.
Two thousand five.
Excel comes in.
Leads a series A.
twelve point seven million dollars at a ninety eight million dollar.
Post money valuation.
That's sort of like crazy in and of itself for the time.
And though.
Still being okay.
With Mark having board control. Yes.
Which you know, one thing for like, okay, at the angel round, maybe like that's still pretty crazy, but whatever, this is angel round, but like
No, like a real venture capital firm.
Real series A Two thousand five.
A hundred million dollar valuation, B being okay with that. That was wild. Oh also C
getting less than twenty percent of the company. Like rule of thumb venture investing back in the day was
You need at least twenty percent of the company, ideally more like twenty five or thirty.
Yes. So Kevin Afrusi, who ran down the deal and did the diligence at Excel, and Jim Breyer, who was the partner and took the board seat.
This is one of the all time great venture investments. And so it's worth talking about some of the deal mechanics.
It was the very first
Post.com Institutional Venture Capital Deal.
Where the founder
maintained control.
Certainly the norm was as soon as a VC gets involved, it is a VC controlled board and company.
The other thing that's worth noting is this is a company getting a$98 million valuation. Now the silly land that we live in now are like this happens all the time.
This didn't happen.
And we were only just coming out of the dot com era. So eyeballs and clicks had just had
four years of demonization from everyone from the press to the public to
Limited partners.
In fact
Excel had limited partners drop out of this fund, who were pr LPs previously, including
Your beloved Princeton, including Harvard. I mean, big and I think Stanford was one of the only ones that really stuck with them for this four hundred million dollar fund.
And
They're kind of looking at this, realizing
this might be one of the greatest companies of all time and we are going to have to do the type of deal
That everyone got
raked over the coals for five years ago in the mania for doing, and no one is doing this type of deal in this environment.
But it's Facebook, so we're gonna do it.
I think the level of risk and reputation risk that they took on this cannot be underscored enough.
Totally. I I was trying to think of
Were there any other
deals like this that you you could even kind of point to as a
comparable from the past, and the only one I can think of was the Google Series A.
Which was
twenty five million dollars at a one hundred million dollar post money valuation.
Split between
Michael Moritz from Sequoia and John Doer.
From Kleiner Perkins. But it was in the dot com run up. Exactly. Exactly. It was a totally, totally different paradigm and
The
Legend has it, I don't know if this is apocryphal or not, is that
After making the investment.
More it's told Don Valentine at Sequoia.
Never have we paid so much for so little. And I think he was actually referring to like the small amount of equity that they got by having to split the deal.
in Google.
So yeah.
In the dot com bubble that happened.
But like that this would happen in two thousand five.
Excel went way out on a limb for this.
Yeah, so some other interesting deal points. One point one million dollars of this
twelve point seven million dollar round.
was done by Jim Breyer personally.
Wow.
Yeah.
The shares were acquired.
at four point five cents per share.
Facebook just recently hit six hundred dollars a share.
So Excel and their limited partners and Jim, for anyone who's still holding the shares after they distributed them.
That is a thirteen thousand X.
Return.
Yeah.
Another interesting thing on this, do you know the whole Don Graham dynamic with this deal?
Yes. The original deal was that Don Graham from the Washington Post was gonna invest in it wasn't gonna be a VC deal. That was at a sixty million dollar valuation.
Excel comes in over the top.
And in part of the negotiation to get it up to this ninety eight million dollar deal.
There was actually a secondary.
Oh wow.
Three million.
Went to
Mark.
Dustin.
And Sean.
as a secondary in this deal.
Wow. I had no idea. Yep.
Well, I mean add to the litany of things that were not done.
Back then.
This is Facebook having all the leverage and full deal control in negotiating the series A.
Wow.
And still.
It was one of the best venture capital investments of all time.
Absolutely.
Man, that is freaking wild. Yeah.
Mm-hmm.

Wow.
Okay, well that is a lot of hype to live up to Which brings us now to the summer of two thousand five.
Where Mark
motivated by this, perhaps. I hadn't quite thought about that.
Announces
To the company.
His product roadmap.
Four.
The summer.
And it is a six point
Product plan.
Number one.
A redesign of
the site.
Bye bye Facebook guy.
Number two.
A photo application.
Which
By the way, f photos
got written by like one guy in two weeks.
Yes.
Move fast and break things. Yep.
Number three.
A personalized newspaper
Based on all of your friends' activity.
Number four, an events feature.
Number five, a local business product. And number six
A sort of vague idea.
for a feature called I'm bored.
Which would let
Users.
on the site who were bored
Consume media.
And play games.
That's a pretty big feature mandate.
This is freaking wild. So now okay, of that.
I think only
the redesign and photoship in two thousand five.
Maybe events did too, I'm not entirely sure.
But this is incredible.
Photos.
Newsfeed.
platform, which is really what this I'm board feature is.
Summer two thousand five, it's all right there.
in the vision. And Mark thinks they can accomplish all of this by the end of the summer.
And the wild thing is they do accomplish all of this
In the next
Two years.
Which
Two big points on this. For any other company.
These are all like multi year long development.
processes. Well, and each one is its own company.
Exactly.
Photos is Flickr. There are independent game platform companies out there. Mini Clip, et cetera. Yeah.
Flash games.
What were some of the other ones? Events, eventbrite.
Yeah.
Personalized newspaper.
That becomes a true, true innovation.
A newsfeed but
I think at the time there was a lot of
buzz and talk about personalized portals and like Yahoo was really big on this and Google was even kind of big on this of like, oh make this your homepage.
Oh, iGoogle.
Do you remember iGoogle?
Yes, I Google.
Exactly.
somewhat of the inspiration, although obviously Mark was thinking way bigger than that. But like, yeah, again, local business product. Yelp. Each one of these
under the old paradigm was its own company. And Mark was like, No, this is all part of Facebook.
Crazy.
Super crazy.
And this really I think speaks to
The genius of Mark
as a product strategist.
It's one thing to say, I'm gonna add a lot of random features to my site.
And I'm gonna throw spaghetti against the wall.
This was not a random grouping of features.
Everything
Reinforced one another.
And drove.
The engagement.
Loop.
of the site.
So
Just as one example, let's take from
You know, this roadmap that Mark lays out.
events.
Let's start there.
Events and parties.
Planned on Facebook.
Get tagged.
With who's gonna attend the events.
Um
Of those
Tags get published out as activity to newsfeed.
That drives interest in FOMO among the friend network. So more friends.
Come to the actual
Event.
At the event
Photos get taken, and now there's more people there.
Well those photos get posted back to the site afterwards and they all get tagged.
with the people who were there who are in the photos.
All of that becomes activity that then gets published to newsfeed.
That generates
More desire from more people who see that on Facebook in the newsfeed.
Two
either engage with the photos and like and comment on them.
Or if they're hearing about it from their friends and they're not yet on Facebook to now register for Facebook and get
Involved in this loop.
All of that now gets published back to Newsfeed. So now it's time for the next party, and you can see how this just grows and builds on itself over and over and over again. It's funny, as you're saying all this, it sounds like very old hat, like almost boring. Of course it does all of that.
At the time it was so revolutionary. Everything I just described was there within the next eighteen months.
So photos, I think was like late summer of oh five. Interestingly, photos did not originally include photo tagging.
Photo tagging was like a pretty new concept. I think Flickr may have had it, but
The idea that like you're tagging a person
And then you can go browse that person's profile by photos they've been tagged in.
That wasn't brand new innovation. That is a mechanic.
That was not
thought of in social networks before. If you think about what Friendster and MySpace were.
you could upload a limited set of photos, which by the way, you'd have to delete one to add another.
Yes. So MySpa only allowed you to have eight photos.
Maximum at the time.
And this is
A Ben, what you're describing of
Person tagging and photos.
Incredible innovation.
Drives the whole viral loop.
And this is a through line through the whole episode. What social media or social networks are definitionally.
changes every year.
And
Often Facebook was the one in the early days to push the envelope and say, This is what it means to be a social network. In the later years, it was Facebook's competitors that then they had to sort of adopt that functionality. But
The idea that a social network includes
an infinite number of photos that you can tag and give XY coordinates on the photo to map to a specific person that is another entity in the social network. That was actually a new
component to what it meant to be a social network.
And as you're saying with Newsfeed.
That wouldn't happen for another what was that, late summer of two thousand six or something.
September two thousand six. Yeah. So another year, year and a half after this.
That
completely turned what social media, social networking was on its head again.
Yes.
Oh, we're gonna talk all about it in a second.
To this point a social network is a
set of static profile pages that you can navigate to. And if you go to home, like the root, you know, facebook.com slash instead of slash profile php.
It's pretty useless. Like the homepage is actually an uninteresting place to hang out. There is no
Hey, let me see what's going on in my network.
Yes.
Until
Newsfeed.
Okay, but before we get to that, two thousand five.
Do you
Broader point here though.
Yeah.
For the first six or seven years of its life.
Facebook was a change maker.
defining what social networking was.
And then after that it became a change taker.
We'll talk about this when it happens, but like
Again, the mental flexibility of Mark and the company to be like, Okay, I'm not gonna have pride about that anymore. I'm gonna adapt and still win.
It's incredible. Very Microsoft. Very Microsoft.
Okay.
So
Even this, even though it takes
Two years to roll out the full roadmap.
Photos, events, but especially photos.
The two thousand five, two thousand six school year is just
off the charts for growth sharing.
Engagement among college students.
Then you found a like
Incredible stat about
Facebook's page views, right?
Yeah, this stat is crazy. By November of two thousand and five.
they were getting two hundred and thirty million
Page views daily.
Which means that they had passed Google.
In page views.
Wow.
Google, the company started six years earlier.
And the reason is because if you when you're on Google, you do like one or two searches and then you go to your destination. On Facebook
you get caught in an hours long trance of looking at everybody you know and what they're doing.
Right.
Which was
Already the case when it was basically text only.
But adding photos, I mean
Oh my god, every photo is a page view.
with such a small user base at that point in time, I think what, probably certainly less than ten million users.
To have a
Two hundred million plus page views every single day and be passing Google in traffic is wild. I mean, let's say it's ten million, it's twenty three page views per day per person. That's assuming that every single person who is a monthly user
is accessing it every day and loading a page twenty three times. Right, right.
In our mobile age now, that doesn't really sound like much. I bet the number of photos that someone scrolls through on Instagram is
Way higher than that.
But for the time.
That interactivity was just nuts.
I mean certainly
Flicker MySpace Friendster.
Couldn't hold a candle to that type of engagement.
Yeah. So here's their user growth.
In June of oh five, as you mentioned, they were at three million. By September of oh five.
They were at five million users.
That was 10x their user base just a year ago.
in September of O four.
And
Almost a third of all US college students.
were included in that five million.
So by September of O five.
They had a third.
of US college students.
Of their five million users that they had about eighteen months in, seventy percent were daily active, eighty five percent were weekly active, ninety-three percent were monthly active.
Wow.
Those are just insane.
Numbers. Yes.
I could go on and on and on, but one interesting thing to also point out, at this period of time, October of oh five,
They were up to eight point three million users. They were the tenth most visited site on the internet.
But the important part is they were doing a million dollars a month in revenue.
They had actually started figuring out the advertising business model. So here we are 19 months after founding.
They're no longer burning capital.
Yes.
Well, when you say figured out the advertising business model, they just had such a high volume of page views
That they didn't have to figure anything out. Right. You just plug in some crappy ad networks and like print money.
Fair.
Yeah, you're right. Actually I completely misspoke. I would say that they were nowhere near figuring out the advertising business model, but they had a traffic machine. They were able to
through alchemy turn page views into revenue. Yeah. But they had not by any means figured out their business model.
And in this world where startups glorify raising capital, burning huge amounts of money.
Delaying monetization and then having these amazing screaming returns when they finally do turn on the money faucet. Facebook was just the opposite.
They lost money.
And not that much money for like a year and a half. And then from that point on they were just profitable.
Yes.
So
The two thousand five, two thousand six academic school year.
Incredible for the company.
Everything we just talked about.
But there were
A couple
Yellow flags, shall we say, that popped up.
During that year.
Mark
Of course, was already starting to think about
Well, how can this keep getting bigger?
People graduate from college.
This is great in colleges, but like
I don't want to
Just build a college site.
I want this to be
A lot bigger. And obviously that was what
Excel was investing in too at that valuation.
So they launch two sort of tests.
Throughout the year.
One.
was opening up
Facebook to high school students.
And the other one was opening
Facebook up.
Two.
Workplace groups.
And both of them kind of flopped.
And for different reasons, right? The workplace ones
They were like, the workplace thing is gonna be awesome'cause it's authenticated email addresses the same way that
the colleges had authenticated email addresses. Most high schools don't have authenticated email addresses, so we expect
These workplace networks to work better.
Yeah.
But the problem was
Going into workplace networks, people didn't want to share with their colleagues. I don't want some low res party photos of me from last night showing up on my workplace.
And I think also just the density wasn't there. It was violating
the principles that got them there of like this thing needs to be alive and every way we fractally spread out needs to be bringing that
nuclear reactor of what's happening along with it.
Going straight into workplaces, like you've got
Sixty year olds and they're like
There's gonna be nothing compelling for them right now. The extreme bear case on Facebook at this moment in time is you started
with the group of people who are the most social and the most open to share.
In their entire lives.
You've already saturated a third of them.
Every single cohort that you add from here is probably gonna be worse.
Yep.
And that
Was a very rational argument.
No.
High schools, as you say, failed for
A different reason.
There wasn't the same standardized
email architecture in high schools across the country. It was just way more fragmented. So you couldn't
elegantly set up these private networks in the same way.
Yep. And in fact what they ended up doing
'Cause I was in high school at this time.
It was technically a different Facebook. In fact, I will quote the homepage when you went to sign up. If you went to facebook.com in two thousand and six, the title was Facebook is an online directory that connects people through social networks at schools.
Now there are two Facebooks.
One for people in colleges and one for people in high school.
The site is open to a lot of schools, but not everywhere yet. We're working on it.
And so if you signed up as a high schooler, you got the crappy one. You had to log into hs.facebook.com. And it looked
Mostly the same. It had slightly different features.
But there was this weird thing where somebody who was
already in college had to invite you. It's not like anyone could sign up for high school Facebook. You needed a college student
who went to high school with you to basically vouch for the fact that you were a real high school student and thus eligible to sign up for HS dot facebook.com. Right. Oh man, I vaguely remember this of my younger

Asking for this.
And
The subdomating thing was that lasted for a long time because the
College Facebook's
were subdomained as a part of their like tech infrastructure.
you know, Harvard.facebook.com
only went to the set of servers that they had set up for that. It made it all really easy from an infrastructure perspective. I was on
Hs dot facebook.com for a long time as a college student.
Right.
Yeah, because
There had to just be one hs dot facebook dot com for all the high schools.
Yes, exactly.
And it meant that they needed to like manage scale and load balance really differently because very quickly the largest
network or like it's certainly the largest subdomain was the high school one. And so I'd think like within a month or two of allowing high school signups
you know, high school as a whole was much, much, much, much larger and they had to solve for
the technology constraint of what do we do with this? It doesn't behave like any of our college networks.
Yeah.
So
The academic school year
In the court college.
User segment.
Wait great.
But once you hit summer two thousand six, all those kids go on
Yeah.
And college growth.
Stops for the moment.
So
Summer two thousand six
was kind of a scary moment for the company.
The initiatives to expand outsleges were not going super well. College growth had stopped for the moment.
And yeah, Ben, like you said, like
Very rational argument that like
Okay, this thing is gonna be a really interesting niche.
site for college students and how valuable is that?
Well.
Viacom, which owned MTV.
Thought.
That that was worth seven hundred and fifty million dollars.
Which is what
They offered.
to buy the company for in the summer of two thousand six.
Well,
There was another party.
that really, really wanted to own Facebook at this point in time.
And that
Was
Yahoo.
And Yahoo.
Was willing to top Viacom.
And pay.
A billion dollars.
To buy the company.
So here we are.
a billion dollar offer on the table.
And growth is slowing. Exactly, exactly.
There's this existential question mark about the company.
Growth is
Slowed a lot.
You've got a billion dollars on the table, which is a lot of money.
Especially in those days.
It was shocking six years later when
Facebook bought Instagram for a billion dollars.
This would have made the careers of everybody involved. Yep.
And
You know, Mark, of course, controls the company, controls the board, thanks to Sean Parker. He doesn't have to sell.
But the whole management team is like
Yeah, we should probably sell.
And I think the board, you know, it's hard to know. They obviously know they can't force him to sell.
But I suspect if you had asked all of their opinions, and certainly Mark did
They probably would have been like, you know
It's been a great run. We should
Probably hit this bid.
So Mark
Actually
Agrees.
To the Yahoo deal.
Billion dollars.
It's gonna be all in stock.
Yeah, who's gonna buy the company?
In the interim.
Between
When they shake hands on the deal.
And while the docks are being drafted.
Yahoo
announces their quarterly earnings.
They have a bad quarter.
And the stock drops.
Twenty percent.
Terry Semmel.
who was the CEO of Yahoo at the time, said
Okay, the deal is, you know.
For the same amount of stock. So commensurately the deal is now worth
Eight hundred million dollars, not.
A billion dollars.
And that
Was history turning on a knife point?
And that was all Mark needed to say. You know what?
Thanks, but no thanks.
And this part of the story never gets told. The fact that actually at first Mark did not turn down the billion dollar offer from Yahoo.
Mark actually accepted.
Or at least.
said let me turn over another card and get one inch closer to the negotiation being final.
You know, it wasn't an outright rejection at first. It was, yeah, come back with the papers.
Yep.
Totally. That is not the way it gets talked about today.
But I think actually makes
The story like
Kind of even more powerful.
It almost really did slip away.
Well, it's certainly much more realistic.
It's a simple and powerful story to say.
They just outright rejected it. But that's just never how these things go. It's like, uh, show me you're real.
Yep.
Okay, so analyzing let's say he just did
Turn it down outright.
Well, here's a reasonable way to look at it.
If what you want to do is run a great company for the rest of your life.
It actually was totally rational. Mark has said publicly, I mean this like fifteen, eighteen years ago.
I didn't have any more ideas as good as Facebook.
But that's like way underselling it.
There aren't better companies to start.
Right.
Yes, it would have been nice to have certainty on a billion dollars or whatever percent of the billion Mark owned at that point.
And also a year before MySpace had gotten bought for five hundred and eighty million dollars.
Right. So it's like
Geez.
Okay, twice as much as my space.
But rationally
If the optimization function is I want to run the best company I can for a very long time.
Almost nobody has started a better company since.
So if you're looking at the engagement.
You're looking at the
Potential
the rational thing actually is
Just keep running this company because I'll never discover something like it again.
Yeah.
I complet.
And Mark
has said so much in so many words to you and me personally that he's not
optimizing for financial outcome here. He's optimizing for impact.
And I think he likes running this company. He would want to go start a similar company and if he didn't have this one.
Yes, totally.
Also though, to his skill as a strategist, even at this very young age.
Yes, Ben. You and I just made a compelling argument about
Why
you could have believed Facebook was going to top out with the college market at this point in time.
Mark knew though, and he had planted the seeds that
That both newsfeed.
And open registration.
We're gonna be coming later that year.
And he was definitely making that calculus here, too, of like, Well, I don't know what the probability necessarily is that those are gonna hit, but Mark had the belief, like
A if they do, they're gonna be really big.
And B.
I think the probability is higher than the people around me think it is.
Yep, that's totally fair. Even if you weren't gonna bet on the growth.
the user engagement was still currently great, and you had a lot of reason to believe that it was going to get even greater.
And you compare
All the metrics.
with friends to in my space as time went on got worse.
People churned.
their daily active to monthly active would just go down over time.
the page loads times would take forever, especially with well, actually with both. Friends are
just was not architected properly. It was a
software engineering computer science issue.
My space
was this weird thing that was sort of born out of this
combined media conglomerate and they just never really had excellent
tech architectural talent.
And so
as you sort of looked at not the high level metrics of how many users have ever signed up, because MySpace and Friends are I think we're still way ahead at this point.
If you looked at like
Hm, but how's this gonna play out if it sort of keeps compounding? And you looked at the deeper metrics.
You kinda thought, Oh, I'm running the better company by a lot.
Once especially, you know, we we gotta figure out the business, but I am running the better product by a lot.
Yeah.
So okay, to figuring out the business coming out of this episode with Yahoo.
They say no.
the whole management team turns.
the whole management team basically turns over the next set of months.
Mark
Gets religion on a couple things.
And actually we should say
Not Dustin.
But a lot of the people around the table who were expecting a nice cash payout and now aren't getting one or are not pleased.
Yep.
Totally.
So
What are they gonna do?
The first thing is I think
Mark had always operated the company this way, but now he gets real religion of like
We need to get more revenue and we need to focus on becoming truly cash flow positive so that we are
never in a position again where we would even
consider doing something like this.
So in August of two thousand six
They do the first
Partnership.
With Microsoft.
It's funny that you know the m Microsoft
Facebook relationship in some ways it's sort of a
precursor to
the Microsoft OpenAI relationship.
Today and how that gets built.
Here's what it is.
Microsoft says
We're gonna
Take over.
selling all of the display ad inventory.
Domestically within the US.
Four.
Facebook.
And we will give you a guaranteed CPM that we can sell.
And then we
are gonna use this to help bootstrap our online services division.
Which
as we talked about in our Microsoft series becomes super, super important, not only for
Their efforts launching Bing and making that into
Ultimately a successful business.
But even more importantly for
Azure that comes out of it.
Microsoft knows they need some
scale the bootstrap up and get started with
Both the ad business, but also just like the online services division, period.
Yeah.
This is a ton of inventory.
Like you just think about the amount of page views that are happening here.
suddenly Microsoft's problem is not how do we find enough inventory to sell. It's how do we go find enough advertisers.
to actually fill all these slots on Facebook.
Yes.
And Microsoft have been trying to do this. They tried to do this with MySpace.
a little bit earlier and they lost that deal to Google.
So
They really
Need Facebook.
And on the other hand, this is a great deal for Facebook because
Facebook sucks at selling ads and Facebook has no targeting or anything, so they really shouldn't justify high CPMs at this point. Yeah, outsource it to a good third party network. Right.
So
This is like
Basically all of Facebook's revenue for the next
Couple years here.
So Facebook had made nine million dollars in revenue in two thousand five when they were selling themselves.
This is
Then as you were saying, like, hey, they're starting to turn on ads in two thousand five, it's starting to work. Like
Nine million dollars. That's amazing for year two as a company. Got to cash flow positive. Got to cash flow positive.
In two thousand six
With this
Microsoft partnership.
That jumps to forty eight million dollars in revenue.
Oh, that's where the money spicet is. Now we're talking. And then the next year in two thousand seven, again.
I think
Almost all of this is Microsoft.
That goes to a hundred and fifty three million dollars in revenue.
So like okay, we are
Way out of
Any league where we consider
selling ourselves here.
We can control our own destiny.
Isn't it wild thinking about
You thought it was crazy to turn down a billion dollar offer.
Or many people thought you were crazy.
And then just two years later.
That
is only a six X revenue multiple and you're tripling year over year.
Oh, and by the way, in the second iteration of this Microsoft partnership, which we will talk about in just a minute.
It included an investment from Microsoft at a fifteen billion dollar
Valuation. Oh, hold your horses. Let's finish this great two thousand six, two thousand seven arc and then we'll get there.
Yes.
Point being though.
Mark made the right decision for all shareholders of Facebook.
To walk away from the Yahoo deal.
I mean it's at an all time high. In walking away from every deal ever, he's made the right decision. Yes. But like within a year, he made the right decision.
Yes. Oh yeah, that's true. Th this became obviously a right.
Fast. Very fast. Very fast. So how does this happen?
Okay.
Adam D'Angelo finally graduates from Caltech, joins Facebook full time as CTO. I love that Adam's our like second protagonist here. I know, I know. I don't know if you did that intentionally, but yeah. Well, he was right there. I mean, they were at Xer together. Like I don't think you can separate it out.
Yeah. And I you know, I think here
Part of the reason why
Adam keeps coming into the story is
He is a really
Really great.
technologist. And even though he's young, same age as Mark.
When he now arrives full time as CTO
This is when Facebook starts to be taking the steps to be building like
real technology.
infrastructure. So before Adam
Joins full time.
The team was shipping new code to the website, like
At a high velocity relative to everybody else out there. You know, it was
weekly ish, maybe every couple of days, you know, maybe even up to daily. Like Well, they were a web company. For the first time in history, you actually could. All these companies with big climbing Microsoft would ship every three years with a service pack once a year.
It's a whole new era where all you have to do is, you know, upload some new PHP code to the FTP server and then boom, the application behaves differently the next time someone pulls down the page. It's uh
the new technology era.
of interpreted languages running on web servers.
in a browser, now that products are in browsers.
meant you could architect your company differently and ship differently.
Yes.
And when Adam becomes
officially a CTO, he's like actually we should
Probably just ship multiple times a day.
We should just be shipping all the time.
And also we should probably start recruiting like
A real
Top tier.
Engineering team.
Because remember.
It's still kind of nuclear winter for startups.
Great tech talent.
is available.
So they start going and recruiting like
really, really top tier engineering.
Hires.
And it's a pretty compelling offer, like
A, we've got real revenue from this Microsoft partnership.
We're
the best funded startup in the valley.
people want to buy us for a billion dollars, we turn them down.
That's all sort of the financial reasons to take it.
For a lot of people too, it was like such a
Breath of fresh air. I think Facebook
was potentially maybe the first company, first startup to have an open office plan. Like just everything about how
They ran the company was different.
It was the prototypical startup. I mean, to this day, early Facebook is still what most startup culture is aspiring to be. I think often without knowing it. I mean, everything from the sort of posters on the walls with your mantras and your values.
to almost having like an employment brand that you really care about cultivating.
to the idea of like we're having just as much fun together socially as we are
working together. I th I think the modern startup culture
Especially when you factor in the shipping every day.
Open office.
Why comedy kind of trains companies to become like Facebook was.
A hundred percent.
I mean there was Google out there.
Which had a lot of this element, but it was a very different thing. It was very academic.
Very wonky
These guys were hackers and they shipped, you know, and they were all in it together.
The other thing that was basically true is they
We're not really interested in recruiting
industry veterans, especially on the technical side.
And Mark says this in early talks that he was just prioritizing raw intelligence.
over experience.
So one of those super intelligent, super talented young engineers with a high slope.
Who joined back in Fall O five.
was an engineer named Chris Cox.
Who joined from the Stanford AI lab.
And Chris.
Joins.
A team of other young smart engineers.
Led by Ruchi Sangvi and Andrew Baz Bosworth.
Working on Mark's
Personalized newspaper.
Product idea.
Richie was one of Facebook's very first engineers, and along with her husband Aditya Argarwal.
They run South Park Commons now.
Buzz.
was two years ahead of Mark at Harvard and had actually been Mark's TA in the intro to artificial intelligence C S class that he took. And then he later joined the company. Which is actually not how he ended up getting a job, but they did happen to cross that way before.
Yes. Baz went to Microsoft, I think, before joining Facebook. Yep.
Just for a few years.
So the three of them start working on Newsfeed.
And
So we've talked about
Things like photos and the fundamental architecture of the site.
Newsfeed required like
A whole new level of engineering prowess.
to get this thing to work. Like you're not just gonna code this up in PHP. Like photos also required real engineering.
But Newsfeed was
Like pushing the state of the art.
of what was possible in technology and on the internet.
So the first question you
have to ask yourself if you're a good product designer, developer, capital allocator, someone in Mark's shoes saying, Should we do this? is
Do people want this?
If we build this, will it be valuable?
The reason they knew it would be valuable is because the company is data obsessed.
And they watch
the analytics like a hawk to figure out what are people doing on our site.
And they noticed this behavior where people were browsing to other people's profiles.
Just to look at them.
And see if anything changed.
the user was doing the heavy compute lifting
rather than having a personalized newspaper of just bouncing around to a bunch of people's profiles and saying, anything new here?
So there was an engineer who did something
really kind of hacky because they didn't want to at first put all the engineering resources into building out something like Newsfeed, which is
Well, when something changes for some period of time, we'll just highlight it in yellow. Yes. So it's easy for you as you're bouncing around to different profiles to just see, oh, hey, this thing changed.
And
That totally worked. They watched the lift in that and they were like, Oh, it's a good feature. People like that.
So
That sort of gave them the confidence of we should find a way to
Make it more obvious to you when
new updates happen when things change.
Technically, David, for people who aren't
In the
sort of tech ecosystem.
Why is it so difficult to build something like a newsfeed?'Cause now we're all trained to believe that like a feed is um
You know, a primitive that is available to you as a developer when you're building a product because feeds are everywhere. Feeds are the core feature of most products.
When you hit the homepage, it's some sort of feed.
That was not true at the time.
That was not true in any product.
I actually challenge you right now, think back to two thousand five.
What was a feed on the web? What was sort of an infinite scrolling
They didn't exist. This was the first one.
Right. This was the invention.
Like maybe you've got
Reddit and dig.
And you could sort of make an argument that their feeds their
Paginated.
rankings of stories. So you could see like oh what are the most important stories.
But even that's a pretty different fundamental thing.
I don't think Reddit had launched yet.
Dig maybe exist, but yes, as you said.
Oh yeah, Reddit was in the first Y C batch, which was O five. So it wasn't really it was right around this same time.
Okay, so how do you make a feed?
Well, if you are an algorithms developer
the way you would sort of think of it is, okay, well first
I need to
Pick a point in time.
And from that point in time.
And let's call that maybe the last time someone looked at their feed.
I need to store that timestamp and now I need to go look at every single profile of someone that you are connected to. So this is N.
And
download or cache all of their recent updates since that
Time period.
So I need to like store that somewhere. I need a new place to store
A copy.
of all of this information that lives on someone's profile or at least pointers.
Two
that on everybody's profile.
And
I need that.
To happen.
for every user. So now it's n squared.
Every single person
on the entire Facebook.
needs to have something running in the background that is looking at every other person on Facebook since a particular time.
And then that compute.
And storage all needs to happen fast enough such that by the time they want to go check the feed again.
It's happened again.
And obviously like now that happens in real time and I think it was something like every three hours there was like a new batch.
Yeah.
It was four times a day.
When it initially
launched there was like a four X a day refresh. Okay, so every six hours. Yeah. It was a cron job because they didn't have enough memory to run it in real time. That's right. They needed to happen on separate boxes.
To run this process.
Cash the results, and then when you loaded your newsfeed, go fetch them. So this is like a whole new application using the same data.
That
the company has to build in order to make newsfeed happen.
And so
What you just described is all the technical work just
Making a feed possible. On the back end. This doesn't contemplate any of the front end design or engineering or incredible permutations of how to display this data when it does come back, given a massive
combinatorial problem of how might this data come back?
Exactly. Then you need to make the feed actually.
Compelling. Like
I don't really care about
You know, somebody who I'm tangentially connected to what they had for lunch today, but I really care about like a photo of Ben at the acquired meetup.
Right. So now you're telling me you want to rank order it by something other than Chronology.
make another pass and figure out what I think is gonna be the most interesting to you.
Which on its own is an incredibly difficult computer science problem. What is interesting to you? What data should we use to inform that decision?
Right.
Totally.
Who are your close friends? Who do you care about the most, you know?
What general news do you care about the most? What types of stuff do you care about? Do we have to put weights on every relationship in this entire complex friend graph between every single entity and how close they are, and then re rank that very often?
Eventually, yeah.
Yes.
So
The team spends the better part of two thousand six working on this.
By September it's ready.
And so by September fifth
Two thousand six.
Just in time for the new school year.
They launch it.
And uh
People noticed.'Cause they launch it like to everybody.
Right away.
And this is a massive paradigm shift.
Yeah, it's not opt in or anything. This is Facebook changing
The game of social
Not often.
Everybody gets it.
Right away.
They get thirty thousand
Angry emails to support on the first day from users who are really upset about this.
Ten percent of the entire global user base signs up for a group.
a Facebook group called Students Against Facebook Newsfeed. I'm pretty sure I was part of this group. The irony here is they had only just launched open groups across
School networks.
Days or weeks before. So like they enable the tool of their own vitriol here.
And also
Guess how people are finding out
About this group.
Through newsfeed. Yes.
This is the great irony of the whole situation. There's a
literal panic in the streets. There are people protesting outside the office. There is somebody trying to use a crane
To get into the third story.
Basically a T V truck is trying to cover what's happening in the the pandemonium.
And at the same time
Despite everyone telling him, I hate this thing, it's the worst thing ever. If you look at the analytics,
People
Love it.
People cannot get enough of scrolling through the new newsfeed.
And the reason they're really upset is actually quite interesting.
They're saying oh
It's sharing this with my whole network.
Okay.
But you updated it on your profile.
Which has always been public to your whole network.
And I think Facebook for the first time kind of stepped in it and realized
Oh.
Even though technically this data has always you know, we didn't change
how public or private it is. It's just as accessible.
People react really strongly when you change
The
ease of obtaining that information or whether it feels like you are pushing that information out versus someone is sort of pulling by going to your profile and viewing. It went from pull
To push.
Yes.
So
It's the start of the new school year.
We've just come off this sort of tumultuous summer.
Growth had slowed. Walked away from the Yahoo deal.
There's this revolt in the streets.
Against
Newsfeed.
Which
To Mark's mind, along with Open Reg,
Which was
supposed to come like two days later of opening up Facebook to anybody.
They delayed that because of the newsfeed reaction.
But to Mark's mind, the two of these things are like
the big growth levers to reignite growth.
For Facebook.
The board, the management team, everybody's like
All right, we gotta roll news feedback. People hate it.
This is P R one oh one.
We apologize.
We roll it back.
And to
And a kicker.
Newsfeed actually
significantly hurt Facebook's revenue.
Because where do you think all the page views were coming from and all the refreshes? Oh, loading a new ad. Yep, loading all the profile views and clicking around.
So page views are actually gonna go
Down in this new paradigm. Every reason is aligned.
To roll this back.
So Richie and Chris and Boz though are looking at all the data and they're like
Holy crap.
Engagement is through
The roof. Yeah. People can't get enough of this. People say they hate it, but yeah, it looks like they can't get enough of it.
So Mark
Decides.
That he is going to
Write a post.

