The Facebook Defect

14 minute read
David Kirkpatrick is a longtime technology industry journalist, author of 'The Facebook Effect,' and founder of Techonomy Media. He is now focusing on climate tech and the climate emergency.

Mark Zuckerberg barely even thought of Facebook as a business. The first time I met him, in September 2006, he effused in big-picture terms about what he called Facebook’s “mission”: “Helping people understand the world around them.”

His scope and focus impressed me, so I gave him what I meant as a big compliment. I told him he seemed like a natural CEO. He wrinkled up his face as if I had insulted him. “I never wanted to run a company,” the then 22-year-old replied, even as he admitted that “a business is a good vehicle for getting stuff done.” As I covered his company as a journalist in the months and years that followed, it became clear that doing something meaningful was his highest priority. But as crisis envelops Facebook, the question of its nature as a business is still not completely answered. This is uniquely odd, given the scale of the firm’s success.

A chain of revelations has befallen Facebook since the Observer of London and the New York Times reported on March 17 that data about tens of millions of users had escaped the company’s control in 2014 and was likely exploited by Cambridge Analytica in efforts to push Britons to vote their way out of the E.U. and Americans to elect Donald Trump. (The firm has stated it did not break any laws and neither worked on the Brexit referendum nor used the data in any form during the U.S. presidential election.) Then we learned that all of Facebook’s users have probably had their public data “harvested” by outsiders at some stage because of ill-conceived product designs. Its stock dropped 20% before bouncing back a bit. And Zuckerberg, famously uncomfortable under the spotlight, was summoned for grilling before both houses of Congress.

In response, Facebook has rushed through reforms at an unprecedented rate. New regulation appears certain, both in the U.S. and in many of the other 190 or so countries where Facebook operates. In all of them, political campaigns use Facebook ads and posts to sway voters. Zuckerberg was emphatic before Congress that he welcomes regulation and that he and the company are willing to help craft it.

Still, how could Facebook have let the way it handles personal data get so out of control? How could a company founded by an idealist reach a point where it’s widely accused of putting democracy at risk? How did Facebook end up here?

The answer, I believe, lies in that ambivalence about the company’s status as a business, an ambivalence that has existed since its founding. Is Facebook’s purpose humanitarian, to make the world “more open and connected,” as Zuckerberg has said for years? Or does it want to be the most efficient money machine in the history of capitalism? Up until now it has tried to have it both ways. And that has made it hard to avoid trouble.

Zuckerberg and Sandberg celebrate Facebook’s May 18, 2012, IPO
Zuckerberg and Sandberg celebrate Facebook’s May 18, 2012, IPO, which would come to be seen as a wild successZef Nikolla—Facebook/Bloomberg/Getty Images

Once Facebook caught on, doing something meaningful quickly got expensive. Even so, Zuckerberg hardly prioritized the company’s bottom line. According to a recent Facebook post by former board member Don Graham, in 2005, a full year after founding the company, Zuckerberg did not know the difference between revenues and profits. He had hired an advertising team but frequently overruled it when it proposed ads he considered intrusive. When the company was about two years old, he brought on a veteran to run sales and found it necessary to explain, “I don’t hate all advertising. I just hate advertising that stinks.” A few months later, Sprite offered to pay $1 million to turn Facebook’s homepage green for a day. Zuckerberg didn’t even consider it.

This all changed when Sheryl Sandberg, a master advertising strategist responsible for much of Google’s advertising platform, joined the company in March 2008. She wrote a question in big letters on a whiteboard at the front of the room where executives had gathered for brainstorming sessions: “What business are we in?” Sandberg had no doubt that Facebook was an advertising gold mine, but she needed support from numerous top leaders at the company who felt otherwise.

Zuckerberg had departed on an around-the-world backpacking trip, deliberately ceding the field so Sandberg could settle in and establish her authority. The reality was that he didn’t really want to think that much about how the company would make money. But in traveling alone to the ashram in India where his hero Steve Jobs had found inspiration, he kept discovering more evidence of how much the world needed to get connected.

Sandberg, as chief operating officer, has consistently cared deeply about how the company makes money. That was and is her job. “There has been this myth that everyone’s waiting for our revenue model,” she told me in 2009, when I was reporting my book The Facebook Effect. “But we have the revenue model. The revenue model is advertising. This is the business we’re in, and it’s working.”

