Mark Zuckerberg has prioritized increasing Facebook’s ad revenue. Reuters
MENLO PARK, Calif.— Mark Zuckerberg needed help. Facebook Inc. FB +0.54% ‘s initial public offering in May 2012 had been a mess. And after turning a website born in his college dorm room into a company valued at $100 billion, the young chief executive was under pressure to prove he could sell lots of ads on smartphones.
Facebook has seen its shares rise and revenue from mobile ads jump up. How did CEO Mark Zuckerberg turn the company around after its ill-starred IPO? Evelyn Rusli joins digits. Photo: AP.
So he went for a long walk a few weeks later through the center of Facebook’s corporate campus here with Andrew “Boz” Bosworth, a top engineer at Facebook and friend who once was Mr. Zuckerberg’s teaching assistant at Harvard University.
“Wouldn’t it be fun to build a billion-dollar business in six months?” Mr. Zuckerberg asked. He wanted Mr. Bosworth to help lead the company’s shaky mobile-ad business, then bringing in almost nothing. Another part of the job: figure out all the ways Facebook could make money.
Ads didn’t sound like fun to Mr. Bosworth, but his boss persisted. Soon, the engineer was filling in the blanks of a spreadsheet that grew to about 80 pages long. The entries became the manifesto of an in-house project that Mr. Zuckerberg called “Prioritization.”
Interviews for this article with the CEO, Facebook directors and executives, and dozens of other engineers, friends and former employees laid out how Mr. Zuckerberg’s growing attention to the bottom line was part of a sea change by the often-stubborn, idealistic 29-year-old chief executive once called “toddler CEO” in Silicon Valley. Taking Facebook public and reshaping it around mobile phones forced him to grow up.
“It’s a story of a vertical learning curve,” says venture capitalist Marc Andreessen, a Facebook director and longtime adviser to Mr. Zuckerberg.
Mr. Zuckerberg still wears jeans and a T-shirt to work, drives a black, stick-shift Volkswagen GTI and keeps the temperature in his glass meeting room, known as the “aquarium,” near 68 degrees to keep everyone alert. As a holiday gift, friends of Mr. Zuckerberg got socks decorated with the image of Beast, his white, woolly Hungarian shepherd.
Yet Mr. Zuckerberg has learned to embrace—or at least accept—the reality that he now is in charge of what might be bluntly described as the most visible advertising business in the world. It is a big leap for the college dropout who wrote in a letter to potential investors just before the initial public offering: “Facebook was not originally created to be a company.”
He embraced the idea in 2012 of selling more ads in Facebook’s prized “news feed,” the center of the screen where the social-networking site’s 1.2 billion members spend most of their time. The news feed is a constantly updated list of stories from people and pages followed by a Facebook user.
The intensified focus on advertising, long shunned as less important than the photos and status updates posted by users, generated a surge in new revenue from corporate giants such as McDonald’s Corp. and Wal-Mart Stores Inc. WMT -0.79% Analysts expect Facebook to announce later this month that its revenue jumped more than 40% in 2013 compared with a year earlier. About $3 billion of the company’s revenue—or more than one-third of the overall total—likely came from mobile advertising.
Facebook shares jumped 105% last year, compared with the technology-heavy Nasdaq Composite’s rise of 38%. On August 2, the stock climbed back above its IPO price of $38, erasing a $50 billion slide in stock-market value. Facebook closed Friday at $54.56 a share.
Still four months away from his thirtieth birthday, Mr. Zuckerberg is worth about $20 billion. Last month, he pocketed about $1 billion in his first stock sale since Facebook went public, and separately he donated about $1 billion in stock to the Silicon Valley Community Foundation.
Mr. Zuckerberg bristles at the view of some people close to him that he has changed as a CEO. His primary mission still is to connect the world digitally with Facebook. “It drives me crazy when people write stuff and assert that we’re doing something because the goal is to make a lot of money,” he says.