And it's titled.
Calm down.
Breathe. We hear you.
And he announces that they're going to launch a set of controls.
For you to control what
Which by the way sounds like something that Mark would say today.
I think this two thousand and six era is like the last time
And then
You would have had like a seven teen year break.
And now we're sort of getting that mark again.
Yes. You can't imagine Mark Circa twenty eighteen saying, Calm down, breathe, we hear you. Yes.
So
It's kind of a brilliant strategy of like, hey, I acknowledge
Yeah.
This was surprising.
We didn't handle the roll out right.
I'm seeing that you all actually like this in the data.
Let me give you some controls.
So that what you're really worried about
You have some control over.
And then let's just see what happens. And within
Two weeks.
It's like magic. Everybody just gets used to it.
And that this is now the way.
Facebook and social media operates.
And engagement continues to skyrocket.
Yeah.
But it's funny, I did just pull up
We've been getting a lot of feedback about Newsfeed. We think they're great products, but we know many of you are not immediate fans and have found them overwhelming and cluttered.
I don't think clutter was what people were complaining about.
Little bit of redirection there.
Yeah.
It's funny, we didn't take away any privacy options. Your privacy options remain the same. The privacy rules haven't changed. None of your information is visible to anyone who couldn't see it before the changes. Blah blah blah. It's like it is interesting. It's
True.
And not relevant.
That's not what people are mad about. People are pretty aware that this is the same information. Well, and I think
to sort of set a theme here that we're gonna come back to several times.
The definition of what social media is is
is actually very fluid.
And
It changes
In
The consumer's mind.
I'd even say before this there wasn't social media.
Or at least Facebook wasn't social media. Facebook was a social network.
But this was the first time they introduced a media component, a thing you would read. Right.
Inspired by a newspaper.
Right.
And I think when these paradigm shifts happen
People get upset because their expectations are being violated.
So it actually doesn't really matter what the privacy is or isn't, it's the expectations. Right.
I'm glad you planted the seed because this will come back
over and over again in their history of
People now feel differently.
And the product.
needs to change with those societal expectations in order for people to not be upset about it.
Yeah.
Unfortunately for the moment, I think the lesson that Mark and the company took from this experience was
Well
We actually know what's
Best and the user base will just get used to it whenever we make a change. It just happened to be that that was true with Newsfeed, but that wouldn't always be true.
Yeah.
So originally
The two big initiatives, Newsfeed and Open Registration, were supposed to
Basically launched together.
And
They chose to do newsfeed first because it was gonna be
A a a little bit easier to roll out.
And be more valuable to the core.
college audience that was just starting back for the new semester, the fall semester at school.
So they launched that first.
And then yeah, the original plan was open registration. Facebook is now open to anybody in the world was gonna come
Two days later on September seventh.
They obviously put that on the shelf for a long time.
Two and a half weeks. At the end of September.
Open registration launches.
Anyone can sign up.
Sure.
Facebook.
This is another major, major change.
before all these networks were siloed, you had to be part of a verified email address network to join Facebook. Now anyone
Can sign up.
This is the beginning of
Uh oh, my mom is on Facebook. Exactly. Exactly, exactly. Which ultimately would be a problem because that's what created room for Instagram, for Snapchat.
Et cetera, et cetera.
But that would actually be
Down the line.
In a weird sort of perverse way.
I think because of all the controversy around newsfeed.
When Open Reds launched
There wasn't the same kind of controversy. People were already
Desensitized or they had just been through
newsfeed and they're like, All right, yeah, whatever. Nobody even really like noticed that much.
Especially because the product experience didn't change.
For the already engaged users.
And to the extent that you did feel that
Privacy had changed.
You're now kind of used to anything I put on Facebook gets broadcasted. So who cares if more randos come in? It's already getting broadcasted.
Yep, yep.
And
Now with Newsfeed.
There is this mechanism that makes sure like, hey, even as randos from your perspective join
Facebook
You're still seeing the updates of people you

Well
I don't think at first when it was this like pure chronology. Yeah, I guess that's a good point.
As they make it more algorithmic.
But this was still a period in time where your friends were your friends.
I mean, Facebook was only two years old and so
for the vast majority of users they joined in the last year.
So they didn't have anybody who wasn't really their friend.
As a friend.
Now,
I just have to treat Facebook posts as if they're public.
Because then
group of friends is aged.
But in that period of time
you could trust if something was getting published to your friends that like it's just going to your friends.
Right. The age of the network itself.
was only two years.
So your friendships hadn't shifted that much.
Well
Open Reg.
Despite
high schools and workplaces
Not working well. Open Reg works.
Really well. Yeah. I mean, Facebook has a brand at this point. It's the best social network. It's the fastest growing social network. It's the one that all the
College kids will always be the cool people in any society at any time. That's the age group of trend setting. And they have
conquered that market.
High school kids wanna be like college students and people not in college wanna be like college students.
Yep.
So over the summer
Facebook was adding like
five to ten thousand users a day.
By late fall after launching open registration, they're now adding seventy thousand users a day. Wow, by fall of O six.
Yeah. Wow.
Growth really picks up.
So
This brings us now to spring of oh seven.
And the final piece.
Of Mark's original
Product roadmap.
I'm bored.
AKA.
platform.
And
Platform is this kinda forgotten thing right now. I mean like
It's Farmville. It's
Zinger. It's
Apps on Facebook.
It's quizzes. It's quizzes, yes. That will come back up later. That'll come back.
A four
A period of about four years.
From two thousand seven.
to twenty eleven.
This is the most important thing
in the company and this is what everybody
Believes the core and feature of the company is. Facebook has become a platform. This is the goal of a technology company. Become a platform, be like Microsoft.
This is now.
Facebook is like Microsoft. We are a developer
platform.
And there was this incredible tension.
at least it seemed like the m tech media wanted to play up this tension. Are they an advertising company or a platform company? Cause they're super different business models with very different incentives and users kind of need to know how to think about it.
And it was kind of at the same time.
Uh, Cheryl had just join the company or was about to join the company.
The next year in two thousand eight. So yeah, not yet. And so they really hadn't
Gotten serious. She sort of led them to figure out, hey, let's survey all the business models, do some work on each of them, and figure out and commit to being an ads company. At this point in time, like,
They were showing ads, but
the whole leadership team, at least I'm convinced
Believed.
we are on the way to becoming a platform.
A hundred percent.
So
May twenty fourth.
Two thousand seven.
Facebook holds its first developer conference to launch their developer platform.
FA. Which again, let's take a step back. This whole idea is kinda wild.
A developer
platform on the web. The web is a developer platform. Facebook is now becoming a
Platform on top of the
An open developer platform.
But they have two important things that as an application developer you're interested in.
One, user attention.
You know, the same way that Microsoft had user attention with
PCs because they had the install base of Windows.
And two.
A whole crap ton of data.
about each person that you could then
build into your application to make it really rich and feel personalized.
And it turned out that that was really attractive to developers.
So
At FE.
They announced that the Facebook user base is now over 20 million and it is growing by over a hundred thousand users a day. So growth is accelerating.
Wait, it's twenty million total and growing by a hundred thousand a day.
Yes.
I mean, open reg had just launched a couple months before, so like
This thing is really taking off.
Oh my God.
Every 10 days they're adding another twentieth of their user base. And they're growing by five per what is that? Uh it's like seven percent every two weeks. It's like three and a half percent a week.
Yeah.
Pretty good.
Wow. At a scale of over twenty million already. Wow.
It is the sixth highest trafficked site in the world.
And
They're announcing.
To all the developers in attendance.
The Facebook API.
Facebook Graph is now open to you. You can build apps.
And publish and run them.
Natively on
Facebook.
For users
And

Product roadmap from two thousand five.
This is
Huge. Until this point in time, Facebook
was about
Digitizing everything that happened in your offline life.
Your real friends, your real parties you went to, the real photos you took were
There wasn't.
Anything.
Detached from your
offline reality to do on Facebook.
Now all of a sudden you can play games on Facebook, you can take quizzes on Facebook, you can use apps on Facebook and you can do them all.
With your friends.
It's pretty compelling.
I remember playing was it Scrabulous? Yeah.
I think I was playing with my sister, with my grandma. I mean it is a great way to like
do things digitally with the people that matter to you.
Yep.
And I think it's also an early foreshadowing of the job that mobile and the smartphone would really do in people's lives.
Which is
Hey, there's actually like a lot of white space.
Where you're just bored during your day. I mean, Mark's original title of the feature of I'm Bored was
Perfect.
This is the cure for boredom.
It just so happened that it was on a desktop.
And so when you were bored at your desk or bored at your home
Mobile then opened that up to like, hey, I'm bored anywhere.
Right.
And it gave Facebook
from a business perspective, it sort of gave them another stakeholder. Hey, developers are someone who can
keep people on the platform longer so we can show them more ads.
they might do their own advertising. So they might drive traffic to Facebook that they could help grow the core platform itself.
It gives us a
sort of more lock in as people develop for us and as users seek out applications on us.
They're hoping for sort of that Microsoft playbook of platforms get really epic lock in.
Yeah.
Oh and by the way.
developers on the platform will probably have their own business models.
Where they'll make revenue.
And especially if we ultimately introduce our own virtual currency, we can probably make revenue from their revenue too. Yeah. So
The internal goal of the company
was to get five thousand developers
In the first year.
Who would be making
Social apps on the platform.
How made they get?
They got five thousand in two days. Developers went
Freaking
Nuts. It was a great keynote.
It was a great keynote. Yes.
You know, they went nuts because yeah, Ben, as you say, like
Oh.
distribution to a lot of people and then like bringing along your friends and data on them. Like that's
very powerful incentive as a developer to then go make an app or a game for the platform.
You're building a web app that has an unbelievably rich set of data that you can hook into.
The thing that I was
I don't think I could have put into words then, but I can now is
Has a successful scale durable platform ever been built that wasn't an operating system?

Like it always felt weird to me in that moment that Facebook thought they could be a platform.
'Cause I was like, Well, it's a website, I mean it's a web app
And I have profile and I have all this rich information, but it's not like
running on my device.

Well then.
Turns out you would have been right. If only I had the the words. But what do you do with that information? What was I gonna be bearish on the company? That would have been a super wrong call.
Right.
Well, this is the amazing story that we're telling here of like they keep surviving
And thriving.
Despite not having the operating system.
Yeah. Listeners, write in if you can think of one, a successful, scaled, durable platform where the platform is able to make money and they're able to make a lot of money for developers, for people on the platform that is not an operating system that runs on
Hardware.
Hardware.
Either
Captively controlled hardware like Apple.
Or open hardware like Android and Microsoft. And this gets into the question of what is a platform, because let's say I make a web app that I run on my own website, I do my own marketing, I do my own monetization, but I let users authenticate Facebook so I can pull some information out of their profile.
It's like it's not really built on the Facebook platform. It's not like the core APIs that enable my application to run.
R
using Facebook's APIs. I'm using Facebook's APIs to grab some data. The core API set that allows it to run.
is the browser.
Yeah.
It's almost like
If you think about the intermediation layers, Facebook was trying to build a platform on top of
a browser that was a platform on top of an operating that was a platform and it
The reason why we aren't all using rich Facebook apps all the time today and think of it as the default platform, it was just too many layers of abstraction away from the hardware.
To win.
I think that is.
Totally right.
But for the moment, thousands and thousands of both indie devs and venture back companies like flock to the platform. But what this does tease out is
Facebook
And now we can talk about this f
Fifteen plus years later.
Has kind of a weak position for launching a platform since they don't control the OS or the hardware. And so they have to.
Make a little bit more of an appealing sale.
to a developer. And that includes
Big distribution for you, but it also includes
a ton of access to data. And I remember being an early Facebook developer and after user authenticates looking at that JSON and being like,
Okay, so it's their whole profile. Oh, it's their whole friends list. Wow, I get a lot of stuff here. And Facebook was incentivized to do that.
because they almost had to sell harder than other platforms who controlled hardware historically would have had to.
Yeah.
It's a super great point.
Now also the reality was at the time
I think developers were getting plenty of value just out of the distribution.
And that was coming from
Newsfeed.
Yeah.
A user starts using your Facebook app.
And then the activity that they're doing on your app is getting published to the newsfeeds of all their friends. Oh yeah.
You could build a whole zynga on that interaction paradigm. Oh yes you can.
There's this great quote from Josh Elman in the Stephen Levy book. Josh says
If you're a developer and you can get someone to bother ten friends to get one more user to join, you're very happy because you just got one more user. Facebook, though, has nine other people who've just gotten bothered. And he doesn't say that, but then and are quite unhappy about that.
And that's the trade off they have to weigh. That's sort of their in the type of platform they are trying to build, they have set up that incentive set and they need to figure out what to do with it.
Yeah.
So
For
A year or two, that is the state of play.
Facebook
Brilliantly for them.
Eventually.
Pulls back on organic.
Newsfeed distribution for apps. So say like
We gotta stop this. We gotta take care of the problem.
You don't need to know every time there's a new mafia war move by so and so showing up in your newsfeed.
And that does.
effectively kill a large percentage of
developers and apps on the platform.
Yeah.
But it's the right long term move. That was the right thing to do for Facebook.
with a twenty year view.
Absolutely.
And
It doesn't
Kill the platform though.
it actually makes it even more valuable to Facebook.
Because for the developers
And apps who have gotten to scale.
They kinda look at this and they say, Okay.
My organic distribution just got kneecapped.
But
Facebook is still this pretty powerful platform.
What if I just buy ads?
How well would that work?
Can I generate positive ROI
If I buy ads to effectively
accomplish the same thing.
Natively on the platform.
And drive usage back to my app.
Turns out that there was a very profitable arbitrage there still for many years to come.
And
For Facebook, they're like
Well, hell yeah. Okay. We're monetizing
the platform through user engagement and ads that we're showing on the right rail.
While
People are using Facebook apps.
We are also
monetizing
Through
currency and commerce that is happening in the apps where we're taking a cut of that through payments.
Now we're gonna monetize platform in a third way.
Which is
The biggest scale
Developers and app.
distributors on the platform.
are going to use our native advertising as their primary form of distribution.
You can see why for a couple years here
Facebook is like, Well, this is it. We've won. You know, we are
A platform. This is it.
Yep.
And then
Mobile comes along. Oh mobile.
That is uh
quite the chapter in the Facebook story.
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All right, so David.
We're here in the era of mobile, right? This is January two thousand seven. Steve Jobs just announced the iPhone. The whole world changed, right?
Well, actually ironically
No.
Or at least
Not for quite a while.
Yes, January two thousand seven. Steve Jobs announces the iPhone.
People forget though.
It took five years for mobile and smartphone adoption to really ramp up and like actually change the world. There was no SDK in that first iPhone and iOS. That didn't come till two thousand eight. It was seven hundred dollars. Android was a Blackberry clone at the time, not an iPhone clone.
The droid does campaign wouldn't be another year or two.
Yep. Yeah, I think two years. I think that was two thousand nine, if I remember right. Yeah. So yeah, I mean, hell, Facebook platform
didn't even launch until May two thousand seven. So after
The iPhone announcement.
Yep.
So for the moment
Platform is
Rocking and rolling. Like we were just talking about.
Facebook is becoming the next Microsoft, which brings us
to the second Microsoft partnership in October of two thousand seven.
So just five months after F eight and platform launch,
Facebook now has like
All of the leverage.
Dan Rose has some
great stories on Twitter about how
This negotiation goes down. Oh yeah. You spent time with Dan, didn't you, prepping for this? Yep. And I chatted with Dan about this. This is great. So
Microsoft.
Perhaps.
Obvious now in retrospect to everybody.
really just wants to buy the company. But
Mark's of course not gonna do that after the whole Yahoo experience, et cetera.
Microsoft is also happy though to just keep the partnership going and expand it.
Because one, it is really helping them spin up their online services division and get
Really good at online ad sales and ad serving.
And two, they know they made a huge error in missing search and letting Google get big.
And social sure seems like it's gonna be the next
Search size platform. So they're happy to just
be in bed with Facebook in a way that they never will be with Google.
As long as they can keep it going. I mean, for them, I think the thing that shocked them about Google is
Oh my God.
The
business model of the web is advertising.
search and browsers and everything are monetized by advertising, and that's completely orthogonal to our traditional license based business model.
Social.
sure looks like where all the page views are going and is gonna monetize exactly the same way as search.
So actually the thing that's important to them is locking in
those page views.
to the extent that they can participate in this market, it kinda has to be
Either we own you or we are the long term ad provider.
Which they didn't end up being.
Or we're a big equity holder.
Yep. So enter this second partnership negotiation.
October two thousand seven.
Microsoft comes down to Palo Alto.
Facebook.
Tells them that
Hey, Google is actually really interested in taking this partnership over.
Larry and Sergei have been banging down the door and
We've been trying to hold them off.
But they're coming to meet with us tomorrow to talk about switching
our Facebook ad serving partnership over to Google. And this has been great. You know, we love working with y'all. We want you are our preference, our preferred partner. We want to keep it going with you.
But we need to get the deal done tonight.
So they lock themselves all in a conference room.
They start negotiating. It's getting late. Ten o'clock goes by, eleven o'clock.
The Microsoft team, you know, by Facebook standards is all old guys, like they're getting tired.

And then you know, old guys like you know.
Forty. Like so old.
And then at midnight
This is amazing. You can't make this up.
Facebook probably plan this.
All of a sudden
This really loud like house music starts blaring like with like heavy bass in the office. And the office is hopping, like
Everybody's there. The whole company's there. It's midnight.
The Microsoft guys like
What's going on?
And uh
The Facebook you decides like, Oh yeah, uh we have a hackathon scheduled tonight. And actually
Javier Olivon.
had just started at Facebook. Who's now COO. Who is now the COO of Meta.
Had just started at Facebook as an engineer.
And uh
He had organized this hackathon to begin work
On internationalizing
The site.
So tonight is the beginning.
of internationalization, which is a critical, critical part.
of Facebook's next chapter of growth. Yes. And it is beginning
At the same time that this Microsoft partnership is happening in a conference room. And didn't this Microsoft deal end up being about international?
Yes.
Yes, it did.
So they keep going. At one point.
During the night one of the Microsoft guys.