Zuckerberg had bequeathed her a data-rich environment, which emerged because users made available to Facebook the information they shared with their friends. It was the first Internet site that people trusted enough to use their real names and identities on. The data they created turned out to be eminently exploitable — particularly if you wish to target specific groups of people to sell products, ideas or political candidates. It was better than anything advertisers had ever seen.

Wall Street analysts expect Facebook to earn more than $21 billion this year after taxes on about $55 billion in revenue, almost all from advertising. That margin of almost 40% makes it the most profitable company of its size in the history of capitalism, and almost twice as profitable per dollar of revenue as Apple. The profits generated by all those ads have funded rapid expansion and growth into almost every country on earth. Facebook now connects about 2.1 billion people, the largest aggregation of humans ever assembled.

It’s hard not to conclude that this success is at least one reason why Facebook failed to protect user privacy or take more steps to make it hard to interfere with democratic processes. The company was making heady progress on two distinct but, until now, mutually beneficial goals: growth (Zuckerberg’s obsession) as well as the ad revenue that paid for it (Sandberg’s department). Vigilance about security and privacy and controls on speech took a backseat. The serious steps that might have prevented the current crisis would have added cost and delay to their grand accomplishments. Protecting people might also have reduced the amount of time they spent on the service.

Two days after the 2016 U.S. presidential election, I interviewed Zuckerberg onstage at the Techonomy conference in Half Moon Bay, Calif. I asked him whether he worried that false information planted on his service could have played a role in the unexpected results. “The idea that fake news on Facebook … influenced the election in any way I think is a pretty crazy idea,” he said. He has spent much of the subsequent year and a half apologizing for that statement.

Facebook’s crisis is one of governance. The company faces excruciating choices in how to manage itself, what to communicate with users, what content to allow or ban and how to deal with governments. In many ways, it is more powerful than those governments, in that its reach expands beyond borders to take in the entire world. And yet this indispensable communications service for humanity operates as a big commercial company.

Zuckerberg was aware of the nature of what he was building for a decade, at least. A year after he hired Sandberg, he told me that one of the reasons he selected her was that he was especially impressed with her experience in government, which he believed would become increasingly relevant to running the company. Sandberg had served as Larry Summers’ chief of staff when he was President Bill Clinton’s Secretary of the Treasury. “In a lot of ways, Facebook is more like a government than a traditional company,” said Zuckerberg. “We’re really setting policies.” Sandberg proved to be near miraculous at building an ad business, and she is rightly an icon. But whatever she did in governance was clearly inadequate, as she has come to admit.

Make no mistake: Zuckerberg maintained absolute voting control of the company even after it went public. Everything rests on the inclinations and decisions of one 33-year-old. Luckily, he is far from the anxiety-ridden, Machiavellian caricature of the 2010 blockbuster The Social Network.

Even as Facebook continued in early 2017 to downplay the significance of Russian manipulation on its service, Zuckerberg surprised many by publishing an extraordinary 5,700-word document, titled “Building Global Community.” The manifesto was hardly what you’d expect from the CEO of a mammoth company. It was extraordinarily idealistic about Facebook’s opportunity and even obligation to address the challenges facing the world. It talked about reducing the scourge of fake news. It promised to introduce “a large-scale democratic process” inside Facebook, surveying users to enable them to help set standards to govern issues like permissible nudity, profanity or graphic content. (So far this appears not to have happened.) But curiously, it omitted any mention of advertising. It portrayed Facebook almost as if it were an NGO. Nowhere did its founder address how the company would pay for all these efforts or whether it would sacrifice ad revenue to pursue them.

Ambivalence about being a business whose shareholders want it to make ever more money is further manifested in a claim Facebook’s leaders have made throughout its history: they insist it is not a media company, even though, along with Google, it is one of the two primary beneficiaries of a systemic shift toward targeted advertising. But that’s been a convenient argument for why the company should not be subject to regulation. Zuckerberg allowed a gaping crack to emerge in this long-held axiom when he conceded to Senator John Cornyn of Texas on April 10 that “I agree that we are responsible for the content” on the service.

