Facebook’s history is marked with drama, intrigue, and he-said-she-said. So much so that Hollywood made a lot of money off of it.
But we’re not here to talk about all that. If you want to learn about Harvard, incriminating messages, and abuse of administrative server rights, there’s 2 hours of Jesse Eisenberg and Andrew Garfield that can lay that story out for you.
We’re here to talk about what happened after all of the drama. How did Zuckerberg – a 19-year-old kid with a gift for coding – take Facebook’s (kinda) humble social media origin and create the empire he’s known for today?
It wasn’t only Zuckerberg’s genius – as much as he’d like us to believe it. It was a symptom of the single most valuable thing about Facebook: its business model.
Facebook has no cost associated with goods, spends no money on marketing, and incurs exactly no cost in selling ad space on their site.
And Facebook made $18.5b last year, which was a 16% decrease from 2018 – likely in part due to The Zuck’s bizarre and intensely noncommittal Congressional testimony.
Regardless of one’s opinion on Facebook, any company that can turn an $18.5 billion profit while incurring almost no costs is doing something right, and – brace yourselves – we could all take a page out of the Zuck’s FACEbook. (Not sorry, it had to be done.)
Let’s dive into Facebook’s history and see how Zuckerberg and FB’s early business decisions led it to surpass Apple, Google, Netflix, and Amazon’s profit margins.
Funding Facebook’s History
Part of what makes Facebook’s history so compelling are the investments that got it off of the ground. While Peter Thiel goes down in history as Facebook’s first investor, he wasn’t truly.
Initially, a man named Eduardo Saverin (who the movie The Social Network is about) gave Zuckerberg $15,000 to support his servers in exchange for a 30% stake in the company.
Saverin, who now says he holds “no hard feelings” for the Zuck, was removed from the Facebook’s leadership but was eventually granted 2% when he sued the company for breach of fiduciary duty.
After Saverin’s ousting, Facebook secured Peter Thiel’s angel fund of $500,000 for 10.2% of shares in the company. While it wasn’t possible to value Facebook at the time, the first round of funding determined its value.
Accel Partners was the first to invest with $12.9 million in April of 2005, and the company’s value was set at $98 million. Then Series B & C funding drew in $425.5 million by March 2008, and Facebook’s value was set at $15b.
Since then Facebook’s value has risen and fallen, and risen and fallen again – often in conjunction with Zuckerberg’s public addresses.
To Pay or Not to Pay Was Never a Question
Zuckerberg said it then and says it (but more defiantly) now – Facebook is and always will be free. The Zuck would have you believe that it’s purely out of the kindness of his heart. It’s right there in the mission: to give people the power to make connections and build community.
While it’s a stone’s throw from the original “To give people the power to share and make the world more open and connected,” it should be noted that sharing is apparently no longer considered necessary for Facebook to accomplish its mission.
But if people aren’t sharing, how does Facebook get paid? The answer lies in the business model they refuse to change.
One comes from advertising, something everyone and their grandparents are aware of. You pay Facebook to show your advertisement to a specific set of people based on the parameters you provide.
The second comes from commission charges on in-app purchases. Don’t worry, this doesn’t mean you’ll be shelling out 30% of the sale of your ’98 Kia Sportage. But you will be shelling it out on every stack of FarmCash you buy.
The third, however, is what landed Zuckerberg and Facebook in hot water with the suits of all suits – the American government. The third form of profit for Facebook is in selling its users’ data.
Facebook has amassed around 1.69 billion users. Each of those users has a varying amount of personal information on their profile – information Facebook uses to market to advertisers.
In the early days, Zuck had to make a decision about this. His background in psychology helped him understand the way people would interact with a site that was free vs. one that was subscription-based. Being the intelligent man he was, he realised that far more people would sign up for a free site.
The genius is that he also realised the information 1/7 of the global population would provide to that free site would generate far more revenue than the subscriptions fewer people would be willing to pay anyway.
Maybe it was Zuck’s altruism. Maybe it was a savant-level market prediction on Zuckerberg’s part. More likely it was a combination of both.
Zuck likely really wants to connect the world. Genius doesn’t often come to people without any awareness of the bigger picture. But that same good heart put a lot of money in his pocket after a while, and he realised bucking this specific system would cost him a lot of money – regardless of the moral implications.
This is probably what we all think of when we think of Facebook’s profits. The ads we see on the sides of our pages and in banners between our friends’ posts were placed there by intrepid businessmen who wanted Facebook’s knowledge of who would be most likely to buy their products. Those algorithms chose us based on the information Facebook gathers from our profiles, and thus that ad was shown.
Advertising campaigns range from tens of dollars to thousands and are a proven method of increasing visibility for your brand. Anyone from a self-employed artisan to a multi-billion dollar organisation profits from advertising on Facebook, so this profit line will not dry up in the foreseeable future.
As you broaden your target range, your costs increase. This is also part of the genius of Zuckerberg and his team in creating the Facebook empire.
In creating a tiered payment structure, no one is excluded from the space. And in being able to select both the specific statistics and how many of them you’d like to use in your campaign, they’ve created an endlessly customizable advertising experience that can tailour to multi-millionaires and mom-and-pop shops alike.
Commission on In-App Purchases
Facebook used to make a hearty portion of their profits on in-app purchases for integrated apps by mobile developers like Zynga (their highest earner).