Well.
This is awesome. This is just like the old days of Microsoft. So they finish the negotiation.
At six AM.
They announced the new partnership that very same day.
As promised with the thread of Google.
Microsoft
Becomes.
The worldwide exclusive
third party advertising network for all display ads on Facebook. So it was domestic in the US before. Now it's international to
And domestic.
Everywhere around the world.
Facebook of course can still
Also sell their own inventory themselves.
But anything that they don't want to sell themselves or that is excess inventory, Microsoft gets
exclusive access to be the only ad network.
Where you can access it.
And
The big kicker.
Microsoft is going to invest two hundred and forty million dollars
in Facebook at a fifteen
billion dollar.
Valuation.
This is like
Thirteen or fourteen months after the failed Yahoo deal.
For one billion dollars. That is the thing that no one talks about here. I'm so glad you brought this up, because before they started this negotiation, the attempt was to buy.
Facebook, the highest offer floated. We talked about this in the Microsoft episode. It was a complicated set of deal terms that basically net it out to a twenty four billion dollar offer.
And that was less than two years after the one billion dollar offer that everyone talks about with Yahoo. Oh, remember the time where Mark Zuckerberg turned down a billion dollars?
Less than two years later he turned down twenty four billion.
And then they were really good for the money. It's Microsoft.
But turned it around into an investment.
At fifteen billion. Yeah.
Crazy. So
The great thing is like all great partnerships
Everyone makes out
Wonderfully here.
So except maybe the venture capitalists in Silicon Valley, because this just like breaks everyone's brain. It was the high watermark for Facebook's valuation for a while, because then the great financial crisis would happen after this, valuations would all reset and then Facebook's next deal would get done.
I think with Yuri Milner at ten billion.
Ten billion dollar valuation.
With Yuri.
Yeah.
And Yuri would actually also buy
common stock through a secondary tender offer in that. So his dollar cost average would get down to more like six. So he got a screaming deal.
But you know, for the moment, like there are no comps to this.
Ever
Dotcom bubble, you name it, like
never has been a comp like this for an investment in a private technology startup.
The closest comp that I can
Even
sort of think of was Google's market cap at IPO was 23 billion. So like higher, but not that much higher.
And Google at IPO
Was a
two billion dollar revenue run rate spinning off hundreds of millions of dollars in free cash flow annually.
Facebook at this point in time is basically break even and doing 150 million in revenue, most of which is Microsoft itself.
Uh
All that said.
Microsoft, this is a home freaking run.
Like we've been saying all along, helps them spin up Bing, doing all the ad serving for this, getting into like real online services.
And then Big, you know, Microsoft is not a hedge fund, as we talked about on that episode, but
That two hundred and forty million dollar investment.
By the time they start selling it down.
Years after Facebook is public.
ends up being worth eight billion dollars.
Wow.
And then maybe the most important benefit to Microsoft out of all of this is like
Microsoft and Facebook have always had a good relationship.
Unlike
Microsoft has with Google and Apple. I remember Facebook events.
Like when you look at the page, it was a Bing map.
Not a Google map that always like felt emblematic of the partnership to me.
Yeah.
Every single place it could be a Microsoft product, it was.
Yes, and it wasn't a Google product. Yep.
Okay, so interestingly, here we are, two thousand seven, Facebook is still
Saying
We don't need to be in control of the core revenue.
creator for us. Like we think platform is the future.
Microsoft.
You're our preferred partner to handle making the money.
Yes.
And I think, you know, there's two things here.
Yes. I think that is
True specifically at this moment in time.
But this is where, you know, again, Mark is just master strategist, you know.
Kind of like calling it all the way back to civilization and the four X strategy game. He's got multiple bets he's placing on the chessboard.
One.
As you said, it's like platform like
Hey, platform is rocking and rollin'. We think we're building
the next great technology company and the next great business model.
Just on platform.
Also, yeah, we're
A social media company that involves a lot of page views and engagement and like
the right way to monetize that is advertising. So yes
We've just continued this big Microsoft partnership.
But we have the right to sell our own inventory and we
Should probably start building.
That muscle.
Two.
The other thing that's happening here is
Mark still kinda thought
Ads were gross.
At this point in history.
So
The things he cared about were product and engineering and design, and he kinda wanted to outsource everything else, or at least
have someone else at the company think about it.
And having Microsoft take care of the ads was I think in his mind kind of a win win. That way the commodity stuff can happen elsewhere and I can focus on the thing that really matters.
And
The company really did not have the insight yet.
Oh.
We can do ads different and better than anyone has ever done them before.
Well, I'm smiling as you're saying that because um
In practice.
For this moment. Yeah.
In reality they were trying to build their own
Native.
Facebook.
advertising unit, so to speak.
It was just beacon.
Yeah.
Beacon is one of the most epic failures in Facebook's
Hall.
History.
Yeah.
Okay, so Beacon.
Well,
First off, you were totally right. And I think you were foreshadowing Cheryl Sandberg there of like Mark wants somebody within the company to just, you know
run and manage this thing and build it, great and world class.
Before Cheryl
Do you know
Which Facebook executive
Led.
Beacon.
I do not.
Tamoth Pali Hapatia. No way. I he always talks about the growth team. I never knew he was in charge of Beacon first.
This was Chamas's big thing.
Before
Growth. And actually the epic failure here of Beacon leads directly to growth, as we shall see in a second.
No.
What was Beacon?
So
Like you said.
Mark is kinda
Allergic to traditional advertising.
But he's like, Well we have this incredible
social activity happening on Facebook. And we know through newsfeed that people engage with and they and they love it.
What if there were a way?
For a native ad baked into the very fabric of the product itself.
That brands
could sort of control and monetize.
Well,
If we give
brands a way to essentially boost
how people are already engaging with them.
That might be the way to do this. And what this ends up being in practice is
Brands.
Publishing your friend's e commerce activity into your newsfeed.
Now
To be
Fair.
To Mark and Tamath and
the company.
We didn't know yet what the right advertising unit on Facebook was gonna be.
And this is probably as good an idea.
as any because like the core thing that you do on Facebook is you engage with your friends and you engage with their stories on newsfeed.
There's kind of no
Evidence really that people would want to do anything else but that. And so you're trying to kinda think of like how do we shoehorn advertising and brands.
Into this.
I actually
I don't buy it at all.
The obvious thing.
Is
show an image that people can click on and take them to a website.
It's
Display ads.
And like
I don't understand why they needed to
try to way overthink it and say our ad format has to be something
that no one's ever thought of before. Like just offer advertisers to do the thing that they know how to buy.
Well, I was trying to like think of how to be the most charitable possible.
to the company and how they can come up with it.
But yeah, I have next in my notes here.
To be clear.
This was a truly, truly
Terrible.
Head up your rear end idea. These are actually two different things, I think.
There was
Beacon, which was JavaScript that an advertiser could embed on their website, on an e-commerce provider's website, that would do exactly what you're talking about, publish.
into the newsfeed purchases that people were making. And like
This was at the point where
You wanted to publish all sorts of interesting different things on social media.
I don't think we knew for sure that purchases wasn't gonna be one of them. Like people still keep their Venmo history public. You don't know what people are gonna do.
The second thing.
that I think is in your description there a little bit is the idea of social ads.
Yeah.
That
Brands could take interactions that happen on pages.
And boost them.
but they couldn't just take out a regular old ad.
Yeah.
So it was this weird thing where like you could only advertise as a brand
to people where someone in their network had interacted with your brand page.
Yeah.
Pretty convoluted. I get that it's like this super natively social thing.
But again, it it did feel like they started in this place where like they're let's get way too clever for our own good first and then work backward to the most basic ad unit.
Yeah.
Totally agree.
That said, like
As soon as it's live.
It becomes clear, like one
Nobody wants this. Either of these things.
Yep. Users don't want it. Users are confused why they're seeing I mean, certainly the there's instant blowback against their publishing by
purchases. Someone I think had a engagement spoiled by a diamond ring getting broadcast.
Yes. Oh yeah, I was gonna say, I mean, this is number two, like the privacy implications here actually are like horrific. Yes. Like spoiling engagements. Like that's the wholesome.
horrific privacy things like you can imagine the
non wholesome publishing stuff that you're buying versions of this. Yep.
And then of course advertisers are confused.
And people don't really understand what's an ad, what's not an ad. They just burned credibility everywhere by launching both of these things.
Yeah.
Totally.
And
Mark and the company is coming off the newsfeed experience where they're like
Yeah, if we just give it enough time, users will get
So
They let it run for a couple of weeks. They run the newsfeed playbook of like, Yeah, yeah, yeah, we hear you, you know, but
You'll get used to it. Here's some more controls.
Oh, the social ads was years and years, but the purchases, you're right, that was just I think a couple weeks. Yeah, for Beacon.
Ultimately after
A few weeks they
Do acquiesce and they say, Like, okay, we will
Turn beacon off will make it opt in as opposed to opt out.
And
You can have a way to like completely turn off
All beacon tracking permanently.
From your profile.
A lot of people do that.
beacon activity basically drops to zero and then yeah, two years later it's like completely
Killed off.
And this sets the stage for
Cheryl joining the company.
Because I think
You know, Mark's takeaway from this is like
Okay.
Maybe I don't
understand, you know, advertising as well as I thought I did. Like I thought I didn't like it, but I thought I could be clever and engineer this new thing and like
Actually let's bring in somebody who like
Really, really does.
understand this. And Cheryl was
The perfect person.
Coming from Google. Cheryl joined Google in two thousand one.
Right as they were figuring out AdWords.
I mean, that's like three years after the company was founded.
Totally. Well and and the company didn't figure out AdWords for a couple of years. So it was like that was like the key moment. And then Cheryl built and ran
The whole self serve business at Google.
Which was the most important and the most technology like enabled part of what they were doing.
She had built the greatest
digital advertising system in the world.
And Mark was like, Oh
I'm trying to build the greatest digital advertising system in the world. Who could I ever get to do that with me?
And wouldn't it be great if that person was also a good like manager and leader who could teach me how to manage and lead? Yes. Yes.
And I think that really is
the quote unquote deal they make and
They say and you know, Cheryl agrees too. It's not like hey, Mark said, like you're gonna take this side of the company and I'm gonna take that side of the company.
She always reported to him, like
The whole company was his company.
But
Mark is really focused on product.
engineering and importantly platform.
Shale takes ads, shale takes operations.
Et cetera.
And when she comes on board, like
You referenced this earlier, Ben.
There's
Basically no ad targeting.
That's happening.
Natively on Facebook. Like there probably is targeting that's happening.
Through the third party Microsoft
advertising network, but none of that is like technology that Facebook's building or value that's accruing.
To Facebook.
And so the first thing Mark and Cheryl did when she joined was like
Okay.
Beacon was such a disaster.
We've got this great partnership with Microsoft. Like let's just do a full exploration. Should we be in the ads business
At all.
Yeah, she definitely
famously kind of led the exploration of what business are we actually in here.
Yeah.
And
You know, ultimately they decide
Yes, we are
In a media business.
Thus we should be in the advertising business.
And we should do it right and we should make it work.
And like
Ultimately that is gonna be building a really, really, really great
targeting engine, which is the thing that Facebook is like uniquely capable of doing.
Yep.
So though
Back to here where we are in two thousand eight.
Too you know, seemingly unrelated, but about to get
Very related things are going on.
One.
After the Beacon Fiasco when Cheryl joined.
Chamat kinda.
needs a new job at the company. And you know, like total credit to Mark to Cheryl
to Facebook as a company. I think at most places, like
Timoth would have been
fired immediately for what happened with Beacon.
But
The culture at Facebook is like, nope, we move fast, we break things and like
We're always on offense and this didn't work and
Let's find the right thing for you to do.
And
Thank goodness, because that brings us to number two.
Right around this time, once again.
User growth.
Slows at Facebook.
Yeah, so
It's funny that I don't feel like in the
public eye, we really knew these things. But as you kind of dig into the company history, you're like, oh, there are these moments in time where growth really did stall out.
And you know, Chamath has said on stage since then, Oh, I totally thought that growth was done.
And
There's a few
things to note about the growth team.
One is it was effectively the first growth team. Yes.
I think it was the first Girth team. Yeah.
Everyone who wants to get into growth now, I don't think really fulfill that is a brand new discipline invented in two thousand and eight.
And the way they sort of defined it at Facebook was
There's marketing.
There's product.
But
Marketing and product.
both touch customers in different ways.
And so the left hand needs to talk to the right hand. So for example, you should not have a marketing team that is sending out emails through an email marketing system and a product team that is sending out
notifications to users through the product.
with no notion of how they're speaking to each other.
You should
A unify those efforts through one team, and B, that team should live within product.
Or at least that team should be tightly coupled to product.
With the general
belief or um
reason for being that
Your product is the best lever.
To grow.
No amount of marketing you could ever throw at something that is not integrated into your product.
Will be as effective as
your product doing a good job with features
hitting the right users with the right message and the right value at the right time in a native way to the core feature set of the product. And so you've got
Shamath, you've got Alex Schultz, you've got Naomi Gleit.
And Javier Olivant.
And so you've got this core early team. It's four people and then it expands to kind of six or seven folks that

really on this agreement between Chamath and Mark of we are gonna have this dedicated growth team and our mission is going to be to grow Facebook using Facebook itself, not through extrinsic measures.
Yeah.
Mm-hmm.
This was like an incredible
Insight.
And was so perfect for Facebook because like I I think this growth insight of growth through product is
Can apply to any company, but it especially applies
to a virally growing social network like Facebook.
Yes.
There's this interesting things that make it tick. The first of which is
This has to be.
the most data obsessed team in the company. Every
team should be data obsessed, blah, blah, blah, but like the growth team is really the one who sort of discovers
Oh, here are the obvious where users are deriving value. Here are the obvious where users are getting confused. Here are the obvious opportunities to find new users. Here are the obvious to reduce friction. Analytics is the answer for that.
And I think that there's a lot of really interesting stories, especially around internationalization of
The growth team.
And
partnering with other product teams around the company.
To say
What is an engineering and product approach?
to something that traditionally has been done other ways.
Like the way most people would translate their product.
is by hiring translation
servicing firms or by hiring a dedicated person to go through string by string and edit
Well, we're Facebook. We have all these users. What if we just
You know, when we're launching in Spain, surface
Different.
words to Spanish speakers and say, okay, is this the right word for Spanish or not? Hey, can you translate this and crowdsource it.
and double check it with everyone. And that way you can not just translate
five or ten of the top languages in the world, you can be in every language all the time, up to date.
using Facebook itself because oh by the way when you translate the product
Way more people can use it. And so translation itself, internationalization is a growth lever, and we have product ways to do the translation with our users.
Yep. And that's what actually started even before the official growth team with with Javi and that first hackathon. Yes.
But that was the seed of this idea of like, oh actually the way to get past this
Growth wall as people refer to it.
in retrospect that we're hitting is use the product itself.
And internal nationalization, there's even more to it than what you said.
One.
When you have the users themselves
who are translating a product as you're seeding it in these new markets.
they're so much more bought in and like feel a sense of ownership over it versus like oh I'm just airdropping this, you know, translated American product onto
your country here. So it's not just that it's a better translation.
It's that like you're actually seeding those first power users who are gonna be deeply engaged and feel
Ownership over the product.
Yeah.
And then two
The nuance in like
This
Local markets that might even
be in the same language. I mean Spanish is the perfect example.
Spanish is spoken in so many places around the world, but like
the local nuances and needs in Spain are like super different than
Mexico or Argentina or Latin America, et cetera.
That's exactly right.
And I think
My point with all this is A, growth is a pretty new discipline in our industry.
Two
Growth is not marketing.
It's very tempting. You see, especially with incumbents like big Fortune five hundred companies who have someone whose title is growth, and then you ask them what they do, and then you're like, Oh no, that's not growth, that's marketing.
You don't actually modify the product at all. So that's a different thing. And it's important to realize like not only did Facebook
kind of invent the discipline.
They are
perhaps still the best at it. They really eat, sleep, and breathe the idea that growth comes from product.
Yeah.
It was that core initial team.
All of them of which
Javi, Javi's now the COO. Alex, Alex is now the CMO of Meta. Naomi. Naomi is now Meta's longest tenured employee besides Mark and runs a ton of stuff at the company. And Shamath, who deserves so much credit for
Starting the team, pulling it together.
Protecting it.
advocating for it within the rest of product, you know, in the way that only Tamoth can.
Man, it really is crazy with the Facebook diaspora. We're gonna keep seeing this as we go along. There's other names where people will be like, Whoa, I didn't realize they were at Facebook, but many of the names that have come up so far.
Yeah, the diaspora is pretty talented.
Yep. So there were a million things that growth did.
over the years within
You know, the blue app and then ultimately within all the apps at Facebook.
Growth today is a core center of excellence discipline that spreads across all the products at the company at Meta.
But the other big thing in the early days besides internationalization is
people you may know. Which
Crazy, like the carousel of people you may know on Facebook is still a core part of the blue app.
to this day.
Dude, I just got lost in it.
Did you know that that's what I was looking at right now?
No.
I was sanity checking, I was like, Oh, is that person part of the original growth team? And I opened Facebook
The newsfeed distracted me. I scrolled down there were stories at the top. I scrolled down one post and
Below that first post was an ad. Below that is people you may know. And I am like three panels over in people you may know because I was like, Oh my gosh, I'm not friends with them.
We're doing a podcast together live and I just had that experience.
Totally.
People you may know become such an important lever.
And

I love it. I love it.
Okay.
So people you may know become such an important lover.
Yes.
For a whole bunch of reasons.
The growth team discovers you were talking about analytics and data and really understanding what's happening.
The key thing that they discover for New Year's joining Facebook about whether they become
An engaged
active, you know, evangelizing user.
Or not.
Is how many friends they get in the first like I think it's
twenty four hours or forty eight hours or like short period that they're
joining the network. And there's like a certain number of active
Friends that you need.
Oh, this is funny, by the way. I watched two different talks by people on the early growth team and one of them cited ten friends in fourteen days, the other cited seven friends in 10 days of you know, how do you create the magic moment? Alex Schultz, who's now the CMO, gives this great talk.
gosh, a decade ago at Startup School with Sam Altman and uh
He makes the point, look, it's kind of a linear thing. Yes, you want as many friends as possible in the least amount of time. It's not like, oh, magically at
Ten friends in fourteen days. It's like super different than nine friends in fourteen. But
You just set a threshold somewhere and you set the threshold and then you're like, Okay, if we can deliver this
delightful experience where now people have a rich newsfeed and the people they care the most about in the world to interact with, they're gonna retain.
Yep.
Totally.
The other thing is
It marries perfectly with all of the investment that is going into the
Algorithmid.
of newsfeed.
Because
Choosing who to show you in that carousel of people you may know.
Is like
all the difference in the world, you know, show you seven randos and like you're gonna churn.
Show you your seven best friends and you're gonna friend them all and become an engaged user.
I'm so excited for I guarantee you at least one of the people that I just friended is gonna be listening to this podcast and realize what just happened because I haven't friended anyone on Facebook in years. And and I just sent out like three or four. They just reengaged you as a user. I love it.
Yes, they just have to new growth tactic, have people do podcasts about the company and then
I think people caught on to that one a while ago.
Yes.
But yeah, like that's a super hard data problem of like
Cold new user.
coming into the network.
How are you going to accurately predict who their best friends are who are already on Facebook?
Well, if you're on the web and this is
the late two thousands.
you ask them to authenticate their web based mail service of choice and then find out who they've been emailing and then use that to figure out who their friends are.
Magic.
Magic.
Oh, you know, there's other less nefarious ways, you know, see who has sent them links in the past.
who are also logged in Facebook users. There's all sorts of stuff you can do, but
Yes.
So by the end of two thousand eight
Thanks to the growth team.
Growth is like
really going again. They go from like just
Barely getting to a hundred million users in August of two thousand eight.
To almost a hundred and fifty million by the end of the year, so
fifty percent growth in the last four months of the year.
And then
Two thousand nine is just like
lights out.
They grow two hundred and fifty percent.
In two thousand nine.
To three hundred and fifty million users.
globally, internationalization is like
really firing on all cylinders here.
That's right. They went from a hundred and fifty million users.
to three hundred and fifty million.
No, in in like one year.
Isn't that wild?
Crazy.
The other
core piece of the stat whenever you're looking at growth is to look at engagement. Engagement in 2008 was also in the doldrums. 50% of monthly actives were daily actives.
And
From what I can tell, that basically was just an artifact of as the company got bigger, every marginal user they added was sort of less engaged than the early core users, you know, when they went from colleges to high schools to
open registration, it it just was gonna have slightly less product market fit.
But
Growth team is focused not just on
growing new users, actually an even better lever, every long term goal is retaining your existing users, and the best lever for retention is engagement. And so that was where a huge amount of their energy went.
So this is really interesting. Fifty percent of
Monthly actives were daily actives in O eight.
Since then.
They have basically improved that metric every year. There's been a little bit of variance, but
It is now almost seventy percent today.
been a maniacal focus on how do we make
as many monthly actives, daily actives as possible, year over year over year over year.
That's wild. And that figure is just in the blue app in Facebook.
That is just in the blue app. Yep, exactly.
Wow.
Well.
On the engagement front in two thousand nine, the big thing that happens there is
Like button.
You know where I'm going with this like button. Yeah. And
I know you know who invented the like button.
Yeah.
Because it wasn't Facebook.
Uh
I don't know.
Friend feed.
Oh no way. Brett Taylor and Paul Bukai invented the like button. How did that work? Cause friend feed would just federate stories from other social networks into one aggregated feed.
Yep.
I don't recall exactly but
Did it only store that information on friend feed and not propagate it back? I suspect that's probably it. Like they probably felt like they needed some sort of like
Hey Native Mechanic on
Friend feed.
Man, friend feed was so awesome.
It's funny in this era where I'm now checking multiple feeds every day.
Twitter threads.
Instagram
all the messaging services to catch up on my messages, occasionally the blue app.
I kinda need friend feed again. That was like the most amazing product. I know, I know.
Uh the world is so balkanized.
It'll never happen.
But yeah, I mean talk about another amazing part of the Facebook diaspora. Facebook would later acquire friend feed. Brett Taylor would become CTO.
When Adam Dantelo left to go start Cora.
And then when Facebook acquired Friend Feed, Brett became CTO.
And then famously Brett.
becomes
the co-president of Salesforce by way of acquisition, and then eventually board chair at Twitter when the whole X thing was going on, and now he's on the board at OpenAI.
Yep, board chair I think at OpenAI. Crazy. And he's got a new startup of his own. So
I'm telling you, the talent that moved through that place.
Totally. Well, and Paul Bukite, the other
Friend feed founder. Invented Gmail. Created Gmail within Google.
Yeah.
So he ended up at Facebook for a while then after I forgot about Paul too. That's unbelievable. Yeah, he must not have stayed very long, if at all. Yeah. Because he went to Y C, I think after that.
Okay, so Friend feed invents
the like button.
Facebook, I believe, was going to call it the awesome button.
And then at some point
Right before launching, I think Mark personally
Made the call. It's just too weird. Let's go with like.
Yes.
The story as I understand it is that Facebook had been considering something like this for a long time. I mean
The benefits are.
Obvious, right? Like if you have a lightweight
way to engage and feed more data about
vote positive votes on posts into the newsfeed algorithm. Like
That's gonna really turbocharge things.
On the flip side, the concern was that it would actually decrease meaningful engagement. There'd be less comments.
Exactly. And so ultimately they started running some tests with like small user groups and specific geographies and they found that it actually often boosted engagement of comments.
Fascinating. That's why you test things. You never know.
Exactly. So yes.
They launch the like button and that becomes huge for overall engagement, but
Also more importantly, for
Just improving.
The algorithm, which is now starting to kick in in newsfeed and making sure you're seeing stories that you really care about. And the like button then also got used for pages.
It became this sort of form of capital among brands of how many Facebook likes does your
company have, which for a while actually meant you could organically
get messages out to them. Every time you post it, it was as if a company was a person and you just show up in the feed before Facebook ultimately was like, those are advertisements. You're gonna pay us for those. Yes. You're exactly on the right track.
Let's flip back now to Cheryl and building the advertising business.
right around this same time we've decided like okay
Yes. We're gonna be in the advertising business.
And to do that right, to do that natively, to do that in a way that generates
defensible sustainable value for Facebook. That means targeting.
And
The like button is
The perfect gift.
To this.
Because all of a sudden there's this really lightweight way.
to engage with things to signal your preferences about
What you like.
Yeah.
And
The like button ended up being the perfect Trojan horse.
to move Facebook platform off of Facebook.
So there was a reason for
third party websites to embed Facebook's JavaScript.
in their pages because of course you'd want to be able to like an article or like a brand all up on their website. You know, how many Facebook likes do you have?
If that's what matters, we want people clicking like on our website too, not just over on Facebook. And so suddenly now every company on earth has some Facebook and has a reason to embed some Facebook JavaScript right there on their page, which, my goodness, that's gonna serve as a great signal back to the advertising algorithm where we can drop cookies.
And we can see who is moving around the web in what ways. So it's perfect for platform, but it's also perfect for feeding data into their advertising system now that they have something that
brands and third party websites are incentivized to drop right on their page.
Yes, Absa freaking ludely.
So
We talked about growth.
reigniting at the end of two thousand eight.
Into two thousand nine.
The business is also
on fire in two thousand nine in a good way. So
Platform.
Still rocking and rolling.
Microsoft display ad partnership still growing strong as growth is happening.
Now under Cheryl you've finally got
Real
Native.
Highly targeted ads.
Coming online in Facebook.
In two thousand eight.
The company had done two hundred and eighty million in revenue.
Up from one fifty three the year before in two thousand seven.
Two thousand nine.
They do almost eight hundred million in revenue. He's crushing it.
Two thousand ten
And even
Two billion.
In revenue.
They're now very, very cash flow positive.
Yes.
reaching the scale that Google was at their IPO.
twenty ten, they hit six hundred million users.
twenty eleven eight hundred and fifty million users.
twenty eleven.
revenue grows almost another hundred percent to three point seven billion
Like all right.
Hm.
Time to start thinking about taking this company public.
It's also time to start thinking about what is our biggest existential threat. It's so funny that we're talking about
And the existential threats are over. We've won. We're we we have platform going well. We have this advertising business going well. We're getting data from the open web.
Because we have like buttons everywhere.
Everything is going our way. We finally have it dialed.
And
None of that matters in a mobile world.
As people shift from spending time on the web to other apps, that open web data used as signal goes away.
All of your ability to take payments.
By the way, Facebook had launched
Payments.
At some point.
they started requiring apps to use their virtual currency. Facebook credits. Facebook credits. That's right.
All of these amazing pillars that they've built were for the open web and created the most incredible business known demand.
And mobile's a completely different thing.
Yep.
That seed.
From five years ago that has been growing a mobile.
It's finally gonna turn into
A big thing.
Big problem for the company.
All right.
So let's just get into it.
I thought it would be fun.
I listed out
All of the way.
That I could think of that mobile
Was a big problem for Facebook.
One, and I think this is kind of like
the Uber problem that everything else is downstream of.
iOS and Android
Are closed.
proprietary ecosystems.
not controlled by Facebook. Yeah, you can argue Android is open source and all that, but for all intents and purposes
Google controls it and they control the Play Store.
Put another way.
The web is the only open platform in history.
Yes.
And
Facebook was born on the web.
I mean, how crazy is it that they could build Facebook on entirely free technologies at the beginning?
And then
Get distribution just by people sharing URLs around. Browsers are interchangeable, operating systems are interchangeable.
It works on any device that anyone wants. Yeah.
If you live on the web, you have infinite degrees of freedom and flexibility to control your own destiny.
Yeah. And Facebook had kind of built this, you know.
Walled garden on the web. And it was pretty nice.
Yep.
And walled gardens are great as long as the foundation under you can't shift.
Yes. Build your walled garden directly on the earth, not on someone else's foundation.
Okay, specifically, why is iOS and Android being closed proprietary ecosystems such a problem?
That means my number two reason.
Platform.
Which is, you know, fifty percent or more of the value of Facebook in their minds at this point in time.
No longer works.
At all.
Like
Full stop.
Flip a switch.
Does not work, will never work.
at all ever again on these platforms.
And why is that?
the whole premise of platform.
Is you can run apps
Inside of Facebook.
on mobile, you will never be able to run an app inside another app.
Just not gonna happen.
Apple's never gonna let it happen and Google's never gonna let it happen. And that's primarily because of that thing around you can't launch an alternative app store.
Right. Yeah. I mean it's the core part of their business model are the apps. Not to mention if you are
paying for things on their phone, you have to use their payment system. So Facebook credits ain't gonna work because you can't charge thirty percent on top of thirty percent.
Yeah. And there's technical aspects to this too, right? Like code runs in native code on these
Devices as opposed to open HTML on the web.
Right, you get told what your development environment is. This is the language, these are the frameworks, these are the APIs you're allowed to call.
Yep.
So okay.
Greater than fifty percent of, you know.
The revenue and the sort of like theoretical future value. Inherent theoretical value and strategy of the business.
Kneecapped. It gets worse.
Facebook and Mark and Cheryl
have been hard at work building
The other
core pillar of the business, this new super sexy, targeted
Adds business.
Well
Guess what? All of the ads that are running on Facebook at this point in time.
are running on the right hand column on the website.
There is no right hand column.
On a mobile app.
There's only room for a feed.
Which to this point in time has never had advertising in it. And in fact there's like a
Cultural.
allergy.
To the idea of polluting the
beautiful, pristine, organic newsfeed with an ad. We don't require big cultural change.
This is why you can't make up this stuff in these stories that we tell.
Facebook has
I kid you not.
No way to make money at all.
on mobile. Here is an actual honest to God statement.
That is in Facebook's S one
That they filed before the IPO in twenty twelve. I am reading as a quote.
We had more than four hundred and twenty five million monthly active users who used Facebook mobile products in December twenty eleven.
We anticipate that the rate of growth in mobile users will continue to exceed the growth rate of our overall MAUs for the foreseeable future.
And our users could decide to increasingly access our products primarily through mobile devices. Which let's be clear, comparing those growth rates, another way to simplify that and say it is.
our user base is shifting to mobile from desktop.
Another way to simplify that is our desktop business.
is going to zero. Yes. Now
The kicker.
This is a statement in the S one.
We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.
Accordingly. Buy our stock. Yeah. Accordingly. If users continue to increasingly access Facebook mobile products as a substitute for access through personal computers,
And
If we are unable to successfully implement monetization strategies for our mobile users
Our revenue and financial results may be negatively impacted. Yeah, no kidding. Oh my God. Uh I'm still not done. That's only reason number three. Okay.
Reason number four.
Another benefit of the open web is
Is that you can
Push code.
Whenever you want.
You can make changes rapidly.
You can move fast, you can break things, and then you can fix them.
Rapidly.
This is how Facebook has always operated.
On
Mobile apps.
You can push code when Apple and Google tell you that you can push code.
And at this point in time there was approximately a two week
delay between pushing an update and it being reviewed and accepted.
Not only is there a two week delay
During that two weeks,
Apple and Google are reviewing and if they see anything that they don't like for whatever reason, they are telling you, No, you cannot push that code.
Or your company could be in a fight with that company and they could decide, uh, I don't think you should push any updates for a while until we resolve our fight.
Yeah.
Okay, so that's number four.
And then that brings me to number five reason that I could think of of why this is really bad for Facebook.
The competitive field
Is about to get
A total
Reset.
On the web.
Facebook is dominant.
Network effects are super real.
Everything we talked about in this whole first part of the episode, if they can suck up all of the new social functionality that they or anyone else invents, they can put it into
The main Facebook app.
Photos, chat, platform, newsfeed, etcetera.
On mobile though.
Facebook is just
one icon of many on the home screen.
Exactly. And the wisdom at the time was that mobile apps should be narrow in their functionality and you did not expect a single app to bundle a ton of different use cases.
It's super easy for users to be like
Hm, okay, I get this utility from Facebook, but like
Well, I don't know, here's th this Instagram thing, like that's kinda cool. I get great photo utility from that.
Which also lives on my home screen right there, and I'll still use Facebook for
seeing when my friends get married, but like photo is cool.
And messaging, you know, this WhatsApp thing is super cool. Like maybe I'll just use that for messaging. It's super easy to use one app for one thing and other apps for others.
And you can see why Facebook adopted that uh sort of early twenty ten's constellation of apps strategy.
For a while they had slingshot, poke, messenger, paper, rooms, riff.
Camera.
The belief by a lot of companies for the direction mobile was going was
there's going to be specialized apps, each for their own tiny little purpose. And that's not great if a lot of your value is we bundle a lot of stuff in to create the most user user engagement to all feed into each other for people to use all these different components of our application.
Yep.
Tell it.
Okay.
Those are my short list of five reasons of why the shift to mobile is dangerous to Facebook. Anything else you would add?
No.
So they're going public right into this.
For the first time
since our business is founded, we face a real existential threat completely out of our control.
That is gonna make the next few years look really bad.
Let's go public.
Yeah.
Well, let's talk about that IPO.
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All right, so David, here we are.
We're going public.
Despite uh
everything you just listed that is wrong with the future of mobile and this company.
Oh man, which seems like a not very smart idea, right? And uh
You know, like one thing about
Mark Zuckerberg.
You could say lots of things about him, but one thing I don't think anybody could say is that he's not smart. So
What gives? Why are they doing this?
Well
Back then.
Once a company crossed five hundred shareholders.
The SEC actually mandated by law.
that you had to start reporting quarterly.
Like a public company.
Whether or not you were traded on an exchange. Whether or not you were traded on an exchange. And at the end of twenty eleven.
Facebook.
Crossed five hundred shareholders.
So for Facebook, this means that they were gonna have to report like a public company anyway.
And in practice the common wisdom was
You have to go public as part of this.
Anyway
Because otherwise you're gonna report and then, you know, you're gonna lose all the momentum and excitement about having an IPO and doing an S one and having a big road show, et cetera, et cetera. So you might as well just
Do the IPO as long as you're gonna have to do this. And I think Mark and Cheryl and the team like really debated like
Well, should we skip the IPO? But like
Well shoot, then we're gonna be reporting as a public company in
Heading into
all of these headwinds without having actually gone public and raise the money that we might need to be able to make these investments. So they're like
Nope.
We gotta just do it and go public.
Yes, it is a
Odd time to go public, given everything with mobile
And of course they're being forced into it. There actually are a couple of kind of tailwinds that they have.
That are probably worth

