Its business model is threatened by lower usage and advertiser discontent
Big tobacco is what the bosses of several large technology firms have started calling Facebook in private and in public. The company has spent the past year fending off critics who claim it is addictive, bad for democracy and overdue for a regulatory reckoning. Being compared to the tobacco giants is one of the business world’s more toxic insults, but it is not the only unflattering analogy circulating. A lower blow is the suggestion that Facebook may become like Yahoo, the once high-flying internet firm that plunged.
Even a year ago the idea would have been unthinkable. The social-networking giant, which runs Instagram, WhatsApp and Facebook Messenger as well as its own core service, was thriving. But since January it has become mired in a series of controversies, misjudgments and missteps.
- It became clear that it had done too little to stop Russian interference in America’s election in 2016.
- It had to admit that it had shared the personal data of 90m users with outside firms without permission.
- It later suffered a data breach affecting 50m users.
.. The past week has brought more bad news. Mark Zuckerberg, Facebook’s chief executive, has been forced onto the airwaves to defend his second-in-command, Sheryl Sandberg, after the New York Times on November 14th published a report alleging that they had tried to downplay the extent of Russian electoral interference to the firm’s board of directors, and hired lobbyists and the kind of “opposition-research” firms commonly used in political campaigns, to deflect blame onto other firms and to tarnish critics. The revelations have cemented the idea that Facebook is “grossly mismanaged”, says an advertising executive. Its shares have fallen by 27% since the start of the year.
At its height, Del.icio.us was the toast of budding social sites known as Web 2.0, had millions of users, and served as a direct inspiration for sites like Reddit and Pinterest. Schachter talked to Intelligencer about his decision sell Del.icio.us to Yahoo in 2005 — and how it felt to watch as the company was mismanaged and sold off to a series of buyers before being permanently shut down in 2017.
In the late ’90s, I started a site called Memepool, and people would email me links. At 20,000 links, it got unwieldy. I’d copy and paste the URL into a text file on my Unix box, and then make a Unix comment mark — which is a hash — and a terse note, just a word or two. So, like, “# wifi.” A friend would ask, “Have you heard about this new Wi-Fi thing?” and I’d be like, “Yeah, I’ve been collecting stuff.” I would get the 15 links I had collected about Wi-Fi and paste them into a message.
Del.icio.us was a way to save things while wandering across the web with low cognitive overhead. You could save and tag. Tags were something I invented, they weren’t a thing before that. Instead of carefully organizing your bookmark folder, you added a word or two. And you could see what other people were working on, and share and contribute with them as well... People say VC is pattern matching, and we were so far out of the pattern that no one could really evaluate us. We got one or two term sheets, but they were small... Companies make you sign a “no shop” before they give you an actual offer, saying you won’t take their offer and turn around to a competitor and try to get a higher price... We went with Yahoo partially because it was the first company to make a real offer, but also because it had already started a major push into Web 2.0. It had already acquired Flickr; it had acquired Upcoming — it felt like it was trying to make a big change in what it did... There was also the technical consideration. The access to a search-engine indexer tech was super exciting. We were getting crushed by the traffic. We had like 30 or 40 machines in the data center, and we were adding to it every time we could. Yahoo told us, “We have a bunch of tech we could bring to bear.”.. Negotiating with Yahoo was very awkward because it would disappear for days. It turns out it may have been negotiating with Facebook at the same time. Yahoo led with a number and a bunch of terms, and then the lawyers went back and forth on terms and payouts, but the initial sale price never changed... The price of the acquisition was reported in the press at the time as $30 million … I’m fairly sure that “$30 million” is just journalist code for “We have no information; here’s our guess.” That’s the published number, and it’s a wild guess. The actual number is under NDA. It probably doesn’t matter now, since Yahoo isn’t even really a company, but it was definitely less than $30 million... The money was good, but if I had joined tech and risen through the ranks the normal way, it probably could have been about the same... I’ve since become an angel investor, and I’ve done just shy of 200 investments. And when founders sell, they wanna go out and celebrate. As often as not, they’re weird and awkward anyway, so it’s not like … I think a lot of time that selling is not the victory it seems. It takes away all of your forward momentum. Do you take building a product and being vibrant and known and trade that for cash? It may be the intellectually correct thing to do, to ensure your financial stability going onward, but it’s not emotionally rewarding in the same way... Once we were acquired, Yahoo helped us on the tech side, but not as much as it said it would. I think this is common for acquisitions. Before you’re acquired, you’re an important visionary. Afterward, you’re a crazy person who just wants to burn money.Any decision was an endless discussion. I remember once, we had to present to a senior vice-president. We had a 105-slide deck prepared, and we didn’t get past the second slide because they ratholed about one fucking slide. It was a miserable environment... It took a year for reality to set in. If you wanted to get hardware, you went to the “hardware request committee” with your proposal. They assumed that engineers liked spending money for no reason, so you’d have to go back and present again in two weeks. So there’s a month gone... On top of that, leadership had no vision or mission, so they couldn’t evaluate any decision. Upper management wasn’t taking risks, and everyone else was just optimizing to not get yelled at or stay at work late. My contract was that I had to stay for two-and-a-half years. At the end of my time at Yahoo, I woke up screaming a few times. It was a grind and super demoralizing.I don’t regret selling to Yahoo. But I do wanna know where it could have gone if I hadn’t sold at that point. Could it have been Pinterest or Facebook? Probably not Facebook. But clearly, the urge to collect is a broader thing than I satisfied with my product. What we had built was pretty narrow; it could have been broader and bigger. And I am frustrated about what happened with Del.icio.us at Yahoo. Yahoo Answers ended up being this huge thing, and the engineering team was doing both, and they ended up de-staffing Del.icio.us in favor of Yahoo Answers. Del.icio.us had, like, one engineer.
