by GEOFFREY A. FOWLER
February 15, 2011
Facebook Inc.'s growing ambitions are redrawing battle lines in Silicon Valley.
As the seven-year-old company ramps up its hiring and adds new features to its social network, it is disrupting the businesses of established companies like Yahoo Inc. and Google Inc. and putting even more Internet firms on notice.
Facebook, which has more than 600 million users and was valued at $50 billion in a recent funding round, is grabbing online-advertising from Yahoo, Myspace and others. The social network is a potential rival in electronic payments to eBay Inc.'s PayPal, while partnerships Facebook is cementing with smartphone makers set the stage for competition with Apple Inc. and Google in mobile services.
Meanwhile, Facebook is tussling with Google and Microsoft Corp. for top engineers.
As a result, many Silicon Valley companies increasingly have to decide whether to treat Facebook like a friend whose reach and user data can help propel their own growth, or a foe that can become a destructive force.
"Facebook is both a great competitor and a benefactor here in Silicon Valley," said David Cowan, a venture capitalist at Bessemer Venture Partners in Menlo Park, Calif. "Anyone who's trying to get the attention of the young Internet user now has to compete with the dominant position that Facebook has there. On the other hand, they have opened up a lot of opportunities."
Facebook executives aren't shy about their aspirations. "We think every industry is going to be rebuilt around social engagement," Chief Operating Officer Sheryl Sandberg said.
Facebook already helped spur a new crop of videogame companies designed around interacting with friends, Ms. Sandberg said, adding, "News, health, finance, shopping and commerce—we think similarly, all of these things will be rebuilt by companies that work with us to put social at the core."
So far, Facebook's key battleground has been in online marketing.
In just two years, Facebook's share of online display ads has surged to 13.6% from 2.9% of the U.S. market, which reached $8.88 billion in 2010, according to research firm eMarketer.
Facebook's growth comes at the expense of companies such as Yahoo and AOL Inc., and the site is also likely taking ad money away from traditional media like newspapers and TV.
Yahoo has stopped trying to compete directly with the social network and instead integrated Facebook features into its sites, hoping to halt a slide in the time its users spend on Yahoo each month.
Myspace, which like Yahoo has struck some partnerships with Facebook, declined to comment. Myspace and The Wall Street Journal are owned by News Corp.
Jeff Levick, the president of AOL advertising, said he viewed the rise of Facebook as "complementary" because the companies are "running two very very different businesses."
AOL, he said, focuses on monetizing the content that Facebook users share. "The more high quality content we produce and is shared, the traffic comes back to us," Mr. Levick said. The top advertisers who are working with both companies are spending more with AOL each quarter, he said.
Facebook likely had revenue of $1.9 billion to $2 billion last year, mostly in advertising, one person familiar with the company has said.
Facebook has recently introduced ad formats that incorporate users' networks of friends—even their names, photos and postings—into the ads.
And Facebook has also turned its attention to the local advertising market, launching its own location check-in and deals services that bring together elements of sites such as coupon site Groupon Inc. and business reviews service Yelp Inc.
Groupon and Yelp declined to comment.
Facebook is likely to tread on more toes as it builds out what's known as a platform for the Internet, which other websites, cellphones and now even cars can use to build their own offerings to allow people to take their friends and preferences with them.
Some 2.5 million websites have so far tapped the platform, which lets them populate blog posts, news articles, product listings and other pages with Facebook's "Like" button.
With its platform play, Facebook is positioning itself as a partner to other tech companies—even Google, which allows YouTube users to share videos with their Facebook friends.
"The foundation of a platform is one where people want to build on top because there is equal value exchange," said Dan Rose, Facebook's vice president of partnerships and platform marketing.
Still, Mr. Rose said Facebook intends to participate in new businesses that emerge from the use of its platform.
One case in point: Game developers such as Zynga Game Network Inc., among the first to find massive growth on Facebook's platform, now have to pay a kind of tax.
Last month, Facebook said it would require all game developers on its platform to use its in-house Credits, a virtual currency for buying things in games. Facebook takes a 30% cut from all Credit sales. Zynga declined to comment.
Facebook could later extend its Credits system to other areas of commerce, including physical goods, potentially making it a competitor to PayPal and Amazon.com Inc.
Mr. Rose didn't rule that out, but said the company had no current plans to do so and was focused on virtual goods for now.
PayPal President Scott Thompson plays down any rivalry with Facebook.
He said his company partners with Facebook, which lets people pay for Facebook Credits with PayPal. Even if Facebook gets deeper into payments, he said PayPal will be well-protected. "Payments is really, really hard to do," he said.
Yet many Silicon Valley firms are wary of Facebook's control over its platform and have turned elsewhere.
Online-dating service Zoosk Inc. launched in 2007 as an application on Facebook, where it experienced fast user growth. But in mid-2008, co-founder Shayan Zadeh decided Zoosk needed to expand to other platforms such as Myspace and its own website. It began to ask its Facebook users for their real email addresses, instead of just relying on Facebook as a means of communication.
Mr. Zadeh said he was concerned that some shift in Facebook's business model or platform strategy could destabilize Zoosk. "If you want to be a long-term established business, you have to establish a direct communication line," he said. Today, Zoosk has about 15 million to 20 million active monthly users; only about 20% of new users come through Facebook.
Facebook executives also have their sights set on smartphones, where they hope to become more integrated in the software on the handsets. Last week, INQ Mobile, owned by Hutchison Whampoa Ltd., unveiled a handset for the U.K. that prominently features contacts, photos and other data from users' Facebook accounts. More such arrangements are expected soon.
Such activity increasingly puts Facebook on a collision course with Google, Apple and others in mobile advertising. Mr. Rose said Facebook could eventually make money off its mobile efforts through ads and Credits, but doesn't have any plans for it at the moment.
Google declined to comment on Facebook, but in an interview last, year Chief Executive Eric Schmidt said the two companies compete for talent but not for ad dollars and that Facebook users use more Google services than any other users. He also said that "you're assuming that if they do well we do poorly," but "winners tend to all do well.