Even in his most self-reflective moments, what Mr. Zuckerberg sees is a series of logical moves and adaptations that are part of what he calls a “continuous trajectory.” In an interview, he paused abruptly after saying the words “business review.”
“Uh, I’ve never used that term before,” he said with a smile.
Despite all the improvements, Mr. Zuckerberg must show that Facebook can out-innovate a steady stream of upstarts. Investors were rattled in October when Facebook reported a decline in use among young teenagers, some of whom are migrating to newer mobile-phone apps such as Snapchat. Snapchat messages automatically disappear in 10 seconds or less.
Last fall, Mr. Zuckerberg approached Snapchat with a takeover offer for more than $3 billion. Snapchat’s 23-year-old chief executive said no. Facebook previously tried to create a similar app called Poke, with Mr. Zuckerberg even contributing some computer code, but the project flopped.
A secret project called Firefly included a “social” phone that was to be created with HTC Ltd. of Taiwan—but was killed by Mr. Zuckerberg in mid-2012 because of glitches, according to people who worked on the project. An app for Google Inc. GOOG +0.21% ‘s Android operating-system mobile phones, known as Home, has failed to gain momentum since last spring’s debut, despite a big publicity push by Facebook. And a smartphone released by HTC and based largely on Firefly’s design has been a dud.
Just a few years ago, Mr. Zuckerberg paid little attention to many of the numbers that are obsessions to shareholders. In 2010, he said there was “no point right now in having a massive profit.” He boasted that the ad business “factors in, like, not at all” to decisions about Facebook’s operating platform and user services. His No. 1 goal: increase the company’s total membership to one billion users.
“If you brought up revenue in an argument with Zuck, you would lose automatically,” says one former senior employee. He recalls being chided for mentioning revenue while discussing a new product. Mr. Zuckerberg says such comments are a reminder that Facebook was designed to care more about its mission than money.
At the time, most Facebook users looked at the site on a desktop computer. Ads usually were banished to the right-side gutter of the screen, the Facebook equivalent of Siberia.
By the end of 2011, though, the surging popularity of smartphones was causing Facebook users to spend less time on computers. “The IPO process surfaced how fast the mobile shift was happening,” says Facebook director Peter Thiel, a founder of PayPal and one of Facebook’s earliest investors. Executives worried that Facebook was falling behind at an alarming rate.
Internal data showed that many users were so frustrated by Facebook’s mobile software that they would quit the app and use their tedious mobile Web browsers to reach the social-networking site instead.
The smartphone shift also was a problem for Facebook’s ad business. There was no easy way for the company to relegate ads to the side of small screens, and Facebook had no mobile ads to sell anyway. Meanwhile, efforts to sell older types of ads on desktop computers were starting to lose their punch as more users embraced mobile devices.
“We pulled the lever, but this time, it didn’t work,” recalls one senior employee about 2012’s first quarter.
Just before Facebook went public in May 2012, Mr. Zuckerberg walked into the “aquarium” and did something that surprised everyone.
A group of Facebook engineers presented the latest mock-ups of ads for Facebook’s iPad app. The ads were marooned on a separate screen—and to the right of the news feed.
The CEO quietly studied them. “Why don’t we just explore ads in news feed?” he said, according to people at the meeting. Mr. Zuckerberg indicated that he would be open to the possibility of more types of ads there, including ones not tied to “likes.”
“Oh, my gosh, he’s actually open to it,” one executive present at the meeting remembers thinking. No one in the room asked Mr. Zuckerberg why. They were too worried he would change his mind.
“It’s not like I just decided to get more involved in ads,” he says now. “I needed to because basically the ad product had to be more integrated.” He adds: “And that created all these hard decisions that we needed to do well.”
Mr. Zuckerberg’s willingness to upend even what some people close to him describe as sacrosanct beliefs took on more urgency after Facebook’s bungled IPO, which subtracted more than 25% from the share price in its first 10 days of trading.