Whenever a gamer on a bender would spend money to purchase in-app items, Facebook would take a whopping 30% of the top of the transaction. Many speculate that the hefty price tag is in part due to Zuckerberg’s disdain for other developers (he currently stands accused of hacking into rival and prior teammate ConnectU’s servers in order to sabotage them).
But the sad fact of the matter is that even if Zuck hadn’t been charging such a high premium for Facebook’s prime real estate, the market quickly shifted away from microtransactions in Facebook-based web apps in favor of smartphone apps whose marketplaces charged much less.
This unfortunately caused Facebook to shift heavily toward advertising as their primary source of revenue.
At face value, it’s harmless enough. Penny Painter uses Facebook to advertise her shop on Main Street to the locals using gender and geographic location as a parameter.
The sinister nature of Facebook’s rise to power comes in the way Facebook manages this data, the data users willingly input into their Facebook profiles.
Information and Datamining
Facebook gathers data from its users as a byproduct of its very nature. How can people find and connect with you if they can’t identify you? No one argues the necessity of this, and if Facebook kept that data to themselves, we wouldn’t be having this “conversation”.
But Facebook doesn’t keep that data in-house. Facebook sells your data to companies that use it for various purposes – namely advertising.
This means that when you post about hating Trump or Biden, Facebook can sell that data to Trump and Biden’s SuperPacs, who will then use that data to advertise specifically to you on – you guessed it – Facebook.
But it’s not just about politics! Information and oil are argued as the most valuable commodities on the planet. There is a literal wealth of data on Earth today, and people have no idea what the companies they’re sharing it with are taking from them.
Allowing cookies on a web page gives that site permission to harvest and store a unique, random browser ID they create for you so they can improve their site. There are multiple types and uses for things like tracking new vs. returning users, time spent on certain pages, etc.
It’s why the Cookie Law was enacted, and why websites have to ask whether or not you’re ok with them storing your information.
The problem is that Facebook doesn’t ask, and more alarmingly they don’t tell. Neither what Facebook takes from you, nor whose information Facebook collects, nor how they store and mine this data is clear.
And Zuckerberg fights adamantly to keep it that way, though the reasons are his alone.
While it’s fair to say most companies will try to spin things to their favor, the Zuck’s knowledge of psychology is apparent during his perplexing addresses with lawmakers. When asked what data Facebook takes, how long they hold it, who they take it from, and just about every other question asked of him, Zuckerberg answered with a standard “Mr./Mrs. [TITLE], I’m sorry but I don’t understand the question.”
How Does Facebook Work Without Marketing?
What modern company can say they spend nothing on marketing? What’s more, how can one of the largest companies in the world be one of the only ones to do it?
Facebook’s very nature is an answer to this question. The sharable, viral use of the platform has created a situation where using Facebook inherently promotes it. Want someone to see what’s on so-and-so’s Facebook? They can’t without a profile.
But don’t worry! It’s free and always will be.
In other words: Facebook is all Facebook needs to advertise Facebook.
Because Zuckerberg built and sustains a business model that does not profit from its direct users, it relies almost entirely on the advertisers who purchase ad space on Facebook’s platform.
In doing so, they completely remove the need to market to new users, focusing instead on its Facebook for Business platform. It’s not hard to guess where they advertise it. Yep, on business Facebook pages.
Facebook’s Founding Tech Mystery
Zuckerberg’s made a name for himself by debating the nature of “transparency” (read in a sarcastic Zuck voice with air quotes) in order to justify its absence from Facebook’s updated 5 core values.
This extends to the technology Zuck used to code Facebook’s (then thefacebook.com) initial platform. He’s never spoken about what programs or applications he used, but fortunately for curious souls, 2004 didn’t have the overloaded technology market we see today.
In 2004 FreeBASIC was released, and we already know The Zuck was a BASIC prodigy. Java, C++, and PHP/Linux (likely used one or the other) were all already around, though they’d only been for around 9 years.
The Zuck would have had to use a combination of Java, C++, and BASIC (or some equivalent) to code Facebook’s framework and fill it in. Relative to most sites, it’s graphically basic – simple colours shapes, and animations with minimal shading – and the mechanisms that make it work are pretty simple as well.
But don’t let some dudebro at a party tell you that he/she could have done it in an hour or so. Coding in 2004 was still manual. That is to say that you had to type out every character of code (modern platforms have copy/paste archives), and the process of troubleshooting was far more involved.
While we’ll probably never know for sure what Zuckerberg used to build Facebook, we can at least guess. Maybe one day those tight lips will open just enough to tell the world how he built his empire.
One can only hope.
What Facebook’s Dramatic Social Media Origin Story Tells Us
From humble dorm room social media origins to Facebook’s launch, Zuckerberg has singlehandedly written the history of Facebook. Most of us don’t like admitting that Facebook’s success is in large part to Zuckerberg’s genius.
But we have to.
Zuckerberg built a self-sustaining economy for himself. He created a platform that uses the way the human mind works to gain a massive user base, a website that is its own marketing platform.
While we’ll never know whether Zuckerberg was a true visionary who foresaw the direction of the world and capitalised on it or a savant coder who got very, very lucky, what we do know is that he created an entirely new landscape for internet users.
If this is about all you could hear about Facebook for today, head on over to our other web pages to see what alternatives to Facebook exist – and how you can take a dollar our of Zuckerberg’s pocket if that’s your thing. They’re out there, and when Facebook finally falls from power, you’ll need to know what they are.