Some have called Zuckerberg naive, in attempting to explain his privacy oversights, but if so it is a naiveté reinforced by the sense of destiny that comes from making so much money, so quickly. Zuckerberg today is worth almost $67 billion, down from $70 billion before the crisis, but he is still the seventh-richest man on earth. Sandberg has garnered over $1 billion in Facebook stock. The CEO has promised to give away 99% of what he has to the Chan Zuckerberg Initiative, a charity he created with his wife Priscilla Chan (which would still leave him with $650 million). The initiative aims, among other things, to “cure all diseases” by 2100. Yet this wealthy idealist seems a bit perplexed that the world is not as good as he would have expected it to be by now. In a recent interview for the Freakonomics podcast, he conceded that “the world is today more divided than I would have expected for the level of openness and connection that we have.”

Although Zuckerberg and Sandberg always strive to present a united front, increasingly there appears to be a genuine possibility that their interests could diverge. For 14 years, Zuckerberg has avoided or misunderstood the decision that confronts him now. Which will Facebook optimize for: The privacy and well-being of its users? Or for the continued growth of its profits? How he reconciles that question will determine the future of the company. (A company spokesperson disputed this analysis but declined to comment for this story.)

Since Sandberg arrived, exactly a decade ago, there have been two distinct camps inside Facebook. Zuckerberg still considers himself above all a product person, a code-wielding engineer. Among the product people who report to him, most of them engineers, connecting all of humanity is the holy grail, and “Zuck” is a near god. They consider their top priority to be user growth. This group in some ways thinks of Facebook’s “users” as in fact its “customers,” and in general views their data as a precious asset that merits respect and care. Revenue and profit are not their concern. To the degree they understand themselves to have erred in creating the current mess, it’s because, they think, they were too trusting of people’s behavior and intentions.

Then there is the advertising side, under Sandberg’s supervision. They are, for all their successes, second-class citizens. They are resolutely focused on building revenue and serving advertisers. These people, most of them concerned with business, strategy or sales, view data as a tool. But for all Sandberg’s brilliance, she may find her world-class sales organization restrained by the controversy now raging.

The factions inside the company seem to be evolving a new relationship in real time. Part of the reason the entire crisis spun so far out of control is because for five days after the first reports of the Cambridge Analytica breach, the company issued nothing but reassuring bromides and a few fitful tweets. According to those close to the company, unresolved arguments raged internally about how to respond. According to one well-informed source, those on the product side generally advocated a forthright and contrite stance — after all, it was a product problem that had mostly been fixed. The advertising and marketing teams, by contrast, generally held that the concerns of the press and public were overblown and that the best stance would be to hold tight and concede little until it all blew over.

None of this diminishes the fact that Zuckerberg on repeated occasions has proved himself oblivious or inattentive to user-privacy concerns, or heedless of warnings about threats to democracy. (After all, back in 2007 he was the most ardent advocate for the open and lightly regulated applications that enabled collecting the kind of personal data that made its way to Cambridge Analytica.) He also has to pay the bills somehow. However much ads fail to excite him, he knows they do that best.

One of the most impressive things about Zuckerberg is his capacity to learn and to change, even if belatedly. He is clearly arriving at a new place. Many of his statements before the Senate and House stepped considerably beyond what the company has been previously willing to concede or advocate. Here’s how he formally concluded his prepared testimony before the House: “My top priority has always been our social mission of connecting people, building community and bringing the world closer together. Advertisers and developers will never take priority over that as long as I’m running Facebook.”

Does that mean he’s decided that the customer is the user, not the advertiser? Perhaps. Zuckerberg has repeatedly told investors in the past year that he expects profits will fall considerably as the company spends whatever is necessary to remedy the problems that led to the current crisis. He has estimated that it could take at least two more years to institute reform. That may be conservative. This is likely to be an ongoing, continuous calibration that will eventually lead to a fundamentally different relationship between Facebook and its various constituencies — users, advertisers and governments.

For too long, the maturation of Facebook’s management has failed to keep pace with its rise in global influence. Even insiders concede that. By being forced to answer questions he may have previously considered a distraction, Zuckerberg seems, to me, to have matured a great deal over the past few weeks. He is still, as he was when he was toiling in his Harvard dorm room, a true believer. But he is now realizing — by finally confronting the bad and not just marveling about the good — the full scale of what he created. He will take whatever measures he thinks necessary to achieve what he considers “community” and brings people “closer together.” For Mark Zuckerberg, buy-in from advertisers may well be less important now than buy-in from the world.

David Kirkpatrick is the author of The Facebook Effect and founder and CEO of Techonomy Media.

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