In public, he tried to play down the importance of the stock price. Mr. Thiel now says the CEO was more worried than he let on, citing the risk that Facebook employees who owned stock might get discouraged and quit. “I care about this because I want to retain my people,” Mr. Zuckerberg told senior executives in a private meeting.
Facebook’s first earnings report, which hit analysts’ targets but disappointed investors who wanted even more, sent the stock into another tailspin. The mood of some employees darkened.
A worried Mr. Zuckerberg asked Facebook executive Mike Schroepfer, one of his most trusted lieutenants, to interview engineers about morale. They were frustrated about the plummeting stock price and worried that top management couldn’t relate to their financial stress because those executives owned so many Facebook shares that they were rich despite the stock’s slide.
Mr. Schroepfer, usually an unemotional software engineer, choked up when he presented the results to a room full of engineers. “I know you are fathers, parents. I am, too, and I know that you have to think about putting your kids through school,” he said, according to someone at the meeting.
Mr. Bosworth, the Facebook engineer who agreed to help Mr. Zuckerberg hunt for new revenue, worked on his spreadsheet for about 1½ months, quizzing scores of employees. Around the same time, Mr. Zuckerberg began assigning revenue targets to certain product teams. Previously, he resisted the idea because he worried managers would become too fixated on money.
Over the next several months, Mr. Zuckerberg also grew to fully embrace putting “nonsocial” ads, or those that aren’t tied to a user’s “likes” or other signals, in the news feed. The shift came after Chris Cox, Facebook’s vice president of product, showed the CEO internal data that suggested his previous resistance to nonsocial ads was hurting Facebook’s business.
Tests by the company showed that adding nonsocial ads improved the overall quality of Facebook’s advertising for users. “At the time, it kind of struck me as a crazy idea,” Mr. Zuckerberg says, since those ads veered away from Facebook’s traditional word-of-mouth-based pitches.
The CEO even compromised on a subject where he had rarely budged before: user experience.
Mr. Zuckerberg told Mr. Cox that some decline in usage would be an acceptable trade-off for higher ad sales, as long as Facebook made improvements elsewhere that more than offset the decline. The first test showed that more ads reduced user activity by 2%, below a target of a low single-digit percentage, while overall “engagement” rose by a much bigger percentage. Engagement is a broad gauge of user activity.
Facebook’s sales gain of 53% to $1.81 billion in the second quarter was the company’s largest jump ever. In July, a beaming Mr. Zuckerberg addressed most of the company’s more than 5,000 employees. “We did a good job,” he said. “We’re figuring this out.” A few days later, Facebook shares drifted above their IPO price.
Mr. Zuckerberg now meets often with Facebook’s biggest advertising clients, often spending hours with them. He has told customers to message him with ideas, which he will consider incorporating into product decisions.
At a visit last summer to the headquarters of Facebook ad client McDonald’s in Oak Brook, Ill., he learned how to cook an egg-white breakfast sandwich and asked the head of french fry taste tests why one batch he tasted looked a few shades lighter than fries served in McDonald’s restaurants.
Her answer: French fries sold at McDonald’s are cooked in oil that has been through multiple fry cycles. Mr. Zuckerberg said: “You have the greatest job ever.” His own Facebook page has long been peppered with McDonald’s and Chicken McNuggets references.
This year, Mr. Zuckerberg will have to wrestle with how to avoid turning off some Facebook users with too many ads, as some critics have warned. Some investors are antsy for Facebook to wow users with something new.
Mr. Zuckerberg says he is aware of the risks, but notes that user activity still is rising. The company does more than 35,000 surveys a day to monitor user sentiment, and the “driving force behind everything is that we’re trying to build the best experience for mobile,” he says.
Some of the changes at Facebook remind him of walkways at his old high school, Phillips Exeter Academy in New Hampshire. As a student, he was befuddled by a meandering path to the campus cafe. The route seemed strange, so Mr. Zuckerberg did some research.
The answer? “Instead of choosing the path up front, they kind of waited and saw where people walked and put a path where people walked,” he says.
—Reed Albergotti contributed to this article.
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