The first of which is
is they had just beat Google Plus.
That's right.
Facebook treated this like a total existential threat. We laugh about Google Plus now, it's a butt of jokes, but that's because Facebook was so effective in competing against it.
I'm not saying the product itself was amazing and it would have been fine without Facebook, but like Google did not end up executing that well on that product. It actually is a really good point though.
Google Plus may or may not have been a good product and may or may not have succeeded, but the Facebook competitive response was like Unbelievable. Unbelievable. I mean, this is like the growth team plus Facebook's engineering culture at its finest.
in defeating this.
Whether or not they executed the product well
Google.
Was
the big web tech company at the time, and they put a ton of resources and a lot of their best people on it.
And they had Gmail.
And they had Gmail.
Right.
So
It's interesting to look at this because
Google
basically is
Facebook's
Biggest.
business model comp.
They show ads on the web and they monetize that really well.
This theoretically could have been in their wheelhouse. This is just more real estate to show ads on the web. And they've already got all these people with user accounts.
You can see why Facebook took this really seriously. We've talked a lot about Facebook's technical prowess. Well
Here is an example of where it really kicks in.
when you need it to to be a key competitive. So they structured themselves in a way that encouraged flexibility of engineers. And they really broke from the tide of microservices in this era. They had one monolithic code base that everyone worked out of. And you might say, well, that's stupid. Why would they that that's not the way the world was going to be a problem.
But
What they basically did was they wanted to encourage portability of teams.
If you're an engineer, you get hired into the company, not onto a team. You learn the company's code base, you learn the company's conventions, and you can easily sort of move around after that. You do have to deal with the trade-off then of you have this big monolithic code base with gigabytes of PHP code for thousands of engineers. What do you do about that? Well, then they just had their cake and eat it too. They would go and have the
infrastructure team figure out how to deal with that problem rather than saying, oh, everyone can just work in their little silos. And so that meant that
engineers could kind of be quickly reorged. They could have this company wide lockdown to fight Google Plus. And they did all sorts of things. They launched video calls to compete with Hangouts. They launched something to compete with Google Circles, but either way, like they could
really quickly reallocate resources and people who sort of knew how to work together to defeat
What
could have really been an existential threat from their biggest
Similar company.
Oh man. Mark famously in a internal speech around this uh you know referenced uh what was it? I think Cato the Elder from uh ancient Rome of uh Carthage Must Be Destroyed.
Yep, there is a second way in which things had settled down and now was a good time to go public, and that's around privacy.
Facebook had just been
I mean
playing way too fast and loose with user privacy for years, and it had finally caught up with them by twenty eleven. And just to jog your memories, I'm sure people may remember a lot of these, some of these included even though users could restrict the audience of their posts with a setting,
This apparently didn't apply to apps, which could access these posts regardless of how you restricted the audience. And for a time, this even included when your friends installed an app too, you didn't even have to grant the permission yourselves.
Similarly, they made friendless public without user consent at one point.
Facebook could decide without user consent to change private fields of your profile to be public, and this wasn't always messaged as clearly as it could have been to users. So to remedy this, they had just signed what is called a consent decree with the FTC, the US Federal Trade Commission, in 2011, and they promised to make a

user privacy issues going forward. And so all this was behind them now. And interestingly, David, an FTC consent decree
Is the same thing that Microsoft signed.
Yeah, hark back to the Microsoft episode. Yes, the FTC consent decree with Microsoft was the predecessor to the big DOJ suit. In this case, the FTC consent decree is the predecessors to what eventually would be become the Cambridge Analytica settlement. So here in twenty eleven
The way that they settle this is there's a bunch of provisions that with Facebook promising they'll be tighter on making sure user data is treated in a very particular way. They're subject to audit every year for two years for the next 20 years. You know, there's there's all these things that they sort of agree to.
But
You know, once you sign a consent decree, it's like, Okay, we're through it. We don't have this thing hanging over our heads. We can go public and say, Oh yeah, that's in the past, we've taken care of it. That's another reason to go public right now.
Yep. It's such a good point.
There actually was
This little window here at the beginning of twenty twelve.
Where
Desktop revenue.
Can yet
been impaired so badly that they could still show it.
They had these couple little winds they could point to. Yep. And say like
All right.
Not great, but like if we're gonna do it, we gotta do it now.
Yeah.
You could almost look at it like a little bit of a win of
Everyone knows us as the company that
is uh a little bit dodgy on privacy practices. Like at least the public perception is this, that they're constantly
Changing the terms of the game, shall we say.
Yes, to the company's advantage when it was confusing or misleading to users. And now you can say, look.
Not only do we sign that, we have these five product initiatives in place where we're just buttoned up now.
I actually think that's pretty true. I think they became a company that had rigorous privacy practices.
because of some government regulation when they otherwise may not have.
I mean, if you look at the early days of what you could do as a developer on platform.
It was pretty wild west. And so I'm not saying it's fully because of the consent decree, but
They could definitely tell a story around
look, we made some mistakes, we got some some things wrong in privacy, and going forward, we're in good shape.
We're all good. Yeah. Well, we'll come back to that in a little bit.
But for the moment.
Yeah, PL.
February first, twenty twelve.
They file the S one, they entered the traditional quiet period before the IPO where
legally

Once you have filed for an IPO, all material information about the company
needs to be included in the S1 registration statement. You can't go give interviews, you can't go talk to the press, you can't say anything meaningful about the company besides what is
fully publicly disclosed to any potential investor in the
S one statement.
And then
A week later.
On April Ninth
Twenty twelve.
During
The quiet period.
Facebook acquires Instagram for a billion dollars.
Time's now, baby. The time is now. And they can't say anything about it besides what they file in the amended S1 because they're in the quiet period. Amazing. The company's previous largest acquisition was$70 million.
obviously this is a way different thing. Now, sitting here today
You might be really tempted to say
Oh, well.
There's the fix for mobile.
They just bought Instagram. That solved all the problems.
Except
Not because Instagram didn't have any revenue on mobile either. It's like uh, you know, you're tying one anchor to another here.
Well, not to mention Instagram had twenty seven million users.
Facebook had nine hundred million users. This was potentially a problem for future Facebook, but this was not.
Currently.
A problem.
Totally. I was just about to say that too. Like yeah.
Also, not currently a fix to Facebook's major problem of the shift to mobile. And I mean,
My God, talk about the Hutzpa of
Mark.
to do this, you're already in a really challenging
period for the company, a really challenging IPO process. You just entered the quiet period and you decide to spend a billion dollars on something with 27 million users and no revenue, and you're not going to be able to talk about it except what you file with the SEC.
Wow, you gotta really, really, really freaking believe.
In the future.
potential of your company and the combined companies of Facebook and Instagram here to make this move.
Not to mention, on top of it all, we're not gonna go into it here because we had a whole episode on Facebook and Instagram.
But this was done over two days, over the course of a weekend.
Mark didn't do a whole lot of socializing this before pulling the trigger. He just knew it was the right thing to do and did it.
Yep.
And that ended up working out.
Pretty well in the long run.
In the short run
Yet another question mark to add to the already very large pile around this company.
Finally.
Long roadshow process.
By the week of May fourteenth, they're ready to price the IPO.
Pricing is set for Thursday night.
May seventeenth, twenty twelve.
On
Tuesday.
May fifteenth.
General Motors.
GM, who by the way was not a particularly large Facebook advertiser.
Announces publicly to the world that they are pulling all their spend off of the Facebook platform because it's not effective.
Not really what you want to have happen two nights before you price your IPO.
Was that motivated by someone that feels like a hit?
feels like it must have been. I've never heard one way or the other, but like A, why would you announce that publicly? B, why would you announce it publicly right then? Like
There's for sure more to that story.
None the less.
Facebook goes ahead.
Thursday night, they priced the IPO at thirty eight dollars a share at the very top end of the range after the roadshow. Again, the Hutzpa here.
They raise sixteen billion dollars.
At a one hundred and four billion dollar market cap.
Making it I
think the third largest IPO of all time at that point behind Visa and
Ironically
General Motors coming out of uh
The bankruptcy during two thousand eight.
Which both of those are mature companies that are going public under weird circumstances. Those are not comps. Totally, yes.
By far the largest IPO of a like
new startup company in history.
On Friday morning.
Trading starts.
The Nasdaq
is overloaded.
with so many orders for buying and selling Facebook.
That trading in Facebook stock doesn't actually open until eleven thirty AM
Which is you know.
Two plus hours after the open of the markets. Gotta be terrifying if you're a big Facebook shareholder. Yeah, that's pretty terrifying.
Initially it looks like oh that delay might have been good because the price shoots up to forty five dollars a share from
Thirty eight.
But then it crashes back down.
It is
One of the most volatile trading days in any stock. I think it
history on any exchange.
Facebook shares
And the day
At thirty eight dollars and twenty three cents, up twenty three cents from the IBO price.
But only because all of the underrating banks in the IPO stepped in.
to buy shares and support the price, which was totally crashing throughout the day.
Hm.
Thank God they did it on a Friday, so everybody had the weekend to breathe.
Once trading starts again the following week, the price falls on nine of the next thirteen trading days.
And ends up
By the end of May.
down twenty five percent from the initial IPO price of thirty-eight dollars.
Kinda in free fall at this point.
The style.
continues going lower and lower and lower.
ultimately bottoms out.
On September fourth, twenty twelve

Down fifty three and a half percent from the IPO price. So market cap.
Cut in, you know.
Over half in what's that?
Five months since the IPO.
It wouldn't end up reaching IPO price again until August twenty thirteen. Anyone who bought at the IPO was underwater for sixteen months.
underwater for sixteen months and five months later had lost.
Half their money.
On Facebook.
So you have to have Nerds of Steel to even just keep holding.
I'm sure anybody who got back to even at sixteen months was delighted.
Totally.
You've also got the employee lock up coming up, uh, around November. So like now you're staring down the gun of
Shoot, I've already lost.
half of my value as a public company and pretty soon all the employees in the company are gonna be able to sell like that's gonna put more selling pressure on the stock.
Holy crap.
This is.
Pretty darn bad.
Yes, that is horrible. I mean losing fifty percent of your value as
Any company, public or private, but especially a public company is

Having that happen.
Immediately following your IPO.
For most companies there's no way to come back from that. You're entering a death spiral, you're gonna end up being acquired or you know, you're just gonna get
Driven to zero, basically.
Yep.
And just to be super clear.
desktop revenue wasn't gonna go to zero immediately.
But Wall Street investors are really worried that like, hey, the world is transitioning to mobile.
Eventually growth will start slowing and it will start declining, which it

And so like if you can't show me that you're gonna replace that with mobile revenue, why should I value your stock at
Anything.
Yep.
And so here is where founder control matters.
This is, David, it's interesting you're explaining the mechanics of a death spiral. That would presume there's a board of directors who feels a strong desire to do whatever is best in the j interest of the shareholder. And they might think that it's these short term things.
But
If you have a CEO who has a twenty year view and believes deep deep in his heart that the best is yet to come.
And that this is just a temporary problem.
And that person
controls the company.
And own the majority of voting shares.
You can withstand things like this.
You just better be right.
Yes. So a little fun anecdote for everyone. David and I among the twenty other people we talked to to prep for this episode, one of them was uh Cheryl Sandberg. And we were asking Cheryl in particular
How did you start?
the monetization effort on mobile. They were in the third column, there's no third column on mobile.
What did you do? And her comment to us was, Oh, we just stopped caring about the right side ads on desktop.
And we took every engineering resource we could off of that and we put it on mobile.
And we knew we were gonna miss the current quarter.
I think they missed a lot of quarters right after their IPO.
But this was us trading the present for the future, and all we cared about was our future.
And
She said this is great quote.
This is up there with one of the best quotes on acquired of all time. She was sitting there with Mark late at night
And when they sort of arrived at this plan of we are going to
forego a lot of desktop revenue to basically bet it all on figuring out mobile revenue.
She said.
Well, Mark.
Nobody can fire you and only you can fire me.
So if you're in, I'm in.
And we buckled our seatbelt and we said, Here we go.
And it's amazing. I mean, that can only happen in a founder controlled company.
And it really did force them to figure out mobile advertising. If they really are saying like
This is the new first class product. This is where we're gonna point all advertisers toward.
If they're wrong on that
They're wrong.
across the whole board because if ads suck on mobile.
Since it's the only thing and it's filling up your whole screen, user engagement is also gonna nose dive. And so it's basically a bet it all moment where the ads are front and center.
So they must be good.
It is essential for the mobile product and thus your company for them to be good.
Users' attention will be pointed at these ads like no other ads you have ever run before.
And actually the flip side of this is it ended up being the best thing ever for the company.
Because the ads are front and center.
the value per ad is actually higher.
So they ended up creating a much, much more valuable ad unit than they ever had on desktop purely because of this incredible attention on them when you're scrolling in feed on mobile. Necessity is the absolute mother of invention.
Yes.
Totally.
You have no choice.
But to do your best work.
Boy, did it work out fabulously.
Yeah.
Nobody can fire you.
Well I guess you can't fire me either. But either way, if you're in the perpetruction requirement is still a little
That's unclear.
But yes, totally.
So when we say
Taking your best, most trusted engineers.
Taking them off whatever they're doing and putting them on ads.
There's actually an amazing story around this. So
Mark.
Goes to
someone within the company who he knows
Can just ship.
And get stuff done.
And that
Is Baz.
Andrew Bosworth, his old TA from Harvard. Bos at this point is running
The core.
Profile.
And
Time line within Facebook.
Mark.

Baz.
I think you should come work on ads.
To which
Baz replies.
Okay, I mean like I get we're in this situation.
But you know, Mark, like I can't do this for too long because remember I'm getting married this fall and
I've got this.
six month sabbatical plan for my honeymoon and
My wife and I we're gonna travel the world. It's all like
booked and paid for, we're gonna be out of the country. And Mark is like
Yes.
Well, we've got a few months until then. I think you should come over and work on ads. Like, okay, okay. I will do that. I will come up with something here before the wedding. So he teams up with Will Cathcart from the newsfeed team from Chris Cox's team and
They go get to work. By the way, Will is the
Head of WhatsApp today and Baz, of course, is the CTO of Meta and head of reality labs. Yep.
And
The first thing they do during these couple of months is like all right, we just need like a band aid
To stop the bleeding and at least produce some
mobile revenue.
And what they decide to do is like, hey, we do have on mobile the carousel of people you may like.
What if we just slot some brands into that carousel and say, hey, in addition to people you may like here,
Here are some
Brand pages you may like.
Uh
A reasonable first step.
And look, they knew that this wasn't gonna be the long term solution and solve all the problems, but it did start to produce some mobile revenue that they could report.
And
This was super important because as I alluded to
the lock up on employees and insiders selling their shares expired in November. They had to get something out that was gonna prop the stock price up.

Naturally employees are gonna start
selling here and that's gonna put downward pressure on the stock price.
Yep.
Also
Bummer if you are an employee selling six months after that IPO.
Hopefully as many people held as they could to get through it.
Yes, hopefully. And I think
Most people
who were at Facebook at this time really did believe in the future of the company
At the same time.
you have life circumstances. You might need to buy a house. You might need to
Do things for your family, et cetera.
It's a tough spot.
So
Fall rolls around, they've launched sponsored pages you may like.
Baz gets married.
They're still grinding on
The big project, which is called Project Whale Shark.
And that is
getting real, honest to God, native ads in the newsfeed.
Which
Frankly, they should have done years ago on desktop. But like now the gun is to their head. There is nothing in the mobile app except newsfeed. We gotta put
Adds in Newsfeed.
So finally, at the end of the year
They launch it.
Boz is like Phew.
Okay.
Mission accomplished, I can now leave on my sabbatical, we can go on our honeymoon, but there's just one problem.
Shipping this thing is only like twenty percent of the battle.
Now you have to go sell it.
to advertisers, which this is a whole new
Ad paradigm. You gotta like
educate brands on why this is gonna work for them.
Especially when
Your overall brand as a company and effectiveness of your advertising is kinda in the dumps right now.
And it's an iterative process where you're gonna hear a bunch of feedback from brands and you're gonna say, Oh, we gotta modify the ad products.
Which still continues to this day. They roll out and modify ad products. This is not like a uh all right, we now have ads in the newsfeed. We're good.
The job is never done here.
So of course quarterbacking all this is gonna fall too.
Cheryl and

But
Again, as you said, Ben, this is an iterative process. You can't divorce product.
from the feedback from advertisers.
And
The big advertisers are sure as hell gonna expect someone from product who is leading this thing to show up and tell them about it.
Yeah.

needs to come along to these meetings.
So on December eighteenth, Boz remembers the exact day.
Mark calls him up and is like
Buzz.
Great job working on ads.
Hey.
I really still need you to come.
back and work on ads. And Baz is like no way, man. I did the past six months for you.
I just got married, I'm going on my honeymoon, I'm out.
Mark's like okay, okay, okay.
The next day.
Calls him back december nineteenth and he's like
Baz.
I just want to say really, really great job again.
And you know, the company's in a really tough spot and like
I really think
That you should come.
Keep running ads here. And uh
I was like, Okay.
All right.
I will reduce my sabbatical from six months.

I'll take the holidays, the beginning of the year.
I'm gonna cancel the last four months of my trip. I will do six weeks with my wife and then we'll fly her friends out to do the last two weeks with her.
And uh then I'm gonna go fly around the world with Cheryl on a very different kind of trip here. So that's what they do. And for
Most of twenty thirteen, Boz and Cheryl are out on the road.
They're pitching advertisers, they're explaining sponsored stories in the newsfeed on mobile.
Why this is so important.
Not only do advertisers need education about
this new Facebook ad unit.
They also need education about mobile
Advertising in general. They'd only just gotten used to digital advertising on desktop. Totally. Do you remember those Mary Meeker decks that used to go around where they would show the mobile advertising
Basically the shortcoming. Look at all this attention that has shifted to mobile, and yet the monetization just isn't there. And that was a story every year for like a decade.
Yep.
Totally. And it was the same story with
Desktop on the web for a decade before that. Yep.
So
What's interesting is like as they're getting going here, of course advertisers don't come in right away.
But also the ones that do come in early are
Kinda as you would imagine, not the best.
Advertisers.
And so
The whole effort starts to have this real
problem where the ads that are now showing up in newsfeed are like
pretty freaking crappy ads. And Mark keeps getting more and more pissed because like obviously this is really important, but he's like,
Boz, Cheryl, like why the hell is all this crap showing up in my feed? Like
If this keeps happening I get that we have to save the business, but like
I care more about the user experience and like I'm gonna dial this back.
This is the most interesting thing. At this point in history, Mark is putting pressure on Boz and Cheryl to show fewer ads.
Yes.
And Baz is the one with the contrarian view who comes to Mark and says
We're thinking about this all wrong.
We actually need way more ads.
Not just a little more ads.
huge amounts more ads.
Because
A great ad.
Is on par
With content.
And
If you have tons and tons of ads
then we can do way better targeting. Like you have this beautiful liquid marketplace of
Hundreds of thousands of advertisers.
billions of users and at any given time somebody can see the optimal ad for them and get recommended an amazing product that perfectly fits their needs in that moment with messaging that's perfectly tailored for them.
great advertising can be great.
But you need a really, really liquid marketplace and you need fantastic algorithms, which you can only have if you train them on tons and tons of data. So like we actually need
Ten thousand times more ads than we have right now.
Not less.
It's almost like the only way out is through. We're going down this path.
We must be extremely successful in order to be successful at all.
This was such a
Contrarian view
And also right.
And I think only could have come
From
Someone like Baz
being focused on this problem.
Because
As
A product person and an engineer.
It's the only way that you're gonna have that insight that like, oh, this is the same
problem we had when we launched Newsfeed.
The way to fix newsfeed and to make it really, really awesome is more newsfeed, you know, is more data, right? Like the only way out is through. Yeah. If somebody had purely come, I think, from the advertising world, they would have been like
Well, you know, that's just the nature of advertising, right? It's a tax on the users and that's the way monetization of media works. But like Baz's like, No, no, no, actually, this is a relevance problem and we can make this awesome. And in order to make it awesome, we need a lot more of it.
Yep.
And basically like that's what happened. I mean, flash forward ten years, I open Instagram to get great product recommendations.
Totally. It's actually
Kind of wild.
I believe this is true.
There are markets in the world today where I think Meta has run this test.
Where if you
Turn off ads.
in the you know meta family of apps products.
Engagement in those products actually goes down.
Which is just like freaking wild. You would think like, Oh wow, now I get to use meta products without advertising, no tax on me. Like I'm gonna engage more. Like, no, it goes down. That's the definition of ads as content, if that's actually the case.
Totally wild.
So by the fourth quarter of twenty thirteen
Which honestly in the scheme of things is
Pretty
Freaking fast.
The whole thing finally flips.
Facebook announces that mobile advertising is now fifty three percent of revenue and total ad revenue for the company.
Grew seventy six percent.
Year over year.
In the fourth quarter, which of course is the most important quarter of the year, which means
I did all the math on that.
That means that
All of desktop revenue.
All of it. So
The old platform business.
The old ad business, the Microsoft third party s ad serving.
All of that actually shrank in the fourth quarter of twenty thirteen.
So that's the counterfactual here. If Facebook had not gotten mobile monetization right.
That's what would have happened is Q four twenty thirteen
all of the growth momentum that it had
would have flipped and it would have started the downward spiral.
And
Probably not that early if I guess that's right, because all the resources got pulled off of it. Exactly. But that's what would have happened eventually to it. Eventually. Yep. Yep.
So man, it's like this wild
eighteen month journey, but it
Totally.
save the company because
Now here they are.
They've built this.
Unique.
Pioneering
And
Totally defensible native
Mobile ad unit.
In the feed.
They define the whole generation of, you know, monetization here. It's the best ad unit in history.
It's an ad that completely fill the screen on your device.
and that users are okay with.
So
This is the most insanely captivating, engaging.
ad unit that you could possibly ask for.
And it came out of necessity. It's wild. The fact that they thought their backs were against the wall, they were totally screwed, and instead actually it's the thing that monetizes better and is better for advertisers than any other
advertising product they've ever had.
And you know, I know we keep saying this and it sounds
Maybe sort of um
Silly, but like really better for users too.
Before this
paradigm that they invent here of, you know.
algorithmically driven ads in the feed.
Yeah.
biggest monetizing