There’s a saying: “You can be rich or be king.” You can sell your company for as much as possible, or you can be in charge. Though maybe neither is entirely possible. When I founded my second company, we had seven people, and we still argued over what to do and how to do it. I was CEO and I still didn’t get my way.
Now he’s talking publicly for the first time. Under pressure from Mark Zuckerberg and Sheryl Sandberg to monetize WhatsApp, he pushed back as Facebook questioned the encryption he’d helped build and laid the groundwork to show targeted ads and facilitate commercial messaging.
Acton also walked away from Facebook a year before his final tranche of stock grants vested. “It was like, okay, well, you want to do these things I don’t want to do,” Acton says. “It’s better if I get out of your way. And I did.” It was perhaps the most expensive moral stand in history. Acton took a screenshot of the stock price on his way out the door—the decision cost him $850 million.
.. “As part of a proposed settlement at the end, [Facebook management] tried to put a nondisclosure agreement in place,” Acton says. “That was part of the reason that I got sort of cold feet in terms of trying to settle with these guys.”
.. That kind of answer masks the kind of issues that just prompted Instagram’s founders to abruptly quit. Kevin Systrom and Mike Krieger reportedly chafed at Facebook and Zuckerberg’s heavy hand. Acton’s account of what happened at WhatsApp—and Facebook’s plans for it—provides a rare founder’s-level window into a company that’s at once the global arbiter of privacy standards and the gatekeeper of facts, while also increasingly straying from its entrepreneurial roots.
.. Despite a transfer of several billion dollars, Acton says he never developed a rapport with Zuckerberg. “I couldn’t tell you much about the guy,” he says. In one of their dozen or so meetings, Zuck told Acton unromantically that WhatsApp, which had a stipulated degree of autonomy within the Facebook universe and continued to operate for a while out of its original offices, was “a product group to him, like Instagram.”
.. So Acton didn’t know what to expect when Zuck beckoned him to his office last September, around the time Acton told Facebook brass that he planned to leave. Acton and Koum had a clause in their contract that allowed them to get all their stock, which was being doled out over four years, if Facebook began “implementing monetization initiatives” without their consent.
.. The Facebook-WhatsApp pairing had been a head-scratcher from the start. Facebook has one of the world’s biggest advertising networks; Koum and Acton hated ads. Facebook’s added value for advertisers is how much it knows about its users; WhatsApp’s founders were pro-privacy zealots who felt their vaunted encryption had been integral to their nearly unprecedented global growth.
.. This dissonance frustrated Zuckerberg. Facebook, Acton says, had decided to pursue two ways of making money from WhatsApp. First, by showing targeted ads in WhatsApp’s new Status feature, which Acton felt broke a social compact with its users. “Targeted advertising is what makes me unhappy,” he says. His motto at WhatsApp had been “No ads, no games, no gimmicks”—a direct contrast with a parent company that derived 98% of its revenue from advertising. Another motto had been “Take the time to get it right,” a stark contrast to “Move fast and break things.”
.. Facebook also wanted to sell businesses tools to chat with WhatsApp users. Once businesses were on board, Facebook hoped to sell them analytics tools, too. The challenge was WhatsApp’s watertight end-to-end encryption, which stopped both WhatsApp and Facebook from reading messages.
.. For his part, Acton had proposed monetizing WhatsApp through a metered-user model, charging, say, a tenth of a penny after a certain large number of free messages were used up. “You build it once, it runs everywhere in every country,” Acton says. “You don’t need a sophisticated sales force. It’s a very simple business.”
.. Acton’s plan was shot down by Sandberg. “Her words were ‘It won’t scale.’ ”
.. “I called her out one time,” says Acton, who sensed there might be greed at play. “I was like, ‘No, you don’t mean that it won’t scale. You mean it won’t make as much money as . . . ,’ and she kind of hemmed and hawed a little. And we moved on. I think I made my point. . . . They are businesspeople, they are good businesspeople. They just represent a set of business practices, principles and ethics, and policies that I don’t necessarily agree with.”
.. When Acton reached Zuckerberg’s office, a Facebook lawyer was present. Acton made clear that the disagreement—Facebook wanted to make money through ads, and he wanted to make it from high-volume users—meant he could get his full allocation of stock. Facebook’s legal team disagreed, saying that WhatsApp had only been exploring monetization initiatives, not “implementing” them.