was an interstitial like pop up frickin' display ad that took over your screen, right? Like what an awful frickin' experience for a user.
Right.
Right around this time too, the other thing that's happening is
kinda glossed over this for time, but Facebook's initial attempt at a mobile app
Was
To try to work around all the constraints of the mobile app ecosystem. And they thought, well,
That's nice that the app stores are gonna try and box us in, but we'll just ship our
mobile web views.
Inside of a thin little app wrapper. And that way we can deploy multiple times a day. You know, we're Facebook. This is what we do. It's part of our culture. HTML5. Woo.
Provided a horrible user experience. I mean, the engagement on the app was low, time spent was low. It was a risk to start selling these ads.
Because
people don't want to spend any time in the app even without ads, let alone when you start layering these in. And so
They're finally starting to sort of pull out of this tailspin. They
Basically spent a year completely rewriting all their mobile clients to be these rich, beautiful, native experiences. This is a thing that Facebook has always been good at. Whenever they decide to do something, they go and recruit like the actual best talent in the world to do it. And the group of people that they pulled together from Joe Hewitt Forward to write their original iOS app.
Just like
Some of the best iOS developers and designers in the world. They hired Mike Mattis and the PushPop Press team when they acquired them. That's right. That's right.
That became
I think it was Creative Labs, is that right? Facebook Creative Labs.
But you know, a huge amount of that talent worked on their their mobile apps. And so while they had the wrong strategy at first, once they got religion around native,
They really
created something.
Probably one of the best apps.
Ever on mobile.
Totally. It's funny. I'm laughing. You know
The version of
history that we just told is maybe slightly too charitable to Facebook and to Mark because
Yes, it's absolutely true.
They did the
Really hard thing.
They took the pain, they invested in the future.
They built
You know, everything that would become
Facebook and Meta today out of it.
But the first reaction was to
Bet on hope as a strategy and bury your head in the sand and say
HTML five is gonna save us.
I don't know that it was hope as a strategy. I think it was more like
If this can work, it's gonna solve a lot of our problems. And I don't
Think
They correctly estimated
How
wide the user experience chasm is between web apps and native apps.
And I think they had to like have an app in market where users were actually using it to realize
Oh man.
the state of the art in
Native.
that the platform vendors have developed, iOS and Android is really, really good. And they have brought very little of that.
to the web experiences.
Partially because of standards bodies, but also partially because it's not really in their interests to make web apps great when they can force everything through a an app store that they have more control over.
So okay, after the Q four twenty thirteen earnings announcement, the stock pops way, way, way up to like a hundred and seventy five billion ish market cap. So up
Seventy five percent from
IPO, you know, what is that year and a half earlier.
And from there it's basically if you look at the market cap chart.
Kind of a straight line journey from one seventy five up to
Half a trillion over the next
Yeah.
They're
eventually bring this whole
native feed monetization.
engine over to Instagram and
That works.
Obviously incredibly well there. Probably better than even on the blue app.
And that in particular the I mean I
Everyone's gonna laugh when we say this word.
the legitimate synergy
between going to an advertiser and saying you can use this dashboard to get placements on
Facebook
And on Instagram.
Is massive.
Both of those products monetize better than they ever could without
that single channel that the advertiser only has to go through and use one dashboard to place on both products.
If you flash all the way forward to today, the lion's share of Meta's revenue comes from the ads that run
on Facebook and Instagram. Their whole business today can just be summarized as that.
Totally.
There's another element for a couple of years that's a big part of the native mobile revenue story, and that is app install ads. And actually is worth calling out because it plants the seeds of
This much larger struggle that's gonna come yeah in a little bit.
But a very large percentage of the inventory that they were selling and especially the revenue
of these native mobile ads in the beginning.
was actually for app install ads that

buying on Facebook. So it was kinda like our old platform business all over again. Facebook is actually
the best place to discover apps on mobile. Yeah, it's pretty interesting.
realization where
The big brand advertisers may not move to this new type of ad format right away, but the people that are gonna be really hungry to move to that ad format are
a game developer who makes a mobile app and wants to market their mobile app to people who are A on that platform and B in a lean back experience where they're open for some entertainment. And when you are scrolling through a feed
of your friends and brands and you are open to, oh
Hey, look at this!
A game where I could click one button and then boom install a game and play it.
Is there a better
moment and
channel to reach someone for an app? No. I mean even if you're Apple, Apple doesn't have a better way to do this.
People don't search the app store for apps that often. So you'd have to show them like a pop-up ad or something. Facebook just has this opportunity where you're in an experience where you're open to some new form of entertainment.
And they have the ability to place a button there with rigorous targeting and incredible ad sales force.
Facebook was almost built to be the monetizable front end to the app store.
Oh boy. All right.
Put a pin in that
We are going to talk about Apple and Facebook.

Now, I said it a minute ago that the journey to
five hundred billion in market cap from here is, you know, a straight line.
If you look at the market cap chart, that's true.
Internally within the company, you know.
I think almost certainly not. There are a couple of big challenges that
come up along the way. During this period you've got Snap.
And you've got
What's up?
Both of which are like
Pretty
Big deals.
Yeah.
We've covered both of those
pretty fully on separate episodes that you can go listen to.
But I think ultimately what they represent, and obviously Snap
It was more uh
competitor and WhatsApp turned into an acquisition and is now a big part of Meta and part of the company. But I think together what they represent
Was
This next fundamental shift in the consumer social landscape.
Which
Mark totally picked up on and ultimately announced
as the core of the company's product strategy in twenty nineteen.
Which was
The default
social behavior.
was moving from town square
Which was
the old Facebook paradigm of like
Hey, we're all in this together. This is our college network. This is our friends. Hey, network or public, here's what I think.
Yep. And in many ways Instagram was also Town Square. Totally. The Instagram team
noticed over time that
even before Snap started eating their lunch that
engagement would decrease the longer you stayed an Instagram user because you over time being done with these permanent posts and you sort of saved it for the big announcements in your life that there wasn't a natural way to just
effortlessly share because
When these platforms all started, everyone was in debt sharing with the Town Square the whole time. And everyone was getting a little bit more clammy about that as time went on.
Yeah. As the stage got bigger in the town square, it's like, Well I'm not gonna take the stage unless I like
Really have a great performance that I'm gonna give.
And so every piece of data and metric that they had, you're right, they sort of realized, Oh, the world is shifting from town square to to living room is the way that Mark put it.
That social was shifting from
Town square to living room.
Right, and by living room he means small private groups of super close relationships.
Yep.
And Snap and WhatsApp were both really interesting data points about this. WhatsApp, obviously, with private messaging.
Snap also in its own way. There was the
Original.
Snapchat use case of disappearing one to one photo messaging. But stories really is where it became clear, hey, this is widespread and this is a big problem that is gonna threaten
Instagram
Facebook the whole default.
motion of like
Sharing
beyond just a one to one messaging platform. I want that to be much more private and locked down too.
If you own an engagement platform and someone figures out a new mechanic,
to make them much more willing to free form share. And your platform seems to encourage them to stay back, be quiet, only post once in a while, maybe lurk.
It's not good. Content creation on the platform going down is
really, really bad if you are an engagement company. You know, Snap represents the idea that people are sharing
way more if it's ephemeral and WhatsApp represented
the idea that people are shifting
the places they communicate from more public to more private and from larger groups to smaller groups.

are concerning if you are a Facebook blue app.
Okay, so now here's an interesting question though.
How would Facebook
know that attention is really shifting to these apps. Because remember, we're now in the mobile paradigm, not on the open web where services like ComScore and Alexa and whatnot existing you can see traffic and engagement competitively on other apps.
In the mobile ecosystem, it's all siloed and locked down. No, just Apple and Google really have that information.
Yep. But somehow Facebook was able to get
Pretty good insights on what was happening in the landscape.
Well, to have that you would either need to have some kind of SDK that gets bundled into apps like an analytics provider
Or you would need
Like a VPN where like the traffic was going through it so you could see the traffic.
Well, in twenty thirteen.
Facebook acquired a small Israeli company called Onavo.
On Nava was
Exactly what you just said, Ben. A VPN. Actually I think it initially started as like a data compression tool. So if you were worried about in your data plan, which was
Really important in many
parts of the world. You could install Onavo on your device and it would compress the data and then serve it to your apps. Eventually that morphed into a VPN tool
The net of that is that they could actually see
Traffic and usage data going into specific apps on mobile phones in their network.
Yeah. I think they looked at it as we need some way to level the playing field if we're competing against Apple and Google in different ways and they have this data because they own the platforms, we kinda need to be able to see those same trends.
On the other hand, there is another way to view this. If you're looking for examples where Facebook, you know, may have considered their own interests over being
forthright with users over how their data is used.
Well, this could be another big example. Users who were using Onavou didn't download it with the intent of sharing
You know, their app usage data with Facebook.
Right.
They were just looking to compress their data or for a VPN service.
Either way, Onavo ended up
being like a hugely important acquisition for Facebook'cause it really tipped them off to WhatsApp and Snap two.
Yeah.
So
Obviously they fought those two companies in very different ways.
one thing they learned from fighting Twitter over the years is that
There are these social mechanics.
or or perhaps an interaction paradigm might be the right way to talk about it. A post, or a like, or a retweet, or a disappearing photo message.
And
The thing that kinda matters.
Is
Owning.
a valuable network.
the idea that people are going to come and give you their attention and you own the place that they connect with other people that they authentically verifiably know.
That's the scarce commodity in order to kind of win the engagement game.
And the mechanics
Are actually kinda fungible.
And they're totally a means to an end. So if you discover some mechanic and you build this whole multi hundred million user network platform, ad platform based on it.
That's great.
As long as no one comes up with a better mechanic than you and then goes and rebuilds the network somewhere else.
So one thing they learned with Twitter was
Hm.
They seem to be growing really fast with this status update thing.
we need to look a lot more like status updates.
And that worked pretty well.
There were a lot of people that basically never switch to Twitter because they thought
Oh, I can just use Facebook for this. Yep. And I already have my network in here. I already have my friends. I already have my connections. Totally.
And it also has photos. So like Twitter's this weird esoteric text sharing thing. I'm not really all about that. I'm just gonna keep using Facebook. Oh Ben. Twitter did have photos for a while. It was called Instagram.
Well, yeah, that API got turned off fast.
Yep.
So as they're looking around at Snap.
Hey.
Someone has discovered this new stories mechanic. My goodness.
that is suddenly obvious that that is what the future is.
It now feels
Old.
To do anything else. It's kind of like when you got a retina iPhone for the first time and you're like holding your non-retina iPhone and you're like, this is instantly a piece of crap.
Like I'm not ever gonna touch this disgusting thing again.
I think when someone invents a new interaction paradigm
It's one of these things where like you have to adopt it.
Because otherwise people are just going to flee and of course your business depends on you adopting it because you can't let someone use this new discovered mechanic that's
Perfectly timed for this moment in history with these set of cultural acceptances and this new set of technologies.
to go rebuild the network somewhere else. And so I think the thing that they sort of discover is
either through buying or through copying a mechanic, we need to
protect.
our network by bringing these interactions into our family of apps, either by, as Ben Thompson would put it, the audacity of copying well, or of course by buying them.
Yes. Copying well or buying well.
Yes.
So listeners, of course, we don't actually ever know what anybody's intent is or what they're thinking when they decide to buy a company or something like that. This is just sort of David and I guessing at strategy from the outside.
We do have, thanks to a court case.
An actual email from Mark Zuckerberg on February twenty eighth. Oh yeah, this is so good. Twenty twelve.
to their then CFO.
Talking about
at the time they're sort of discussing the Instagram acquisition, but laying out
the idea behind an acquisition strategy.
The basic plan would be to buy these companies and leave their products running while over time incorporating the social dynamics they've invented into our core products. One thing that may make neutralizing a potential competitor more reasonable here is that there are network effects around social products and a finite number of different social mechanics to invent.
Once someone wins at a specific mechanic, it's difficult for others to supplant them without doing something different. It's possible someone beats Instagram by building something that is better to the point where they get network migration, but this is harder as long as Instagram keeps running as a product.
Pause.
Which is pretty interesting. That is the argument of why to keep Instagram separate and running as its own product is because
Instagram's already discovered this fascinating new mechanic around
Publishing one image at a time with these beautiful filters. If anybody else tries to come after them, they're already ahead. So
Actually the best thing to do is own Instagram and let it keep doing its thing.
Anyway.
Resuming.
Integrating their products with ours to improve the service is also a factor, but in reality, we already know these companies' social mechanics, and we will integrate them over the next 12 to 24 months anyway.
The integration plan involves building their mechanics into our products rather than directly integrating their products, if that makes sense.
By a combination of these two things, neutralizing a potential competitor, integrating their products with ours to improve the service. One way of looking at this is that.
What we're really buying is time.
Even if some new competitor springs up, buying Instagram, Path, Foursquare, et cetera, now will give us a year or more to integrate their dynamics before anyone can get close to their scale again. Within that time, if we incorporate the social mechanics they are using, those new products won't get much traction.
because we will already have their mechanics deployed at scale.
It is.
Goddamn brilliant, David.
Here's my commentary.
Based on all this.
It is so smart to basically say
Well
If we buy them
We basically get two strategies that we get to execute at the same time. One
We just leave them alone.
And let it keep succeeding.
It's actually not a current potential threat. We don't know if it will turn into a potential threat.
Hell, Instagram wasn't making any money. WhatsApp didn't have a feed.
It was just a way people connected. It's not like just because they had a network, they were gonna turn it into a feed. So
There's this idea that it's not a competitor now. By buying it, we basically get this option on if it becomes a competitor.
If we completely leave them alone and let them decide what to do.
But then there's also look.
We will integrate those mechanics into our core product, Facebook, the Blue app, that already has well built out network effects.
And by owning this thing that could become a competitor.
There isn't white space in the middle.
Anyone just like us is also going to take time.
And they're not gonna do it as good as the original and they don't have our network, therefore
Whether the winner turns out to be
the original product or us incorporating the mechanic into the blue app, we've won either way.
And probably what's gonna happen is both. Yes. So brilliant. And that is what happened with Instagram.
WhatsApp is actually kind of different. It never really turned into a competitor.

just serves a completely different use case and is also owned by Meta.
And then with Snap,
They tried to buy Snap over and over again and it didn't work. And so
They basically
figured out how to bring those mechanics into Facebook's core products with stories in a way that
Snap kept doing their thing, but there was really no reason to leave being an Instagram user because you already had that functionality with your own network anyway.
And here's what's really interesting about the stories, quote unquote story.
In Instagram and then
ultimately coming to the blue app.
Stories as initially launched
By Snap.
In the Snapchat app.
was a separate tab
With a list
of your friends who had published stories. It was literally like a table, like a list.
Oh, I don't remember that, really. Yeah. Yeah, yeah. No, it wasn't, you know, the paradigm we all think of today as like
The heads in the row at the top.

Instagram did that.
So an Instagram
Copied quote unquote stories and launched stories.
They launched it as the
algorithmically ordered
row of heads at the top of your app.
And here's where
The internal advantages that
Facebook, the family of apps had
They already had this world class.
Ranking algorithmic.
expertise within the company that was being applied to newsfeed that was being applied
Two ads that was already starting to incorporate early ML and early AI.
start the beginning of FAIR Facebook AI research lab had already happened here. This was coming into the product.
Well, now when you're launching a new feature like this, in this case stories, you can say, Oh, great, is this gonna be made better by our algorithmic and AI expertise? Of course it is. Let's do that.
Right.
That's interesting. Basically, even if you copy the feature wholesale, it's actually even better, not just because you have the network, but because
Your algorithm tech is very advanced, so you can make sure it's the most possible engaging version of that.
particular interaction design.
Yeah. So when Instagram in those early days when it was launching stories, they were optimizing the ranking of heads at the top of the app by how likely you are to tap on that person's head. Of course.
Of course they're doing that.
I do want to jump forward to TikTok. Yes, let's do it.
Because it's a continuation of this story in a very different way. In the mid twenty teens here, there's a bunch of other stuff that we gotta get to, but TikTok is particularly interesting because
Yeah.
Kinda blindsided Facebook.
Yes.
If you believe that
That the asset that matters
Is the authenticated
real name network.
of people you actually know or people you care about.
Following.
you kinda think, Oh, I always have a lead as long as I can incorporate someone's mechanic.
What if
Engagement is possible.
On an app.
That has nothing to do with your social network.
That's
Terrifying.
Because this big asset that you've built, this durable competitive advantage of we already have all the people, so why would you want to go anywhere where your friends aren't?
The magic of TikTok.
Was
AI suddenly in the late twenty teens became sufficiently advanced that
that it could show you the optimal thing created by anyone in the world, most of the time you don't actually know that person. So suddenly the only competitive advantage that Facebook the company has is
people have a habit of tapping on their apps when they're bored.
But I have that's a pretty thin
competitive advantage, that's really easy to break.
Habits are changeable.
Especially on a mobile phone where another app is just an icon away.
Totally.
And so if someone is a great competitor like TikTok, who is incredibly well funded, very good at strategically buying ads, has created their own growth function that is
They're just a very different animal and they're a very
well executing machine and
you know, they obey a completely different set of laws, rules, regulation, norms being a Chinese company.
That created a competitor for Facebook.
that is more significant than anything they've ever faced.
This wasn't like, oh, there might be an existential threat from this in the future. This was like
Oh crap.
As soon as people form a habit around
Oh I just opened this.

We have no more
competitive advantages to throw at.
that problem. So we must as fast as possible make something like reels.
just to stem the bleeding.
And then we can figure out what to do from there and hopefully get to a market stalemate with them.
Yeah.
Which is basically
What has happened.
But interestingly.
TikTok.
And Byte Dance, it's parent company.
As you
Point out Ben was so completely orthogonal.

Everything.
that Facebook had learned over the past fifteen years.
Because yes, number one, most importantly.
It's not social media.
It's media.
There's no social. And your graph doesn't matter anymore.
That's a great point.
Right, it's digital media, it's user created media, it's mobile media, but it's really not social media.
Yeah.
Doesn't matter who your friends are on TikTok.
What matters is in the first ten videos you look at, is their AI pretty good at picking up the stuff that you care about and the stuff that you don't?
It's not.
can you find a whole bunch of other people you know?
Yeah.
And I really want to keep hitting on
This insight again that Mark correctly identified of
Social
Shifting from the town square.
to the living room. This is a second order effect of that shift.
that the company didn't see coming because once you shift social from the town square

It now becomes
Possible.
to divorce media from social. You're already getting your social now in private.
in your digital living room.
The town square can become something that is completely not social.
Right. It's turned into this pretty interesting dual pronged approach that they now have, which is
you open Instagram and you have reels. So the job to be done by TikTok is now done by a thing that you already have habit around. It's bundled into the place where you actually consume your social media.
Great. That's step one.
Step two is
This is where it's nice to have WhatsApp. This is where it's nice to have Messenger.
for these living room style conversations with just a few of your friends.
The new user behavior is
I see a thing that got millions of views, I can think of one or five people to share that with, and then I have a private conversation about this public object in private.
I will share that on WhatsApp or I will share that on iMessage or I will share that on, you know, whatever my
My actual friend living room network of choices.
And from where social networking started back in two thousand and four.
And ending up now in this
reasonably complex interaction paradigm of
I get
AI served videos from people I don't know tailored to me. And then I privately share those in multiple groups with those who I love and care about. That is a huge evolution. It's crazy that we use the term social network or social media for these two things that are like light years apart.
Totally.
The social and the media is now completely divorced.
And that is because of the shift from
Town's quite a living room.
Yeah, we really need to evolve our language around all this stuff.
Okay, so that
I think is
Dimension one that
TikTok is completely orthogonal to Facebook.
Dimension two.
Is actually
Organizationally.
So
TikTok as we chronicled on our episode about it a couple years ago.

Well, it was an acquisition of musically by ByteDance, and then Byte Dance turned it into TikTok.
Bite dance had Totiao before having TikTok.
ByteDance is an AI company. Byte Dance is not a product company. And
The core product that Bite Dance makes.
Is it's AI.
Along with all sorts of other stuff.
TikTok is like the
Product vector, one of many and the biggest.
by which they deploy their actual product, which is AI. This is very, very different from Facebook, which has always been a product company. And so like organizationally, the way ByteDance is set up is there are these
centers of excellence within the company where the algorithms, the AI, that is controlled by
A
centralized team within the company.
At least that's my perception of how they're different.
organizationally from
How Facebook used to be.
Facebook and Facebook leadership was obviously watching this very, very closely.
And if you look at how Meta is organized now
It looks a hell of a lot more like
That
So
Meta today is organized
There are centers of excellence across the company. Same way that I was just talking about ByteDance. There's Fair, that's the fundamental AI research team.
There's
infrastructure shared across the whole company.
deployed to all the products and apps.
There's revenue and monetization shared across the whole company, deployed to all the products and apps. There's growth shared across the whole company, deployed across the various products and apps. There's integrity and safety, which is a like
Big, big, big advantage that
Facebook has.
They've reorganized.
How the whole company looks.
There's still
All the individual products in the family of apps.
Those all have their own heads and they all roll up to Chris Cox, who is head of product for the whole company, and AI too, actually, reports to him.
But
All the infrastructure.
All the revenue, all the growth, all the integrity and safety.
are decoupled from those actual products now and live in these centers of excellence across the company. Fascinating. And I think there's a lot of bite dance influence in that.
Makes sense. It's the most formidable competitor they've ever faced.
And they really have no way to neutralize it.
Yeah.
Alright, so all this talk of TikTok
them being an AI first company.
Clearly Meta Today is an AI obsessed company.
How did that start?
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Okay, so David.
Meta Today clearly an AI obsessed company.
How did that start?
Yeah.
So I mentioned.
This organization fair a couple times.
Fair to go back and
Tell the actual origin of that'cause it's really interesting.
Fundamental AI research. And now it's
Fundamental AI research given.
The company is now.
Mera.
So back in like twenty thirteen timeline
when the company was finally fixing mobile coming out of the
hellscape of twenty twelve of going through that transition during the IPO and the shift to mobile.
Mark and the company's VP of engineering, Mike Schrepfer, or Shrep as he's known.
We're trying to figure out like, okay, we've finally got a little moment to breathe here. The tiger isn't chasing us at the moment.
Can we take a step back and try and figure out like when is the tiger gonna jump out next and try and get us?
Yeah, or all these crazy things are happening because we've been having to play defense as user attention shifts with this new paradigm of mobile.
How do we not let that happen next time? Like how do we play a more active role in whatever the future of technology is so we're not getting whiplashed around
And we can kinda control our own destiny a little more.
Yeah.
Basically.
Not actually owning the platform sucks. We've realized this now. How do we make sure this never happens again? Yes. And that spawns some of the early work on AR and VR.

And
Even this early in twenty thirteen on
AI and Alex Net had
Just happened.
Right, at this time and for whole history of Alex Nick go.
Check out our NVIDIA series where we talk all about that and the importance to AI and ML.
And Facebook actually had a small
M L team already at this point.
They were mostly doing computer vision, the early machine learning folks at
Facebook we're mostly looking at can we do
automatic image tagging to reduce the
You remember how cumbersome it used to be when you'd upload a big batch of photos, then you had to go tag every single one. And then somehow magically, I don't remember the exact year, it was like all
Pre-suggested.
And you were like Whoa.
This is pretty cool. That was what the original ML folks at Facebook were doing.
J'ai.
And Alex Net and those big
AIML breakthroughs in that era were all around image recognition.
And so Facebook was kind of already attuned to this, like, well, okay, there's like some pretty big technological stuff happening.
Maybe this is gonna be like
the next platform vector the future, we should get serious about this AI stuff.
Yeah.
So summer twenty thirteen.
Mark and Shrep.
go out to recruit Jan Lacoon and convince him to come start an AI research lab.
Uh.
Facebook and
Yan was then and is now one of the
Top AI luminaries in the field.
Top academics out there.
And Jan says like
Well I'm flattered that you would
Want me to come.
work here, that's interesting. But like I live in New York. I teach at NYU. I don't wanna leave. I don't want to quit teaching at NYU.
And I'm pretty darn committed to open source and publishing all the work that we do.
And Mark and Shepherd like
One.
Sounds good, you can stay in New York.
Two
Okay, you can stay at MYU two.
Three. Yeah, we love open source. We were built on the Lamp Stack. Great, publish everything.
We haven't talked about this at all at this very long episode so far, but Facebook
had been doing a ton of open source publishing.
In basically everything they were doing.
Things like Cassandra in their backend. They were open sourcing front end frameworks both on mobile and on web. React, React Native, yep. Exactly. They've been open sourcing a lot of the language modifications they were making. Uh I don't
think open compute had started yet, but that was right around this time where they were starting to open source their data center designs. Data center architecture, yep. Facebook definitely has a very particular open source strategy that we're going to talk about in analysis, but needless to say
They have been
advocates of open source
Since the very beginning.
Yeah.
So Yan is like
Wow, well, okay when you put it that way. Sure.
And what's really important about how they do this is
This is not Microsoft research. This is not blue sky.
Yeah, let's go focus on anything. This is a highly focused
A I research group.
AI.
And
I think that has kinda made.
All the difference. It is super clear th exactly how that is going to translate into helping
Facebook and Facebook's products.
This was pretty
I don't wanna say contrarian, that would have been wrong, but it's one of a dozen specializations of computing that you could have sort of
Glimpsed into for the future.
Yep.
And it was one of those
earned secrets that
Facebook had and Google had
at this time at you know twenty thirteen, fourteen, fifteen of like oh, we can very, very profitably apply this work to our current products.
In social media feed recommenders.
Yes. So it's very funny that the rest of the world is having their AI moment now, because Metahead theirs in twenty thirteen, fourteen.
Before language models, like long before LLMs,
Facebook realized they could profitably spend billions of dollars on AI systems to recommend A, what post you should see next in your feed, and B what
ad out of the entire inventory of ads we could show you, what is the best one for you at this moment in time?
for that advertiser spend.
And today there's a lot of companies who are spending on AI in hopes that the use case materializes in the future. Facebook's is like wildly proven.
And has been for a decade and is incredibly profitable for them. So that's just like something to keep in mind whenever you're looking at Facebook talking about AI today.
Yeah, there's a lot of future looking stuff they're talking about, but it is already super at scale and a great business and has been for a long time, and they've just been
It doesn't like they've been quiet about it, but no one cared until now.
It's one of the fundamental advantages that Facebook has today relative to
all other AI companies is that they are guaranteed profitable ROI on all of their AI spend.
All of their research.
All their infrastructure, all their GPUs.
They have
highly, highly profitable ways to put it to work today.
Right.
It is a nice to have for meta if the next form factor of computing is an AI assistant like Meta AI.
But it's not essential.
That's you know
One of many things that they could do profitably with AI technology.
Yep.
The other thing you kinda gotta remember is twenty twelve Facebook
Their engineering brand still wasn't.
Top notch.
Like everyone knew that they were
A
Up and coming
great startup that went public.
But
They weren't necessarily reputable in the computer science community as these people are Microsoft level.
researchers to advance the state of the art. Or Google level in the way that Google always was from the beginning.
Yes, and I think Mark and Shrep had to make this point to Jan.
And then when Jan joined, it kind of made the point to the rest of the industry.
That
This is not something that's gonna like wax and wane with our financial results we're in for a decade.
on this particular area of research. It's kind of amazing. It really only took like two years to bear fruit for them before they had profitably deployed AI systems in production.
Because most of the time these research projects take much, much longer. It's funny, actually thinking through this now, I think there are three dimensions to the
payoffs from this investment in AI and fair back in twenty thirteen.
One is the near term.
And immediately an ongoing profitable payback to incorporating AI
in existing Facebook products and social media feed recommenders.
Highly, highly, highly profitable. It just makes every ad that's displayed more likely to make money and it makes every
feed post that is displayed more likely to get engagement.
Yes.
Hundred percent.
Okay, then there's two
Which is this like hey
AI might be the next computing platform. There's a lot of interesting stuff going on. This allows us to
Have a piece on the chessboard and be a player in the next platform transition, should it be to AI.
And this is just like what
Meta did with threads, with WhatsApp. You know, with threads, they've said we're not monetizing it right now. We're gonna see if it becomes a big close to billionth user platform. And if it does, then great, we'll figure out the right monetization strategy, just like we did with WhatsApp. It may or may not be ad specifically, but
We build things that get engagement and then we later figure out how to make money on them.
Yep.
And then three, they had no way of seeing this at the time.
But fair and AI actually becomes the way that they can
catch up and re architect to compete with TikTok.
Yeah.
You know, no AI, no reels.
That's such a good point. If not for fair.
TikTok could have
Disrupted Facebook.
Totally.
I mean reels would not have come out as fast as it did. Right. Facebook would not have had that near term weapon to go
Fine.
We need something that
kind of stops our users from leaking out and jumping over to this
Other app.
You know, for a use case.
No.
We basically
Can't match.
I mean it is magic.
how the reels and TikTok algorithms work and now YouTube was short that
very quickly they do figure out how to put things in front of you that are incredibly engaging just for you.
I mean, they call it the for you page. And that have no social connection to you.
Yes, exactly.
You're right, the decision looks more prescient than ever given that.
Totally. Okay, so that's fair in AI.
Let's jump forward now to twenty sixteen, twenty seventeen, twenty eighteen.
And I think
For our purposes here today.
It's interesting to view
the twenty sixteen election, Cambridge Analytica.
All the fallout that comes out of that, which much, much, much ink has been spilled.
Through this lens of
The consumer social transition from
Town square to living room.
'Cause I think it actually
Explains a lot.
Ooh, all right. I'm curious to hear what you're thinking here.
But to catch us up, here's
kind of what happened.
Until twenty fifteen ish.
Facebook could kind of do no wrong, other than all the data privacy issues that they had sort of worked through with the FTC in 2011.
But they are now increasingly finding themselves in very controversial situations that they are ill prepared for.
as sort of all of humanity is now uh joining the network.
First of all, content moderation is becoming an issue.
Oh yeah, for sure.
Facebook is trying to figure out their role in this. Are they a neutral platform? Do they need
to kind of please what is said on their platform.
On top of that, actually defining what is allowable speech on their platform is becoming trickier than ever. And it is hard to create one set of rules and abide by them globally. And Facebook was just caught flat footed in a big way by the fire hose of questionable content that people would post.
Ultimately, they end up throwing huge amounts of people at this, hiring tens of thousands of contractors to deal with content moderation, building out really sophisticated kind of policies and programs and escalation and review processes.
They have an ever escalating set of posts, videos, and live streams shared around the platform.
That's right, because it's not just text anymore. It's obviously photos, but like videos now too. Reviewing real time video. Absolutely.
And as you would imagine, they are not perfect at this. So they are creating headlines left and right about objectionable things being shared on the network.
In building technology that enables everyone around the world to communicate with each other and organize, they also have the flip side of
Anyone can share anything, and if it's engaging enough, there's a ton of eyeballs that see it.
So misinformation is starting to become a big deal too. Ultimately, this comes to a head in the twenty sixteen to twenty eighteen period, after they have whittle away a lot of the public's goodwill. And we're just gonna zoom in on this moment for the company.
The twenty sixteen election happens.
And a lot of people are looking around for an answer to
Wait a minute.
Yeah.
This isn't the outcome that I expected. What happened? Exactly. There's a lot of people who feel this couldn't have happened.
on its own, legitimately, you know, somebody did something.
And
One thing that absolutely did happen is there was a firm called Cambridge Analytica who
That sold their services to the Trump campaign.
And
had a methodology to create psychographic profiles that they believed would work that were derived from a Facebook quiz application.
This ends up being an absolute honeypot of a story for anyone who is fired up about a big change to the country that they are not excited about.
Yep.
And so
There were basically four
stories concurrently happening of
How
Facebook
was involved in the election.
One
There was Russian interference.
Yep.
Two.
People are spinning up fake news sites not necessarily for
Politics.
But actually for the ad dollars generated on them.
Three.
Cambridge Analytica.
Four.
The Trump campaign may have been really good at using Facebook's digital marketing tools.
Yes.
I think that is like undeniably true.
Yeah, so there's been years of investigation into each. It seems like that last one is actually the biggest lever. Yes, Russians did spin up fake pages and accounts with pretty modest spend.
And people absolutely spun up fake news sites and generated fake viral stories for politics and also profit.
Cambridge Analytica, yes, it was a thing.
But
They end up with
Actually, pretty crappy derivative data from a quiz, not the treasure trove of raw Facebook data on you and your friends that everyone feared.
But David, to your point, really what happened is the Trump twenty sixteen campaign just actually took Meta platforms seriously and got really, really good at using the tools.
Yeah.
Quite ironic in that
Obama totally doubled down on Facebook as a strategy and used it to great effect to win the two thousand eight and twenty twelve elections.
Yes.
So
As you can imagine, I'm preparing for this episode and I'm like, Okay
I just heard Mark Zuckerberg say on another podcast, by the way, great interview with Alex Heath at the Verge after Meta Connect about this. He dropped this line.
People thought that all this data had been taken and it had been used in this campaign, and
And it turned out the data wasn't.
And the data wasn't even accessible to the developer.
So David, I'm listening to that and I stop because I'm thinking
Well that's not what anybody thinks.
Because there was a
ton of reporting on the fact that they did. So what actually happened here?
So
Here are the chain of events.
Back in the 2010s, Facebook built the platform that we talked about that was incredibly permissive in the early days when you authed your profile against an app, you gave it all of your profile data. And in those earliest days, it could actually see your whole friend list too.
Facebook eventually made their API much more closed off, but it took a couple of years to do that.
Now there was a terms of service that required app developers to delete any data they had after a period of time and only use it for very specific purposes. But of course, Facebook couldn't actually guarantee that people were complying with the terms of service. It was just, you know, you are breaching contract.
So at some point, a developer made an app that was a quiz. Users could opt into taking that quiz. The quiz asked you questions, and by combining the answers to those questions with the profile data, you authenticated from Facebook.
that app developer then tried to label you with a pretty basic psychographic profile. And then ultimately that derivative data, the labels of personality characteristics,
that were derived from Facebook data and your quiz answers is what
Cambridge Analytica had.
as best I could tell. So I read a good amount of the report that the UK government put out about this. The conclusion was that the quiz was taken by 320,000 people. Since those people had access to friends, the total surface area was the public profile data of 87 million Facebook users.
They also found that Facebook had requested that Cambridge Analytica delete all the data.
both the actual Facebook data and anything derived from the Facebook data back in twenty fifteen before the election even started.
So it was
Yes, true an application got access to Facebook data on a lot of users. It is also true that it violated terms of service to use that data for other purposes and they did not comply with a delete request where they
may not have complied. It's kind of difficult to reconstruct.
On top of all this, it supposes that Cambridge Analytica's method of taking these quiz answers and translating them into something that could impact voting.
Worked.
That like it was effective.
And that's
Pretty thin.
Right. That's kind of the most thin thing of
All of it. Right. So here's what the UK report concluded. And this is in government speak, so it's all very hedged. While the models showed some success in correctly predicting attributes on individuals whose data was used in the training of the model, the real world accuracy of these predictions.
when used on individuals whose data had not been used in the generating of the models
was likely much lower.
Through our analysis of internal company communications, the investigation identified there was a degree of skepticism within Cambridge Analytica as to the accuracy or the reliability of the processing being undertaken. There appeared to be concern internally about the external messaging when set against the reality of their processing.
So at the end of the day
The Cambridge Analytica thing in particular
was kind of a nothing burger.
But that is not the story that gets told. The UK regulator that was given full access to this and ended up being quite skeptical that the methodology even worked.
In the first place.
Kinda crappy derivative data.
Not complying with terms of service requests.

And the method may not.
Actually work.
Now this doesn't exonerate Facebook in any way from
what could have happened. They had an incredible treasure trove of data that apps could slurp up in the early 2010s, but the actual narrative of Facebook data that Cambridge Analytica had impacted election results.

Wildly oversold.
Yeah.
All that aside.
As we were waiting through all of this and
Trying to make sense of it and think about how we're gonna talk about this on acquired.
There is such a enormous, enormous disconnect.
Between reading what actually happened
And then
How people felt.
And what the like
lived reality of the brand impact on Facebook was, which that was huge. Yeah. Nothing could have been huger.
To me, the story here is there sure was a lot of
ill will and discontent with the Facebook brand.
that people were willing to dive in headfirst on
It's almost like Facebook isn't guilty of whatever the heck people think
Happened with
Cambridge Analytica all these years later. But something is very, very wrong that like hundreds of millions of people believe that. Yeah.
And it's not just wrong with the system. They definitely
In behaviors along the way, manage to ear people's distrust. I think that's the issue.
So
Let's bring it back to my
Supposition here.
Which is that I actually think
This paradigm shift that Mark identified from town square to living room was
was like way more right and way more
powerful than even he realized.
And this is one of the second order effects of it.
The quiz that was the app on Facebook.
That happened way back in the early platform days.
Totally solidly in the town square days.
And then
The election happened in twenty sixteen, when things are already starting to transition. WhatsApps, Snap exists, Snap has launched stories. Instagram has now copied Snap and launched stories in that very same year.
Two more years go by.
The Cambridge Analytica news doesn't actually hit until twenty eighteen.
By twenty eighteen, we are solidly in the living room era.
So all of the
Supposed real or imagined.
impacts.
of this Cambridge Analytica thing.
had their roots back in the town square era.
We're now here in the living room era and that is what people's expectations are.

of social media.
of everything that they are sharing in their lives.
And I think this is to my mind at least
Where the disconnect is.
People's expectations shifted.
But now all of a sudden all this stuff from the past becomes really, really relevant to the present. And when you look back at the past through this lens of what the present is, you're like,
Well, this is really F'd up. Like how the hell did the company do this?
Right. And you know, the answer was they were trying desperately to grow. They were trying to will a platform into existence. Of course, the cultural norms were a little bit more permissive, but like the cultural norms were really never permissive to the point to say
Sure, you should download and store a big JSO dump of my whole profile information and any pages that I like and anybody whose names I'm connected with. Like that always was probably a little bit of an overstep, but then
once developers were able to do that and then violate terms of service and store it forever, then it just kind of becomes this like ticking time bomb that's out there.
Exactly.
It's like this weird temporal and cultural like
mismatch of it all landing in twenty eighteen when the world is a very, very different place.
In part
You know, you can see why Facebook massively prefers the ad based business model of we never even expose any information to you, advertiser. You target and then
we just deliver the ads, you never get to know anything about who the users are on our platform. We don't sell data. Like that is a true fact whenever they stand up there and say we don't sell data. They don't, they sell the opportunity to target users. But in fact, if they did sell data, it would be a bad thing because someone that could then build a competitor
Like the asset that they have is actually their data that they choose not to sell for business reasons.
Yup.
Totally. Then there's this whole other layer too here of like
Well why did
They do this in the first place. Why did developers have access to so much data? They were building platform. They were building an entirely different business with a different strategy.
Now they are an advertising and media based business. We're almost talking about two totally different companies here, as I think we've told in the story.
Yeah. I do think when I search my heart of hearts though, when I was developing apps in the twenty ten period.
And
would let people use Facebook Connect or whatever the current branding of accessing Facebook accounts was at the time.
I was always like
Whoa.
This is a lot of data that comes with someone clicking that button.
Well, I think you made the point, right? Of like
Facebook had to kinda sell the platform to developers. Totally did.
They didn't have the underlying hardware and technology and operating system to offer. So there had to be
A really big sweetener.
Yeah.
I just can't believe it though, after all these years and all this writing and all these headlines,
If Cambridge Analytica were more competent.
They probably could have
had more impact, but as it stands
I just can't believe there's not a big story on the front page of major newspapers with big headlines saying actually Cambridge Analytica didn't really have that much in the first place. Their methodology appears to have not worked and maya culpa.
Sorry for getting you all all riled up. If you don't want to like Facebook.
Sure, but go pick a different reason.
Okay, so what happened with all this? It is worth knowing to finish the story earlier from the consent decree in twenty eleven that said Facebook is gonna be carefully monitored for privacy concerns.
As you can imagine.
The Cambridge Analytica news coming out.
put a gigantic bullseye on Facebook and the FTC said, Aha.
You guys signed a consent decree a mere seven years ago.
What the hell?
This is exactly what we're talking about.
And
Facebook just decides, you know what?
What's the big dollar sign that check that we can write here? Because there it seems like we just want this to be done. We want this to be buried.
We're a different company now. We kind of want to put that to bed.
The whole settlement here was not specifically about Cambridge Analytica. There were a bunch of other things that are
privacy related, but
The number is five billion dollars.
And
Dave, there is one thing that it comes with.
And that is a
twenty year
window.
that they are monitoring Facebook and that is exactly
matching to the words that Mark gave us on stage that Cambridge Analytica, the way they handled it was a twenty year mistake.
Yeah.
No.
I think by the twenty year mistake he meant much more of like the damage to
Facebook's brand that came out of this. Yes. And specifically the
FTC settlement.
Yeah.
It is funny. I was thinking this is a very um Facebook appropriate comment. If we had subtitles for this episode, this one would be It's Complicated. I guess so great. It really is. So great. It really is. It really is. And what it comes down to is
I think
There isn't
Ethos.
At Facebook.
That
At many steps along the way.
There was an opportunity to
Grow.
To win.