.. Zuckerberg, for his part, had a simple message: “He was like, This is probably the last time you’ll ever talk to me.”
.. Acton graduated from Stanford with a bachelor’s in computer science and eventually became one of the first employees at Yahoo in 1996, making millions in the process. His biggest asset from that time at Yahoo: befriending Koum, a Ukrainian immigrant he clicked with over their similar no-nonsense style.
.. WhatsApp, persuading a handful of former Yahoo colleagues to fund a seed round while he took on cofounder status and wound up with a roughly 20% stake.
.. two things sparked Zuckerberg’s mega-offer in early 2014. One was hearing that WhatsApp’s founders had been invited to Google’s Mountain View headquarters for talks, and he did not want to lose them to a competitor.
.. He recalls Zuckerberg being “supportive” of WhatsApp’s plans to roll out end-to-end encryption, even though it would block attempts to harvest user data. If anything, he was “quick to respond” during the discussions. Zuckerberg “was not immediately evaluating ramifications in the long term.”
.. told them that they would have “zero pressure” on monetization for the next five years.
.. Facebook prepared Acton to meet with around a dozen representatives of the European Competition Commission in a teleconference. “I was coached to explain that it would be really difficult to merge or blend data between the two systems,”
.. Later he learned that elsewhere in Facebook, there were “plans and technologies to blend data.” Specifically, Facebook could use the 128-bit string of numbers assigned to each phone as a kind of bridge between accounts. The other method was phone-number matching, or pinpointing Facebook accounts with phone numbers and matching them to WhatsApp accounts with the same phone number.
.. Within 18 months, a new WhatsApp terms of service linked the accounts and made Acton look like a liar. “I think everyone was gambling because they thought that the EU might have forgotten because enough time had passed.” No such luck: Facebook wound up paying a $122 million fine for giving “incorrect or misleading information” to the EU—a cost of doing business
.. Linking these overlapping accounts was a crucial first step toward monetizing WhatsApp. The terms-of-service update would lay the groundwork for how WhatsApp could make money. During the discussions over these changes, Facebook sought “broader rights” to WhatsApp user data, Acton says, but WhatsApp’s founders pushed back, reaching a compromise with Facebook management. A clause about no ads would remain, but Facebook would still link the accounts to present friend suggestions on Facebook and offer its advertising partners better targets for ads on Facebook.
.. By then, three years since the deal, Zuckerberg was growing impatient, Acton says, and he expressed his frustrations at an all-hands meeting for WhatsApp staffers. “The CFO projections, the ten-year outlook—they wanted and needed the WhatsApp revenues to continue to show the growth to Wall Street,”
.. Internally, Facebook had targeted a $10 billion revenue run rate within five years of monetization, but such numbers sounded too high to Acton—and reliant on advertising.
.. Acton had left a management position on Yahoo’s ad division over a decade earlier with frustrations at the Web portal’s so-called “Nascar approach” of putting ad banners all over a Web page. The drive for revenue at the expense of a good product experience “gave me a bad taste in my mouth,” Acton remembers. He was now seeing history repeat.
.. He has supercharged a small messaging app, Signal, run by a security researcher named Moxie Marlinspike with a mission to put users before profit, giving it $50 million and turning it into a foundation. Now he’s working with the same people who built the opensource encryption protocol that is part of Signal and protects WhatsApp’s 1.5 billion users and that also sits as an option on Facebook Messenger, Microsoft’s Skype and Google’s Allo messenger. Essentially, he’s re-creating WhatsApp in the pure, idealized form it started: free messages and calls, with end-to-end encryption and no obligations to ad platforms.
It’s about to get worse: President Trump’s F.C.C., under the leadership of its fiercely deregulatory chairman, Ajit Pai, wants to let these companies become even more powerful by letting them do whatever they want and allowing them to merge with one another.
.. pushed Congress to erase rules that would have constrained these companies from using and selling our sensitive online information.
And he is getting ready to wipe out the classification of high-speed data services as a utility — even though, without this legal label, the F.C.C.’s authority to require these five companies to treat their customers fairly will be fatally undermined.
Mr. Pai is responsible for a sector that accounts for a sixth of the American economy. But even that is an understatement: Everything we do, from manufacturing to governance, requires reliable, inexpensive, world-class data transmission.
.. Perhaps the most immediate concern is the commission’s so-called net neutrality rule .. Mr. Pai has put dismantling this structure at the top of his agenda.
.. It’s not just that the existing giants want free rein over their customers. They also want even greater scale and even greater involvement in content as well as distribution
- .. Comcast bought NBCU
- .. AT&T, which already swallowed up DirecTV, wants to buy HBO’s and CNN’s programming through an $85 billion merger with Time Warner.
- .. Verizon already bought AOL, is about to absorb Yahoo
.. Other countries — South Korea, Sweden, even China — have made the widespread adoption of universal, inexpensive, high-speed data transmission a priority.
.. understand that markets, if left to their own devices, won’t deliver this benefit to all citizens.