And
What mattered was winning.
And then when the dust settles, you can kinda look around and say, Okay, what was the impact of that?
That is one way.
to run a company, the other way is to be really careful and ask permission.
Facebook.
fell into the first camp.
And they probably wouldn't be here today, or certainly at least wouldn't be a global player with four billion users today if they hadn't fallen into the first camp.
But by falling into that first camp.
You have stuff that comes up where you're like, ah.
Crap. I wish we hadn't done that. And this is one of them.
Right.
The time bombs, totally.
Okay.
So what actually happens, Facebook becomes a lot less valuable.
after all of this comes out. The company announces in their July 2018 earnings call that they're going to be more focused on user privacy and that revenue may slow as they make this intense focus.
They drop nineteen percent in one day.
Oof.
They wiped out 119 billion dollars in market value, which was the largest single day loss for any company in history.
At that time.
At that time. Save at that time. Yeah.
To be exceeded in the future.
So
This
Hold
privacy issue. The five billion dollar settlement.
All this stuff that just happens with Meta.
It has
Big ripples for the whole
Tech industry.
There's a
phrase that is known on the lips of every American
Somewhere in the neighborhood of
Cambridge Analytica, election interference, fake news, I hate social media, Facebook did this, YouTube did that, blah blah.
And this is a persistent drum beat.
That is underneath
the whole national discourse.
There is an opportunity
To be
the anti Facebook here, if you want to be to be the company that says we are so unbelievably incredibly about privacy, even more than we ever have been before.
David, who does that.
That
Is Tim Cook's apple.
Yes.
So
Apple, a company that I
love and adore and was actually wearing a Apple T shirt earlier today uh and had to take it off before recording because I felt like it was weird to be wearing my Apple T-shirt when recording the Facebook episode.
Apple is a company that has always been incredibly privacy conscious.
They both
use that as something they
believe deeply in their soul and design into their products and is amazing for all of us who use their products to get
That
Privacy and have that trust.
They also, to use Ben Thompson's parlance, use it as a strategy credit.
there are areas in which it really behooves them because they don't need to do server side stuff. They don't need to do advertising because they make a lot of advertising indirectly from Google. And they don't need to do
A lot of other things.
So they can tout.
Hey.
We're unbelievably secure with your data. We take privacy incredibly seriously. No one takes it more seriously than us.
They start really beating this drum and by twenty twenty one they decide, you know what?
In IOS fourteen point six
We are going to launch a new policy called app tracking transparency. Yep. A T T.
And
What that means
Is
A few years ago.
We mandated
That anybody who is tracking you across apps
start using something called the IDFA.
The identifier for advertisers.
Now, in the past, Apple had let you just actually reach in and grab the device's unique identifier, which was pretty cool because it
as a developer, it was unrelated to advertising. Think of it almost like a serial number of this device.
And you could use that for things like, hey, is this the same user across multiple applications? I've got my SDK and my code running in multiple developers' applications, so I can do interesting things like say, hey, this person both takes runs with Strava and they also use Google Maps, and you can just kind of gather data across apps.
Kind of similar to how Facebook was gathering across the web with like buttons everywhere or with Facebook Connect everywhere. So they could build this holistic profile of things you do off of Facebook.
Yeah.
So
Apple stops letting you use the device identifier, they force you into using this IDFA. And then with iOS 14.6 in 2021, they say, Hey, if you're using IDFA,
Part of that API is that now, whenever someone launches an app for the first time, it's gonna ask them in this really aggressive language.
Are you okay with getting tracked?
Or do you want to ask this app
Not to track.
What do you think people are gonna click?
Yeah. There's a default answer to that question. Yes. So
what actually ends up happening most people click Ask app not to track.
a whole lot of Facebook's
Targeting
basically falls apart. They no longer have a picture of you
outside of apps that they actually own.
And a lot of the reason why advertisers can get so good at targeting is because of this holistic picture that is built for you across your phone. David, this is the example kind of manifest in practice of the thing you were talking about all the way at the launch of mobile of what's one of the reasons why Facebook's beautifully constructed business model doesn't work.
in the mobile walled garden ecosystem, it's because the operating maker can make a change like this that
Just
kind of affects core functionality that you were relying on. And now you don't have access to that data. So you can't run as effective of an advertising service.
Totally.
And
A minute ago when you asked the question of who's banging the privacy drum and I said, It's Tim Cook's apple.
One of the reasons I said that
Is that
Actually, I didn't know this till doing the research.
Mark and Steve Jobs had a great relationship.
Which makes this story all that much more interesting.
Mark is very Steve like.
Very, very Steve like.
And
They actually met for the first time
in two thousand seven, right as all of this is coming together. And the first meeting was that Steve actually reached out to Mark and wanted to meet him and build a relationship, which I don't think Steve did that with too many people.
And then so on the back of that
the next year in two thousand eight.
when the iPhone STK was launching and people were building apps.
Mark
And Facebook actually
Go to Apple and meet with Steve and they pitch Steve on
Exactly what you were just talking about, Ben. Like, hey
How about you let us bring our platform that we've just built that has all these developers
into
IOS into your platform. Really? Oh, to make Facebook platform part of the iOS developer. Whoa.
Yes.
Which, you know, from Facebook's part is kind of like a Hail Mary. Like, yeah, they're probably not gonna say yes here, but
This is really big risk to us. We might as well try. But they did have enough of a relationship where Facebook and Twitter both were privileged citizens on
An early version of the iPhone OS. Like in the settings screen, even before you installed any apps, there was like a Facebook and a Twitter settings for.
I guess like native integration between the operating system and those networks.
And social networks. Yes, totally. So Steve it uh supposedly the legend goes, you know, kinda
Mark and the Facebook team make this whole pitch and at the end of it, Steve just looks at Mark.
It is it is
Oh, almost a little sheepish, and it's just like
Thank you.
We're we're just not gonna let somebody else build a platform on top of our platform. And then he sort of pushes back in his chair and it's like clear that's the end. And then he's like
Hey, so by the way, what do you guys think about Microsoft and working with them? And then they just like have a really nice conversation supposedly for the next couple hours and shoot the shit and talk about Microsoft and computing history. It's this very cordial relationship, and I think
The sense I get is that Steve really liked Mark and respected him.
Well they're both like
pretty product visionaries. And they're both like
very stubborn about their views of the future, and they both were very right about their views of the future. I can see it.
Totally.
And
Clearly that is not the feeling today between the two companies. And I think what happened since
Okay, if it had just ended at
Apple isn't gonna let Facebook build a platform on top of their platform. That might have been it.
But then when mobile app installs happened
And Facebook all of a sudden Facebook was making
billions of dollars.
off of deciding what apps in the app store get downloaded. Apple had to have felt like, hey, this is actually this is our turf. Ours. Yeah. Yeah.
And so then after
Everything that happened in twenty sixteen, twenty eighteen, Cambridge Analytica, privacy
To your point, Ben, part of this is that Apple has always cared about privacy and it's always worked well for them and it's part of their main product strategy. Part of it, too, is like,
Oh agree.
Here is
Kind of.
ultimate competitive vector that
we can have against somebody we really don't like who we feel has
profited off of our platform unfairly.
Yeah, you end up with Apple feeling like
Everything that happens on our platforms is ours.
And these are our users to protect. And no one's gonna do wrong by our users in any way.
So you have Apple.
Who is
Protective as all hell.
And then you have Facebook.
Where
Mark Zuckerberg more than anything in the world wants as much freedom to operate as possible. And you have Apple trying to constrain and you have Mark who hates feeling held captive.
Yep.
So now here we are in
twenty twenty one and Apple's like
We're making our move. Yeah. Facebook's been reeling, we've been beating the privacy jump for the last couple of years since twenty eighteen in Cambridge Analytica.
Now it's time to make the move.
So what ends up happening.
Actually the first couple quarters, not much. Facebook's talking about it on earnings calls. Hey, we think this is gonna have impact. It's not huge.
But then
February twenty twenty two, which is technically the
end of year twenty twenty one earnings call for Meta.
They drop the bomb. Interestingly
in question and answer. I listen to the whole earnings call and the CFO kind of casually says in a response to someone, Oh, we think that the
impact from ATT to our ad business will end up costing us on the order of ten billion dollars for twenty twenty two.
What?
That is eye popping. Like
Uh okay.
So what ends up happening
is there's a twenty six percent drawdown in a single day.
Remember we said to put a pin in the uh single day drawdown records. The market cap went from 900 billion to 700 billion. The actual number is they lost 232 billion in market cap, the new largest in history, surpassing their previous record. Also
On this call.
They announced their first ever quarter over quarter user decline.
Keep in mind what's happening is on top of Meta basically saturating.
most of the internet connected world by this point.
TikTok is also really, really peaking. So
You've has some marginal users
kind of using the app less because they're moving to TikTok.
And
Facebook is reacting to TikTok and trying to put reels in, so they're cannibalizing their own revenue by encouraging people to watch these short form AI recommended videos that actually don't yet monetize as well as the newsfeed.
There's kind of three fronts that are destroying them here. There's ATT, there's
TikTok competition and they're they're making
revenue cannibalizing changes.
in their own app.
So the hit continues. It traded all the way down forty six percent.
By April twenty seventh, and then ultimately
It bottomed
On Halloween that year. So this is what
Eight months later.
with a seventy two percent drawdown.
Oof.
They lost seventy two percent of their value.
Between
February and Halloween.
Ooh.
All in the year twenty twenty two.
It's crazy. And that is like NVIDIA levels of drawdown back in the crazy NVIDIA journey that we talked about. It's totally insane.
The interesting thing is
At this time.
The real threat wasn't actually ATT.
The biggest of those three threats
Was TikTok stealing users?
Yes.
The whole ATT thing is about
How much money can we make off of an ad because it is so well targeted?
That's an optimization.
That is useless if you do not have users to advertise to in the first place.
Yes.
So the actual real existential threat.
is TikTok.
And Ben Thompson makes this really great point.
And I know I've quoted Ben over and over this episode, but I think he's just been so astute on Facebook at many points throughout history.
This decision to make these product changes to respond to the TikTok threat in the face of ATT to do these at the same time is
is a founder led decision.
If you had a professional CEO, the correct thing to do to preserve your job and shareholder value is to wait
six, twelve months before you start reacting to TikTok to let the whole ATT thing blow over.
Mark's like
I can't get fired.
I think the right thing to do.
Is
React to TikTok now because
Every day this problem compounds and gets absolutely worse. I don't care that there's this horrible narrative going on right now with ATT that is gonna cause us apparently to lose$10 billion of revenue we otherwise would have gotten this year. We must cannibalize revenue in addition to that to make these product changes.
What it ends up with is a seventy two percent drawdown, and what it also ends up with is the chance for
it to five X from there, which is what has happened.
The company
saved itself by acting correctly in this
And they had to go through this wild tumultuous
two year journey.
In the process.
It's just
Another episode.
Of
Mark making these sets of decisions.
Because he's Mark.
because he controls the company and because he has the stomach to withstand it.
Yeah.
And what ended up actually happening from ATT.
It's
been value destructive overall because I don't think the amount of money that has shifted away from Facebook has
been captured by Apple.
I get the sense that the app install
business for the app store, those search ads is going
Great, but it's not like equivalent to what the monetization over at Meta is on app install ads or was on app install ads. Yep.
I think Apple was sort of
Hoping in its heart of hearts.
Yeah.
This would shift a lot of those.
Dollars into ads in the app store.
And the reality is people just don't go to the app store searching for apps anymore.
Not to mention this kneecapped meta on a lot of
ads that are not app install ads. This kneecapped a lot of the like we have a friend that's in the retain who was saying that their ads doubled in price in twenty twenty two when this happened and they were sort of scratching their head and they have nothing to do with the app store. So
All that kinda happened is
That entrepreneur said.
I guess I'm gonna keep advertising on Facebook as a platform. I hope it gets better. I'll pick some other platforms, but like I can't advertise with Apple. There's nothing for me to do. It's a retail good. It's a physical item. So
I guess I'll just pay more money to acquire customers now. Like it ends up actually hurting
the business when go to market channels get less efficient unless you can sort of shift that spend to a place where your customer is also hanging out.
Yeah.
In practice.
Meta's fine.
When a shift like this happens
the most scale player with the most engineers and the most data.
turns out they're still the winner.
Meta launched this thing called Advantage Plus. And now if you're an advertiser, they use a whole bunch of other data signals and you still have a customer acquisition budget. You're gonna spend it. You're probably gonna go spend it on Meta the same where you were before, and it's just not quite as efficient as it was. Oh, and by the way, anyone else that got hurt from the
changes with ATT.
just doesn't have the ability to react and build around it the way that Meta had because they don't have the resources Meta does.
Yep.
So all of this
Finally brings us to the last
piece of the story here.
Yeah.
I'm sure listeners at this point you're probably saying like
What the heck, where however many hours in you guys haven't said
The words reality labs.
Oculus.
Or AR or VR
Once. Oh, is Facebook in that industry?
Yeah. Yeah, you know, I guess they are.
All right, so what happened here?
Uh way back
in call two thousand twelve.
Facebook starts getting interested around the same time that they're starting Fair for AI in what is the platform of the future. They start doing some hardware prototyping on their own.
They're not really set up for that yet.
but they do want to do the same sort of approach that they did with AI, which is focused research, not general research. Pick a particular thing where we have an opinion about something we think is going to be the future.
And then invest deeply in it.
Yeah.
So a crazy thing happened in February of twenty fourteen.
They opened up the purse strings and paid nineteen billion dollars for WhatsApp.
They had so much conviction.
That the future was AR and VR.
That thirty four days later.
They paid another two billion for Oculus.
I had no recollection that these things were a month apart.
No, I didn't. I knew they were both in twenty fourteen, but I didn't realize they were a month apart.
It's wild.
I think Mark got the demo of Oculus and it was just like oh
This has the most credible
potential to be the future out of anything that I've ever tried. So yes.
But I think actually the right way to think about this is through the same lens as fair.
It's a research lab, in the same way that FAIR is a research lab. And it was like, Oh great, two billion dollars to kickstart the research lab.
Fantastic.
All right.
So
You and I have both
Tried Orion.
It is unbelievable.
Fantastic.
Very clearly a path to the next generation of computing device. I don't know if this is going to be the winning company. I don't know if that's going to be the exact winning device, but like
Never have I been so sure that
a mainframe very far away from the
to converting to a P C which lives
three feet from me, converting to a phone that lives an arm's length from me, the next logical step is glasses that live
on my face. And that used to sound ridiculous. And then you and I tried Orion, and now I'm like, oh
Yep.
That is going to replace or augment my phone in whenever these things are
commercially available and consumer great.
I'm glad we waited to do this episode because I think I would have had a pretty different take having only tried VR headsets and Vision Pro and
big goggly things over the years. I think I would have
Been unconvinced.
Frankly, because I didn't think it was possible to put something in that small of a form factor.
So
That is the
Current
product experience.
That
you and I have recently had. Now let's look at the business strategy and the financials of how we have gotten here and why.
So
There are two ways to look at reality labs.
The first way.
Is to answer the question.
What would have to be true about the business
To be great on its own.
And justify all this investment.
And less level said on
How much investment has gone into it.
Yes.
So based on their spend already since they started reporting reality labs as a separate segment in 2019, they've spent right around sixty billion dollars.
That is in operating losses for the segment.
And does that include the two billion for Oculus or I mean either way it's a rounding error. Who cares?
I don't think it does.
With that level of investment, it already needs to be
Essentially the most successful and profitable
consumer product in history.
to pay itself back.
That is the only possible outcome here where we even get our money back.
I know this sounds wild, but like
That is the bad
no other outcomes are acceptable.
Fortunately, if we want to model this out, we know the financials of a product like that, the most successful and profitable consumer product in history.
The iPhone.
So as a thought experiment.
What if Meta managed to launch such a product, say the Orion glasses, tomorrow?
and say that such a product grew at the exact same rate and with the exact same profit stream as the iPhone.
Well
I did that napkin math and if twenty twenty four
This year was Apple's two thousand and seven.
So you just take all the iPhones cash flows and you start the clock right now.
Meta's cumulative cash flows from reality labs
would be net negative until at least twenty thirty five.
Okay.
Okay.
So we're talking eleven years.
you would get back to break even on your investment 11 years from now if starting tomorrow they manage to create the most profitable and widely adopted product in human history.
Which obviously is not happening tomorrow.
That also assumes generously that Meta could build a services business attached to it the size of Apple's services business, which
probably generates right around an equal amount of profit.
So basically
Take all the profits from iPhone.
And double it.
That's actually what you would need.
It's actually fair to attach a similar size services business.
I think that's very fair.
Knowing Meta and all of its capabilities and everything that we just talked about.
Yes.
That is the bet.
Let's just be super clear. Anything else is a
complete incineration of cash.
Well okay.
That is the bet looking at through the lens that you posited of a purely financial investment perspective.
The second way is actually kind of financial too. I think there's probably a third more emotional way.
The second way though is if you're Mark.
And you constantly live under the thumb of platform control.
You'd do almost anything.
To get out of it.
And that's not irrational. I mean, Apple made a$10 billion dent in their revenue just two years ago with ATT.
And I mean
They could, I don't think they would, but they could at any given moment just pull you out of the app store.
And you'd have little recourse.
That is a existential business risk, and it's an unlikely one, but every day
You could wake up
And
all of your access to all Apple customers.
could be over.
Which, by the way, we haven't talked about it.
But Google could do the same thing. Google could totally do the same thing. They have the right to distribute or not distribute anyone's app in their store at any given time. Look at Apple and Epic with Fortnite.
Totally.
So
There is actually an expected value calculation you can run, which is my entire company's market cap times the likelihood that it could happen, which
You know, it's extremely low likelihood, but
Because the market cap is one point five trillion dollars
the expected value is still a very big number.
So then
If you're thinking this way, what is a reasonable percent of your market cap to invest every year in a hedge that might, might get you out from under the thumb?
of big tech platforms.
And at meta being worth one point five trillion if they're spending fifteen, twenty billion a year on reality labs losses.
That's a little over one percent.
Right.
Is that worth it?
If you truly believe that this is
the most effective way to offset
your most existential risk in the next two decades.
Hell yeah, it is.
Hell yeah.
Now, am I certain that this is the best way to hedge that risk? No, I don't know. And like, is there a huge amount of execution risk along the way? Well, they're running many hedges on this, of course. I mean, this is part of what fair is, this is what lama is, et cetera, et cetera. But it's a one percent tax on your
I mean it's generous to frame it off of market cap. You probably should frame it off of revenue.
But still a one percent tax off of your entire enterprise value every year.
Yeah.
I think there is also potentially a third way to frame it. And it it's funny, I think you put it in the
emotional lens. I I actually think less emotional.
But
more upside oriented of
Facebook did have the taste of being a platform.
for those couple of years there from two thousand seven to call it twenty ten, twenty eleven.
And
If they own the next platform
Not only
Will they
do everything that you're just talking about of like, Oh, they'll have an iPhone size business because if it turns in to be
glasses in reality labs, they're gonna be selling the hardware and maybe they can make that profitable, like the iPhone is profitable, et cetera, et cetera.
Then there's also
Your point number two, which is like this is a defensive play.
our core business right now is at risk because it's built on somebody else's platform. And Mark made the comment on stage with us that they've run the analysis. They think they could be twice as profitable in their
core media products if they were on their own platform.
Sure, great.
But then there's like
The big big play is the third part of like
Well, what if we actually built a platform again where we have millions of developers who are developing on us?
And we are participating in their business.
In the way that we used to participate when they were developing on us in the past.
That's an even bigger plate.
And to underscore your point, David.
Just a few weeks before we recorded this episode, Meta held a multi hour keynote at Connect in September twenty twenty four. And of those multiple hours,
Zero minutes were dedicated to
Their core products of social media apps.
their hundred billion dollar business of selling advertisements on these social media products.
So at least with developers
It's
Not about any of that at all.
Literally the entire keynote. Yeah, I did.
It's great.
It's
Meta AI, it's the Llama models underneath it, it's the open source strategy, it's developers building for
The quest
It's announcing new products like the next iteration of the Rayband Meta glasses. It's revealing Orion.
Zero minutes.
to their current products or business.
And they're one of the biggest businesses in the world.
Yeah, wild, right?
They are all about this platform future.
So here we are.
Trying to make the case of like they did it.
They decided they were an ads business and they built
one of the two greatest advertising systems ever known to man and one of the most amazing business models ever.
And at their annual developer keynote, they're talking about how they're going to one day become a platform company.
There we have it.
That is the story of Meta. I should probably say for a minute here too.
my experience using Orion. You were talking about yours a minute ago.
I thought it was
Unbelievably.
Compelling.
And before trying it
I never would have believed that
Any type of
AR or VR would really have been the platform of the future.
And then after trying Orion, I was like
Oh.
Yeah.
I could wear these on my face all day and like
I could replace a lot of what I do.
On the phone.
With
Just these lenses being in front of me all the time and it would be way more efficient and way more enjoyable.
I would never have guessed that in this year you could fit that into glasses.
Glasses and a wireless puck.
Totally.
Yeah, listeners, we've never shared our impressions on this. It is wildly compelling. And if you asked Mark, he probably would frame this whole thing differently than we have. It's not about this hedge and he would say some things about platform control, but I think for him it is
Just this general belief that
we want to make awesome products and
I believe there's an awesome product to be made here, and I'm gonna assemble the best people I can to go work on it. And I think that's the like most interesting duality of this company is
It's both.
It's what is the
best strategic move to make to marshal my resources.
And
A much more touchy feely, like I want to make products that are great and bring people closer together because that's the mission of the company.
Yep.
Well
Well put.
Should we wrap the story there?
We should.
All right, so we will catch you up on the business today, just to put some numbers to all of this, and then we will move into analysis.
So
As of the end of reporting last quarter.
There are three point three billion daily active people.
Across the whole family of apps.
Yeah.
Okay.
Astonishing.
That's up seven percent year over year.
The family of apps revenue per person is about twelve dollars.
the end of your stats from last year when you just look at
The Facebook app, not the whole family of apps.
the daily active users are two point one billion. So of those three point three billion daily active people across all the apps,
Two point one billion are on Facebook.
And the monthly number of the same.
of Facebook is three point one
billion.
monthly active users. So two point one daily, three point one
Monthly.
Wow.
WhatsApp and Instagram are in the neighborhood of two billion monthly active users.
WhatsApp has a hundred milyen now in the US.
Which this is sort of a big narrative violation that WhatsApp will never catch on in the US and NineMessage is dominant and even after that it's you know
Text message.
This is crazy. A hundred million people a month in the US use WhatsApp now.
I mean, it's been a slow burn over time, growing and growing and growing, but to me that kinda came out of nowhere.
The other narrative violation here, there actually is a lot of growth among young adults using the Facebook app itself in the US.
I think a lot of people think that's a sort of boomer thing. It's funny, one thing that may be contributing to that.
Which we didn't put in the story is marketplace. I mean, for me personally, like I have totally boomeranged all the way back around on the Facebook Blue app, and I am now
A loyal DAU
Because of marketplace.
It's awesome.
Which is crazy, because you don't use any other form of social media besides like posting on Twitter for acquired, right?
Correct.
They've announced that Meta AI is on track to be the most used AI assistant by the end of the year. It's worth disambiguating meta AI from Lama. Llama is the name of their family of open source models.
Those models do power Meta AI, but Meta AI itself is a branded consumer experience that lives both standalone and in a bunch of Meta's apps.
Yeah.
Their revenue in twenty twenty three at the end of the year was a hundred and thirty five billion dollars.
operating income of forty seven billion dollars. So that's a thirty five percent operating margin.
Worth knowing.
Just like all tech companies, they have become capex heavy the last few years.
They now uh last year spent twenty eight billion dollars in CapEx.
Which
you should mostly read as data centers. They operate a
hyperscaler sized data center footprint.
give or take. You know, you think AWS
Azure at Microsoft and Google Cloud.
Meta is the fourth one. They just don't sell it to anyone else. It's only consumed by internal teams.
So huge amounts of investment in AI hardware and just other data center expansion.
The balance sheet is Fortress. They have 50 billion in cash and fifty eight billion, including cash equivalents and marketable securities.
They have seventy one thousand employees.
And their market cap is one point five trillion.
Up.
From two hundred and thirty billion.
In just October of twenty two.
Wow.
Incredible.
Totally incredible.
So two really insane observations about the state of the company today.
All of their products seem to increase user engagement.
Over time.
And all of these products
have different use cases.
And it happens.
Across geographies.
There is something in the water at this company.
Why is it that WhatsApp
and Instagram are both increasing in user engagement over time.
It's the growth function. I mean it's this like
Purpose built.
heat seeking missile of attention and metrics that the company pays attention to where
Across a whole broad product suite.
Engagement increases.
It's not like they have one thing that happens to do really well. It's a process.
I would say it's a whole
set of things is these, you know, the company calls them centers of excellence internally.
It's the growth function, it's AI.
Yeah, it's
Dad's in the revenue team.
All of this contributes to it.
Yeah.
Fair.
The second insane thing.
At IPO.
The US and Canada market had an average revenue per user of eleven dollars.
That number is now$227.
Wow.
Yeah.
And globally that average revenue per user when you include all the emerging markets and less valuable markets for them is forty four dollars.
So they really, really monetize now.
So how much of the world does Meta really have left?
Mm.
To kind of put a bookend on this. I almost asked you this question all the way in the beginning when you were teeing up the episode, but I'm I'm glad we'll save it for here.
So according to the UN
Last year there were five point four billion people online.
This includes China.
Right.
So they're basically saying two thirds of humans are online. And Meta does not include China.
Yes.
Meta has four billion monthly active people across the family of apps.
China alone is one point four billion. And while this isn't like totally exact, I think you just apply the same multiple to China and say, well, two thirds of humans are online, two thirds of China is online. So that means that there's nine hundred and forty million people online in China.
I mean that's
Probably being conservative, I think you could probably argue a much higher percentage of China is online. Yeah.
But let's be conservative.
That leaves about four hundred and fifty million people.
or six percent of the human population
Who have access to the internet.
But are not yet.
meta monthly actives.
That doesn't mean they're not meta
users, that just means they weren't monthly active users as of the end of the last reporting period.
So meta's addressable users who aren't yet users is less than six percent of humans.
Just wild. It's just wild. And then still I think
The craziest thing about the company.
Is that
If you look at the
Daily active user figure, it's not that much lower.
And so once you frame it this way and you're like, huh, there's only six percent of the population left either through reactivation or signing up that they could get, you sort of understand why they put so much effort.
behind emerging markets, behind doing things like zero rating, doing custom deals with telcos.
rolling out fiber, bringing countries online for the first time, even when they have no near term monetization potential. Internet.org was the name of their initial for a long time around this to basically say, look, we are saturating humans. We
Gotta figure out how to get more humans on the internet.
Yep.
Move on to analysis.
Yep.
Okay, so in the analysis, the first thing we're gonna do is power and then playbook.
So
We are gonna do a seven powers analysis.
Of
What enables Meta.
to achieve persistent differential returns, or, you know, to put it another way, to be more profitable than their closest competitor and do so sustainably.
This is interesting.
Who is their closest competitor?
I think that's probably worth defining first and foremost.
Ultimately they're in the business of selling
Advertising.
So I think their closest competitor is Google.
Yeah.
They are certainly the most similar looking businesses in their current forms.
But like who do they compete against for the same profits?
Or the same potential profits. Right. I'm not sure that it's actually Google.
I mean it almost certainly is YouTube within Google.
But I actually think it is
Other social platforms.
Yeah, you're right.
I suppose it's other places people spend time. Yeah, it's where people spend their time. Right. Online and offline. Right.
And I think really what has to happen here is an analysis of each set of stakeholders individually. Like you almost kinda wanna do a seven power analysis on the user side also of why would someone pick a meta product over a Snap product. And even though they're not voting with dollars, it's almost like
their attention is a proxy dollars, because you just assume that those companies should do a comparable job monetizing the attention.
Yeah.
But what makes sense I think is to just walk through each of them.
So counter positioning
They probably don't have much counter positioning in
the current state of meta and hold on AI for the moment.
In their startup days.
They did a lot of counter positioning against other global social networks.
by being a college only authenticated social network.
they were accepting
Lower growth.
They were accepting.
A capped ceiling of number of users.
And they were doing that'cause they wanted to make the trade that they felt
you know, a closed community is more important.
Yeah, with higher engagement.
Scale economies.
Scale economies.
Hundred percent.
Absolutely.
This company's in the business of scale economies.
Yes, and I think that scale economies on the infrastructure side, on the GPU investment side.
I think that scale economies on the advertiser side and on the ad experience side, like
just by having so much more scale they are the
default standard way to spend money for advertisers.
Think about on the tooling side. Think about the experience of being an engineer at Meta and the
thousand engineer years of work.
that comes out of that company every year on making the developer experience of working there better. I mean it's crazy with the revenue scale that they have, how much they can amoritize these fixed costs.
Totally.
Everything at this company is scale economies.
Yes.
Okay. Scale economies for sure.
Switching costs.
As a user
You're pretty locked in.
Once you have followers
Oh, I hadn't thought about that. Yeah, that really speaks to again, you know, another shift we didn't really talk about in the evolution of
what we call social media.
Is the
Creator aspect of all of this.
The whole idea of like a creator and influencer didn't exist in the early days of social media and Facebook, but now
You and me, our platform on the podcasting platform, like we have incredible switching costs. Somebody who has a ton of Instagram followers has incredible switching costs. Yep.
Now, fortunately uh in the land of creators you don't actually
need to switch. It's just an and.
You know, it's not like you're ripping out one vendor and putting another vendor in.
I do have a sunk cost in building a following on a given platform, but that doesn't actually prevent me from also launching on another platform, if you have the time to kind of do that.
Yeah.
I think there might actually be process power.
Mm. Normally there's not, but I keep
kind of going back to this, like there's something in the water. Their products grow in engagement over time. Their growth team does 10,000 little things to
open up every step of the funnel as wide as it can be and make the most frictionless fluid experience for users.
Interesting. Yeah. I was actually having this discussion with Hamilton recently about the difference between process power and
cornered resource and a good test for this is when you
Bring somebody brand new into the organization and plug them in.
Does the power transfer to them as well.
If no, then it's a cornered resource.
If yes, then it's process power.
And in this case I think that's potentially true.
Yeah, you can bring in new engineers, you can bring in new product people.
And
transfer the advantage to them. You know, for a while they had legitimate process power in how they shipped. I mean Statsig has started on the premise of this. It blew my mind when someone from Facebook came and gave a talk at Microsoft in twenty fourteen.
on how they ship product and how it rolls out and it not only the feature flagging elements of it, but they can sort of like watch performance, auto roll things back if they're causing negative performance metrics, how like
there's just deployed code all the time with a whole bunch of experiments turned off, how there's these experiments that are running in different ways in different markets and they can statistically significantly disentangle
Which results are from
which experiment when they have multiple experiments that are concurrently running with the same user base. I mean, that was like
real voodoo that only Facebook did for feels like a decade.
Yeah.
And I suppose
Google probably does similar type things.
In different ways, but nobody else really does.
I think open AI
Kinda does. I think OpenAI has so much former Facebook DNA and kind of thinks the same way that I think they do a lot of this sort of thing too.
Yeah.
Okay, I can buy that there's some process power here.
Yeah.
Branding.
Branding is such an interesting one. I mean, can they have negative brand power?
Yeah, right. Anti power w branding weakness. There's no love for the brand meta.
There's no love for the brand Facebook.
There is love for the brand Instagram.
Yeah, but diminishing as it gets larger.
Certainly not like it once was. Yeah.
There's like reliability with it all. Like I feel pretty
I mean, there's branding that comes with being any big company that you're sort of like large and trusted and institutional.
Yeah.
But no, I think
This is
a clear example of how strong the other powers in this company are that like despite the brand taking a twenty year hit in Mark's parlance.
They're still not.
Today a you know, one and a half trillion dollar company.
Yeah.
And then cornered resource.
Unless you're gonna call Mark one, which always feels a little bit too cute.
To name the founder.
Uh I actually think
There are some cornered resources here within Meta.
And
Ironically, I think one of the biggest ones.
Is
the integrity and safety team.
And all of the privacy controls and work and security.
That they have done. That they've had to harden over the years. Yeah.
Yeah, even though this is also the source of so many criticisms about the company. It's now pretty robust.
If you think about
Anybody that would start up to try and compete with them
Somebody I was talking to put this to me, like, imagine a startup trying to build a hate speech classifier in Farsi.
Meta's got that.
and trying to have the relationships with the public policy people in two hundred countries.
to understand what is acceptable speech in each of those countries.
Yeah.
So
While probably, you know, YouTube
To a certain extent TikTok, perhaps.
Also have
Similar strengths here.
I doubt there is any
Other company.

Uh
Actually operating.
Privacy, integrity, and security. And within that is also anti-spam stuff too, which is super, super, super huge at the level that Facebook is.
Hm, it's interesting.
Okay, so in looking at this.
Why does Meta do$47 billion a year in operating income? And why do we all believe that's going to continue for a while? Like what actually is the defensibility here?
Is it the network economies'cause they're so tautological that
I mean, I I would argue it's not that'cause what we've seen is
TikTok showed us there's a way
Without
Initial strong network effects.
Two
go capture people's attention and thus eventually the add dollars.
Yep.
And they competed very successfully with Meta in doing so. Yeah, if this were five years ago, I would have been like, Why even talk about the rest? Network economies. Once you have the network, then you know, it doesn't the rest doesn't matter. That's just not true anymore.
Yeah.
Well, I think the network economies are still true.
Relative to anybody who would compete in a social product. Yes. Which still exists. Totally. Social is just now divorced from media.
Right. And most people do use both.
And sometimes they even use different apps for it, but it's two different modes of let me
It may be the same session on the couch.
But you do need both use cases of show me who the people that I intentionally follow.
what they're doing and then show me entertaining things.
Yeah.
Totally.
So part of their business is defensible from the network economies.
But the other part honestly it
It kind of feels like habit.
Well, Habit, but I think scale economies are really big for that, too, especially in AI. I think the only way
that this new paradigm exists is because of AI and because of GPUs specifically. And I'm not even talking about generative AI. I'm talking about like
feed recommender systems and personalization systems. And so like there is a very, very large
minimum barrier to entry there that keeps going higher as Bite Dance and
Better keep investing in it? Yep.
That's a great point.
Okay.
Playbook.
Playbook
Let's do it.
Okay.
So
Let's talk about what Meta is doing with AI. And that will lead us into our first playbook theme. Cause we've talked about so far.
the beginning of fair, them starting all this AI research.
The early twenty
14 on use of feed recommenders and the AI for the ad matching system.
But
There's a lot going on with Facebook and AI right now that we really haven't talked about.
So
There are two
words for you to know. One is llama.
And this is the family of foundational models that Meta has developed. And these are competitive with OpenAI and Anthropics Claude and
Google Gemini, et cetera.
Yeah.
And then there's meta AI, and meta AI is a consumer brand.
That is the way that you interact with
meta's self hosted
version of Llama, or maybe give it a little bit more greens than that. It is an application that Meta has
that uses llama in the background, but provides
meta specific AI experiences, some of them bundled into apps like in WhatsApp chat or
In Instagram. The blue app or whatever. Yep.
Yeah, but also there is a meta AI website that you can go to and interact with it directly. But Lama is the models themselves, meta AI is the consumer product.
And Lama.
They have spent
Billions and billions of dollars, huge amounts of RD, huge GPU cluster to train, big data centers.
Interestingly.
It is all.
Open source.
So
Mark makes a big deal about this. Yes. It's interesting to sort of think about why.
It's not
Open source in the same way really that
Oh, Linux is open source and this is the free standard that everybody uses, and there's just sort of a foundation behind it all.
Meta is putting huge amounts of CapEx and OpEx, like huge amount of dollars into willing
Llama into existence. It's very different than these sort of cheap grassroots open source projects of the past.
Yeah. It's open source like Android is open source. Yes.
And so
Why are they doing this? Well
If you ask Mark.
why they have an AI model at all, and I'm quoting from a great blog post that he put out about this.
We must ensure that we always have access to the best technology and that we're not locking into a competitor's closed ecosystem where they restrict what we build.
Okay.
I understand that. You believe that the most important thing is to control the key technologies that make your products possible.
Okay.
That last bit is important.
Basically what Mark is saying here is
We're gonna spend a lot of money training these foundational models, but unlike
all of the competitors in the AI space, we actually don't have a business model.
around making money on this. So we're gonna spend all the money, we're gonna give it away free. Why does that make sense? It's open compute project all over again.
Yes. So for anybody who's not familiar, Facebook made this move in the early twenty tens where they realized they were spending tons and tons of money on their data center infrastructure.
And the vendors who they were paying, these integration partners and the server companies and the networking companies were making fat margins.
And they were thinking, this is dumb. We're a really big customer. Why is everybody else making so much money on us? And they looked around and they saw all these other
big data center companies and they're like, geez, all those people are paying big margins too.
What if we just
Publish.
The specs.
for the billions of dollars of work that we have done.
to
Make our data centers
And then we start this thing called the open compute project and we just get
A bunch of other people to adopt it too.
Well suddenly then the Open Compute Project is this standard by which
all the hardware manufacturers and integrators actually have to snap to because all the customers are saying this is what we want.
And it's a
pretty genius way to drive margins down for these suppliers.
And also a way to
guard against somebody in your supply chain kind of building platform power.
Yes. So
What they basically learn from this is, oh, we open source this thing.
A lot of our costs went down because a whole ecosystem started using the thing that we open sourced. So even though we're not making money, you know, they're not a cloud company, they're not selling access to their data centers to anyone. Right. They're not a hyperscaler.
it pays back in the form of saving them money.
It can do the same thing in AI.
They publish
A really expensive open source foundational model that is in the conversation.
to be as good as these other closed source ones.
Well now
There's a lot of developers out there who are just gonna build on the open source free one. It
kind of becomes something that the community can build on and improve and make better. As Mark said in our conversation with us on stage, there's a lot more smart people outside your company than inside it.
But effectively what it does is it puts pricing pressure
on the AI model companies.
To the extent that Mark views it as a
super important key ingredient to the product experiences he wants to build in the future. It's super bad.
if there's a few closed source providers who can provide that experience and they A
lock him into controlling so here's what you can build, here's what you can't build, but B
Take his margin. Basically say it's really expensive every time you want to make a call to one of our proprietary services.
When you think about it.
It's actually a form of operating leverage where he's basically saying there's a big fixed cost I am willing to bear in order to
Bootstrap this ecosystem and commoditize
all of these compliments, commoditize all of these other closed source AI models. And in exchange, what I'm gonna get for that is just pricing pressure on all of them. So that in the future my variable costs

I just get to keep more of the dollars that we bring in rather than having to pay them out to proprietary model providers in the future.
It's a pretty novel business strategy.
Yeah. Totally.
So I said commoditize your compliments. This notion was dreamed up and named by Joel Spolsky in two thousand and two. There's a great blog post about it.
And he makes this analogy, think about cars and gasoline, these are complements.
When sales increase in one, sales increases in the other.
You have a car, you need gasoline. Well, AI models end up being a complement to meta's products in order for them to build meta AI or even the feed recommendation stuff we talked about, they need best in class AI models.
And just because cars increase the sales of gasoline, that doesn't tell you about
how profitable an automaker gets to be versus a gasoline maker. So imagine the automaker decided that
They want to get into the gas business so that their customers could have access to low cost gasoline. Or even further, let's say the automaker decided to make low cost gasoline just to drive all the other gasoline prices down. Well, if gas is cheaper,
and you're the automaker, you can actually charge more for cars since consumer willingness to pay is around the total cost of ownership, not about a car or gasoline specifically.
Right.
As a consumer, you're always buying a solution. You're buying transportation or you're buying
A technology product doing a job for you.
And if AI is a required input to that solution.
Then like
Yeah.
Total purchase decision.
Yes. Or an advertiser is not gonna pay you more or less depending on how much you have to pay the AI model provider. They're gonna pay you an amount, and if you wanna maximize the amount of that you get to keep,
It behooves you for you to not have to pay as much money to AI model providers.
Yes.
Better put.
Yeah.

Okay, so how does this apply to playbook?
Well,
Meta seems to like
Taking
all the risk in situations like this.
putting lots of dollars in so they can take more of the reward. You can imagine a more moderate company saying, Oh, well, there's gonna be lots of AI vendors out there, and uh we could just let them
take care of that as their core competency, and we'll just buy off the shelf from them. But that's not how Meta works.
Especially with everything they've been through with Apple, they have gotten true religion, and I think always kind of wanted to be in this position, and they just have the capital to do it now.
They will control the key technologies that matter to them.
Both for
getting to own and dictate product roadmaps and product decisions, but also for the financial upside of making sure that they control their own destiny and no one in the ecosystem has extreme leverage over them.
Right.
Only a company
Of the scale of meta.
Can kinda run this.
Playbook playbook in quotes because no startup is gonna be like, Oh, okay, what is my strategy to make sure that open AI and Anthropic don't get leverage over me? Good luck with that.
Yep.
Totally.
So
My first big playbook theme is
Meta discovers commoditize your compliment and is now looking for ways to use it everywhere.
I love it. Well put.
Okay, great. I think my first one is
Almost a different way of putting that, which is really like
Mark and
Specifically his superpower.
Of
Placing multiple bets on multiple chessboards.
Never wanting to be backed in to a corner. Yeah. And I think he has done incredibly well.
And I think the story of Meta shows
all throughout, even in the very, very beginning as a tiny project, not even a startup, where
Degrees of freedom were limited.
He was always making choices and playing the game.
Such that.
There were multiple options of how things could go right.
Totally.
Mark is a master at
Maximizing his degrees of freedom and setting up the board such that
In an uncertain future.
There are multiple paths to victory no matter how the world unfolds.
Yep.
Which is unbelievably Gatesyan. I feel like we said the exact same line.
About
Bill Gates.
In our Microsoft episodes.
The real comp for this company is Microsoft.
I think that's right.
That was actually my next one. They do iterative product development. They put the first version out just to kind of get feedback and see how they need to revit and get better for the future. The early days are characterized by hiring all the smartest people and prioritizing IQ over everything else.
Commoditizing your compliment.
obsession with building a platform that other developers build on top of.
This whole thing about multiple bets and an uncertain future.
I mean it's funny that
Just look at they were building Messenger internally. They bought WhatsApp.
I bet they're glad that they had that dual prong strategy. They were developing a an app called Photos at the same time that they bought Instagram.
That's what they do. It's Gates. And the most interesting thing.
That I think is like
I hit me in the face like a ton of bricks.
Zuck after
All the twenty sixteen election fallout and the shift in public perception and having to do all this testifying is like watching an alternate future for Microsoft where Bill Gates had decided to stay at the helm instead of leaving.
after the DOJ case.
That is the biggest difference is they both went through this hellish period. Yep.
And Mark came out of it and said
I'm more bought in than ever.
Yeah. And Bill came out of it and said, Steve, you're the CEO now.
Yep.
That's exactly it.
Yeah.
Are you gonna talk about Mark's amazing line from
The Harvard C S fifty lecture in like two thousand five.
I'm not, but lay it on me.
Oh, it's so great. Mark's what?
Twenty years old at this point, maybe.
He spent the summer out in Palo Alto.
He gets invited back to do a guest lecture as like a practitioner in the field at Harvard CS fifty class.
And
He's talking about product strategy and he talks about how he really admires Microsoft's product strategy and he thinks it makes a lot of sense of the first version is getting something out there and it's usually not very good, but by the third or fourth version, it's pretty darn good. And that makes a lot of sense to me as a good product strategy.
It is amazing. He lays it out right there. We don't have to like speculate at it. It is explicitly stated.
In the same vein, it is painfully obvious when you look at this company that companies are just founders extended.
The culture of this company
is just Mark.
And it's a
huge lever for Mark to act.
This has been true over and over again. Microsoft, NVIDIA, Nike
It's just how great.
companies are in the world. It's very hard for me to point to a truly great company.
Where
the DNA isn't
like a lever on the founder's personality.
I think that is right.
And I think it is
Doubly so.
With meta.
Because of Sean Parker and because it was set up from the very, very beginning that nobody could ever get rid of Mark.
That it was always gonna be his decision.
And there's gotta be a lot of companies out there that like we're looking at the success case. Yeah, this works if the founder is really, really, really smart and right almost all of the time. Right. As we talk to people here are the traits that we heard over and over again.
Mark is a genius.
A really good listener, a fast learner. He goes from knowing zero to mastery in months or years. He has low ego about being right. That's not to say that he has a low ego, but he has a low ego about being right. He is obsessed with finding truth and open to being wrong. He's intensely competitive. He's relentless.
He's actually a very good product designer and understanding the computer architecture that will be required to accomplish such a product experience at scale.
I mean
All these things, like if you have these characteristics.
And you're then empowered to singularly control the company.
At massive scale, yeah, it's gonna go well. But the first thing is actually much harder than the second thing. Yes. Yes.
There's not a causal relationship here that having founder control will.
lead to the right decisions.
Right. This is my regular reminder that in studying these episodes with extreme survivorship bias, we are looking at the most extreme outliers who
in every dimension you can multiply by
they're at the edge of the distribution. Mark is, I don't know, six or seven standard deviations from the mean human.
across the important traits that mattered to making Facebook.
Oh, and by the way, with the right timing and the right luck and the right circumstance and the right know how
My biggest lesson from doing uh acquire it is these things are unrecreatable.
Yeah.
Agree.
All right, what's your next one?
Durable executive team.
It's kind of shocking how many of the people that are Mark's direct reports and their directs have just been there for a really long time. This team knows how to work together.
Oh, yes. I was actually
Talking about this.
With one of the execs at Meta the other day.
And
He brought this up and was saying that like
This really feels like something very, very unique to Meta and I thought about it for a minute and I was like
Actually.
No.
I think this is something that is unique to all great companies.
If you look across the landscape out there.
Apple certainly like this. If you look at NVIDIA.
If you look at Apple.
If you look at, you know, Microsoft in recent years, if you look at the original Microsoft Costco.
You look at Costco, like
This is
almost always true, really is true in every great company that I can think of.
The core
Senior most executive team are all people who came up in the company or have been there for a very, very long time. It's not a whole bunch of mercenaries there at the top.
Yeah.
That's interesting.
Okay.
That brings me to this next one, which is something we talked a little bit about with Mark on stage. I'm curious to
I hear your answer.
To this.
Now that we've had all this time and space to think about it.
Here are all the battles.
Where
Meta has either
One by buying the company, one by beating the company, one by copying.
or gotten to some kind of sustainable stalemate.
My space and friendster.
Google Plus.
Twitter.
Instagram.
WhatsApp.
We didn't talk about this one, but um Mirror Cap and Periscope.
Oh yeah.
They launched Facebook Live when that was supposed to be the next big thing.
Yep. Snapchat.
and TikTok.
That's like seven eight.
Why do they keep winning?
I have some thoughts.
It's funny.
As we were preparing

This was the question that we kept
Asking people.
In some ways I think it's a little bit of a Rorschach test.
Everybody's answer was different and it was always like
what they think is the most important thing.
Yeah.
I think my answer for this is going to be a version
Of
Mark.
As the answer.
Yeah.
And it kinda goes back to
Adam D'Angelo's friendster testimonial about him.
And then realizing it's not luck at all.
And I think
It is that
You know, as Adam was telling to me as he's reflected on this, it's a very specific way of carrying yourself through the world where you
Don't
hold too tightly
to the path you're on.
Obviously
Mark is incredibly driven.
to the goal of
Yeah, connecting.
all the people in the world and doing that through meta.
But he's very, very open and flexible to like the exact path that it's gonna take to get there. Yes.
And that combination, I think, has led over and over and over again to these threats emerging.
And Mark and the whole team there.

Saying like
Okay.
What is the way that we can neutralize
This threat.
Or defeat it.
And we are open to anything on that front.
And I think they are open to being whatever they need to be.
to make that happen.
I think meta might look extremely different.
twenty years from now than it is today, almost like unrecognizably, because this company moves like water.
in response to whatever the new shape of the world is.
I mean hell, after trying Orion.
I think there's a very
Plausible.
reality five years from now where this company looks very, very different than it does today.
Yeah, I mean it it really is this idea. Meta is a technology company through and through, and then they leverage that technology to be whatever the hell they need to be to adapt to the new world.
Which is so different from all of the other big technology companies out there. They are all wedded to a particular vision of what they are. Totally, because these are all different strengths. Like they aren't afraid of copying. Okay, that is a strength. But that's also a completely different thing than
I'm going to place bets on what I think is going to be the big technology wave of the future and spend tens of billions of dollars on that. That's a different way of winning.
Yeah.
In some cases I'm gonna try to leverage my
existing network effect.
to make sure I adopt someone else's social mechanic.
Okay.
That worked in a handful of these scenarios.
But
That's not at all what works in others.
They don't just have one singular playbook that they run over and over again. Right.
Right. This company moves like water and
Product
is an active discovery there. I'm convinced.
It's not
Pure invention.
You asked Mark that uh on stage. And there's some stuff they have to invent, like Orion, you have to invent, but software where you can ship and quickly respond to user feedback and iterate, it's like they're chisel away at the marble to find David. I don't think they have David in mind when they're starting.
Most of the time.
There are a few moments where they did.
Newsfeed is completely one of them.
Inventing the social feed is a
completely distinct and brand new thing that Meta created.
It's actually one of the few.
Yeah.
When I was a little bit more bearish on the future of reality labs, I was trying to come up with has Meta ever successfully
created something new that has become a profit center for them.
that is like not adopted from someone else.
Well, I think the tagging of photos was pretty novel. Yes.
And newsfeed.
Yep.
But it's like kinda funny that we're naming those things as platform as short lived as it was.
No.
That was a we wish we had an operating system, but we don't. So let's see if we can convince people that this is a sufficient platform.
Well, I think building a real
Honest to God platform with
hundreds of thousands, if not millions, of developers making money on it.
on the open web. Okay. Fair pushback. It was totally novel. Like nobody had done it without an operating system before. And like
Maybe there was going to be a social platform in this new era. Yeah. Maybe that was an operating system of sorts or on par with operating systems to be able to create a platform on top of.
But I take your point. It's certainly not
Every turn of the game where
There.
Inventing. They're doing
A lot of discovery here. Right.
And maybe all companies do and you know, there's not something distinct to meta here and and everybody learns from each other, and that's fine too. But
That was something that I was racking my head on thinking through. In fact, there's even a testimony this is kinda funny.
In the Mark Zuckerberg versus the Winkelvoss.
Case from way, way, way back when
Mark even makes some comment about, Well, actually the idea for Facebook wasn't even new because MySpace and Friendster existed. So it's like this interesting positioning of the whole thing itself is actually a borrowed idea, which of course served him well in that particular case.
But the point sort of stands is like
so much of this is borrowed and we just live in a world, especially in social, where
You do kinda have to just
Maybe this is media as a whole. Observe what the new format is and adopt it as quickly as possible.
Yeah.
So speaking of trying things.
I just wanted to take a moment.
Two
Honor all the failures.
I kept a running list as I was as I was doing my research.
on products that either or just didn't live up to the hype.
Facebook Live.
Facebook watch.
The uh
Drone, the solar power drone that they developed.
To provide internet access? Oh yeah, that's right.
That was like a whole big thing for a while that Yeah, that's right.
Mark was actually two for three on he was forecasting like in twenty fifteen, what are we gonna be focused on ten years from now? That was one of them. But the other two were augmented reality and AI.
It's kind of an impressive call.
Portal.
Portal TV.
Workplace.
Which as far as I can tell, Facebook is the only company in the world that actually uses Workplace. No other enterprise has ever adopted it. I'm sure that's not like exactly true, but that feels approximately true.
Yeah.
Beacon.
Facebook Deals, which was their Groupon clone. Oh, that's right. Think about how nimble Facebook is that they're like, Oh, uh oh, this social deals thing seems to be gaining traction. Maybe that's a
core part of the platform that needs to be a piece of this in the future. I mean, they just had zillions of these Facebook gifts. Do you remember gifting and you could use Facebook credits to to pay for them?
Facebook credits.
I mean, I think.
On top of Facebook credits, uh Libra.
Oh boy, yeah. Wow, we didn't even talk about that.
Whole chapter on crypto. Yeah.
They invented
A whole new you know
cryptocurrency and a big consortium around it and a huge set of investors and other Fortune five hundreds.
Originally Facebook Messages was going to be a Gmail killer.
You could email people into Facebook messages and use that as an email suite.
Facebook places when
I mean four square was
almost on par for a period of time with Instagram and Twitter as
plausibly the next social mechanic checking in places.
And Facebook Places was a real effort. Hey.
Now it just turns into tagging location on posts, but like
A first class post in newsfeed for a while was a check-in on Facebook places.
Yep.
And then there's all the independent apps. Lasso, Poke, Slingshot, Photos, Hello, Facebook Gaming.
Life stage, moments, notify, Facebook watch, moves, all the things they acquired, TBH.
Beluga. They launched IG TV.
This company tries everything.
Yeah.
They move like water to discover what they need to be.
through an ever changing environment.
So true.

All right. That's it on the failures. What else you got?
Well, almost sort of the opposite of the failures.
It's quite ironic that
that Facebook became
The prototypical startup.
Given
that the goal was never to be a startup. Yes. The goal was first to be a project
And then

A very profitable business. The largest empire in the world. Yes. There was no in between of like we are building a startup here. It was like
College project.
Oh, let's connect all the people in the world and let's get big really, really, really fast and skip this whole small company thing.
Right.
That's such a good point.
And all this whole generation, multiple generations now of startup founders that have really like
embraced and romanticized this whole startup thing. On the one hand, like it's great. Silicon Valley's so much bigger and there's so much more investment and there's so many more VCs and all that.
But it's also just all kind of ironic that it's glorifying this startup phase when that is not the point.
Deeply.
Okay, so then we've touched on this one a bunch, but I kinda wanna put a pin in it. Why
has Facebook always been in a precarious position? Why do they need to keep fighting these existential battles? Why are they so obsessed with building a platform
I think the answer is they want to be as durable as a company that makes hardware with an operating system that all the users use and all the developers have to target because all the users are there. I think that's like
What they really want.
But because they've never had quite that much defensibility, you know, like oh a network effect is good, but it's not as good as that incredible platform durability. They're always trying to
Expand.
And
B more.
Every time they bump up against someone else.
it kind of creates a problem for them. And so
I'm using a bunch of weird metaphors here, but it just seems like
the place that they occupy in the technology stack
Is just not
Quite.
Privileged enough.
to do the things that they want to do. And so they're always at the whim of someone else knocking them around.
Yeah.
I think that's right. And it will be very interesting to revisit this again in five years or ten years.
Yeah.
Part two in ten years. Yeah. Right.
And then as we as we drift to a close here.
The engineering
culture and being a technology company at their core has been
Essential.
Early on they really did manage to hire only A plus and then stay A plus
After that.
forever and ever and ever. It was just this badge of honor if you were an engineer at Facebook.
For product design too. I mean they just had
Such a great
Talent density.
The set of
Things.
That they
Did on the technical side.
Were
over and over again a way to have their cake and eat it too.
If you can move faster.
you can learn more through your multiple iterations.
And so
speed of
Development comes from having great tools.
One very great shining example of this.
is something called hip hop for PHP.
I know this is very esoteric, but
In the late two thousands, they had this crazy idea that what we should do instead of switch to
C or C plus plus or Java.
We want our engineers to keep writing PHP. So they wrote a compiler.
To see.
So they didn't have to take the performance hit from running
PHP, which was an interpreted language.
But it also scolved this like scalability problem because then they didn't need to go hire all these systems level programmers. They could hire web developers who wanted to move with that.
pace and flexibility while also having the infrastructure.
to run these massive systems and scale really efficiently.
And then that solved the scaling and performance problem, but again in twenty fourteen
they realize, oh crap, we're big enough and we all have enough sensitive data that we really should switch to
A statically typed language like Java or C sharp.
But again, they didn't want to force their engineers to learn that. They didn't want to uh people who code in those languages have a different culture than existed at Facebook too. They couldn't really recruit people.
So they invented a new language called Hack that was very similar to PHP but had static typing.
Over and over again, I mean, Tau was another example of this NoSQL database. They just keep finding ways.
Where they like
invent new technology to solve a problem that probably only exists for them.
And then they create this like whole
Boutique system.
That allows
A having world class talent, B to have a ton of them and
C, everyone gets to move fast.
But then D, it's all unbelievably performant and efficient, and they just don't have to make trade offs. It is wild.
Yeah.
Okay.
Then my second technical one in addition to this is
They are their own customer.
We've talked about this. They're a
AWS scale.
Technology company.
but they don't take outside customers, so they only have to build for their own internal use cases.
Now this sounds great, but it actually does have these big trade offs. You can't
dramatically change what your infrastructure is used for. It is purpose built, but it does let you be incredibly efficient and have high performance.
If you have good communication between the customers, sort of the app team or the backend service,
and the designers of that data center.
This is completely the opposite of Amazon.
Amazon uses interface so teams don't have to talk to each other.
at meta, they require incredibly tight communication.
It's a very different
organizational philosophy.
Where they're like, no, no, no, not only do we not have external customers, we want this insane type coupling between our infrastructure and our internal customers.
Anyway, my last one.
This is a company that grows.
Intentionally.
it would be easy to look at this company and say
Wow.
What a viral product.
What a universally applicable product.
That is not the case.
It is unnatural.
To have
connected four billion humans. This is a freak of nature.
This is not just something that people adopted.
And so
While I think it is totally fair to say, wow, it just like blew up at Harvard.
Facebook is the story of 50 different growth tactics in different eras, all carefully constructed and iterated upon. Weight lists at colleges, strategically launching at every single college, picking each one for a reason, translation, internationalization, zero rating with carriers to bring new people online.
Figuring out when they needed to acquire versus build.
Carefully split testing every change.
aligning the whole company on specific networks, on specific metrics.
I mean
building relationships with governments in all these different countries and at the very least complying with local laws on
Where should we have certain speech laws versus not? I mean, it is
completely unnatural for them to have done what they've done.
And
It's all been
very, very intentional to connect the world.
Yep.
Okay.
Last playbook theme I've got.
There's always another battle for meta.
Yeah.
It's funny. I think you could be listening and uh think like, Oh yes, there's always another platform battle ahead for Meta and that's
Probably true, but
I think you actually mean like another
societal battle ahead for Meadow, right?
Totally. Yeah. Now that they're through the user privacy issues.
And the many years of the whole twenty sixteen election conversation we talked about and
I'm not gonna list them all here. The many, many societal conflicts that they've had over and over again.
The current issue for them is around the impact of social media on mental health and in particular.
mental health.
Yeah.
Totally.
And it feels fitting to put this near the conclusion of the episode because while going deep on this wasn't a part of our understanding of how and why meta as a
Business.
work so well, it is a really important topic.
There's a lot of people making arguments that social media is bad for our brains, and the consequences if that ends up being globally true.
is catastrophic for meta.
probably a bigger challenge than they've ever faced at any other point in history. So if you're asking
What are the things to keep an eye on going forward for them?
It is of course all the
product innovation and the growth of the existing business and trying to invent the next platform and everything we've talked about. Orion and everything. Yep. Yeah.
But it's also how the mental health
Issue understanding
all that unfolds and how they handle it.
Yeah.
Totally.
All right.

Let's land the plane.
How are you liking this, by the way, this land the plane way of
Finishing episodes.
Ah, well I actually have a proposal for you, Ben. Ooh.
I don't think we have landed.
Pun intended on the right nomenclature here. Or the right um
Construct.
So I actually we've been calling this land the plane, takeaway the splinter in our minds. Like what's the one thing that's not gonna round for you? Yeah. What is the essence of this company? So I propose
That we change the name of this final segment to
Quintessence.
What is the quintessence. Yes, this is my
Inner.
French literature major coming to bear here unacquired listeners.
What is the essence of this company? We've just spent all this time, all these months studying this company.
What is
the very essence of this company that makes it different from any other out there.
Mm.
Alright, I like it. The quintessence.

Ultimately my big takeaway is the company moves like water.
It is the company that has connected the world.
That
Well
Always gear up for the next battle and
be whatever they need to be in the next era. And whether it's them defining the next generation of computing.
Or
creating all these AI experiences or
fending off the next TikTok or the current TikTok, like
They just move like water.
Yeah.
I totally agree. I can't think of a better
Characterization.
Of
this company and how they got to be so darn important in the world.
Perfect place to end it.
And ultimately.
It is st still very much a Mark Zuckerberg production.
Yes.
That too.
All right.
Quick carve outs.
Quick carve outs.
My quick carve out is
A Google product actually, Notebook L M.
This is freaking wild. Our friend Ben Gowen over at the Wall Street Journal who wrote the great piece on Acquire a few months back.
Texted us, what was this, two weeks ago, maybe? Yeah. A week ago.
And no, it was like, Have you guys tried this thing, Notebook L M? And I think you hadn't.
me being me, I hadn't. I was like, no, let me check it out. I uploaded
Just
the links to the sources that I used for my side of the research for the Microsoft Part One episode.
Just links.
And when it spat back out of me, I was like, holy
Crap.
Yeah, at this point I think we're well past the Turing test, but it is sort of the most
Convinced.
that's something is actually a person I've ever been.
And if I didn't upload all the sources and know that it was like unbelievably tailored content to the thing that I just uploaded.
Not sure I would know that it was AI.
It's pretty amazing.
I have two. One is a documentary on Netflix called Mr. McMahon.
I was not a pro wrestling person growing up. I kind of want to go be a pro wrestling person now.
This documentary is incredible.
It is some of the best storytelling I've ever seen. And interestingly, it's a documentary.
That is told with no narrator.
So there is story arc.
All throughout the episode.
Exclusively with
Interview answers.
Mm. And you almost don't notice
At some point you s finish an episode and you're like
Wait.
There was no narration in that. There was no cheesiness. It was all
first party accounts and then cuts to like old footage of things that aired on TV. And then you the credits come up and uh of course it's a ringer production, Bill Simmons is the executive producer.
It is remarkable.
And uh
Mr. McMah as a singular figure in the world.
Certainly not to be glorified, but one to try and understand.
Oh man.
Be fun to do a WWE episode someday.
Yes. My second quick one is the Dwarkesh podcast. I love the Dwarkesh podcast.
I also loved war cash and I think that
If you like this show, you'll love listening to the interviews he does.
uh most recent one, or maybe it was a couple ago, is with uh Daniel Yurgen, who is the author of The Prize.
Which is a book, David. You and I almost
read a whole bunch of it for Standard Oil, and then we realized the Standard Oil sort of over at least the chapter of Standard Oil that we were covering within like the first two chapters of his book. And so it's basically everything from
the end of our standard oil episode forward on the geopolitic of oil that ended up shaping and informing our world today. And uh Dwarkash is just an amazing interviewer and conversationalist.
All right. Well with that, listeners.
We talked to a ton of people for research on this one. And while we can't mention everyone,
In part'cause the list would just be too long. In other part we'd some folks
Asked not to be thanked. We do have some specific ones that uh we want to give a shout out to. So
Alex Schultz, the CMO head of growth analytics internationalization.
Great to talk with.
Boz, Andrew Bosworth, the CTO, Stephen Levy, who wrote the book, Facebook The Inside Story.
was generous with his time. Jim Briar.
who led Excel's series A investment in Facebook.
Yan Lacoon met as chief AI scientist Alex Heath at the verge for spending his time with me.
To friend of the show, Arvind Navarrothnam from Worldly Partners, who wrote an excellent research report.
kind of chronicling everything. Well, it's almost like a written version of this podcast. It's like a hundred page PDF that was awesome to consume kind of
to help me remember all the big beats of the story and that his research report is linked in the show notes.
to Arielle Zuckerberg, Mark's sister, Cheryl Sandberg.
Obviously long time COO
Mike Shrepfer, the former CTO and now senior fellow, to Pete Hunt.
early engineer who transferred from Facebook to Instagram post acquisition.
Naomi Glite, who we talked about, founding member of the growth team and the longest employee. Longest tenured meta employee at this point, besides Mark.
Yeah.
To Mike Vernal, former meta VP of Product and Engineering, and former Sequoia partner, Vijay Raji, former engineer and VP, now of course CEO of StatSig.
Aparna Ramani, a VP in AI, data, and developer infrastructure at Meta.
To Owen Van Nata.
Facebook's early COO
And David, I know you have a few as well.
Yeah, a few for me to Adam D'Antelo, obviously Facebook's first CTO, Dan Rose, early partnerships at Facebook and
Big.
Big final thank you that we owe to Chris Cox.
met as chief product officer and leader of the entire family of apps over there.
Really?
This whole
past couple months at acquired would not have happened.
Without Chris Cold emailing us.
What, about a year ago, maybe, and saying, Hey guys, I love the Nintendo episodes and
Because of that, we met Chris and because of Chris, Mark joined us on stage at Chase Center and now
Here we are doing this episode. So
Thank you, Chris, for making it all happen.
Yes. Essentially this episode came about'cause we had done too much research for the Mark interview and we were like, We probably should
Do the actual meta episode too.

Listeners, check out A CQ two and any podcast player. If you like this episode.
Listen to our NVIDIA series, listen to our Microsoft series.
Uh, I don't know, maybe go listen to our Standard Oil series.
Uh a lot of great acquired in the back catalog and uh discuss it with us in the Slack, acquire.fm slash slack.
With that listeners.
We'll see you next time.
We'll see you next time.
Who got the truth?
Is it you, is it you, is it you Who got the truth now