If you wanted a case study in how the internet enables "disruptive innovation", then Facebook is one of the four best examples. (The other three are the web, Wikipedia, and Skype.) Like the web, Facebook is essentially the creation of a single gifted, visionary individual, one Mark Zuckerberg. And he was only able to launch it because of the way the internet facilitates what one scholar calls "permissionless innovation".
Facebook was not the first social-networking service. The most intriguing thing about it is why it emerged as the dominant player in a long-established and crowded marketplace. The idea of computer-mediated social networking is an old one that goes back to the Californian counterculture of the 1970s, and the history of the field is littered with the carcasses of ventures that flourished spectacularly before either crashing to oblivion (SixDegrees, MySpace) or finding a niche in the ecosystem (LinkedIn).
When Facebook emerged, the most obvious comparison was with MySpace, but even then it was clear that they were not direct competitors. MySpace was riotous, vulgar and slightly weird – partly because it allowed users to decorate their pages by adding customised HTML code. Facebook, by contrast, looked preppy, severe and dull. And it was exclusive – you had to be a student at an elite US university to be a member. It looked as though the social stratification of the real world also applied in cyberspace. A New Yorker cartoon of the time showed the preppy daughter of a Wall Street banker introducing her scruffy boyfriend to her parents. "Don't you think he's a bit too MySpacey for you, dear?" says her mother.
Facebook triumphed for a number of reasons. One of them was the technical virtuosity of its founder and early staff: unlike many other comparable ventures undergoing explosive growth, Facebook coped brilliantly. But its marketing was also very astute: its initial growth was fuelled by the fact that the main preoccupation of Harvard undergraduates is getting laid; and it used its early exclusivity as bait, gradually adding less elite universities before eventually opening up to the world.
Once it did that, Metcalfe's law kicked in. In everyday parlance, this means that the more users there are on a social network, the more attractive it will be to people who are contemplating joining. What it means in practice (regulators take note) is a potential winner-takes-all situation. Which is where Facebook is now.
From when its exponential growth began, Facebook has been the object of feverish speculation in both the financial and media senses of the term. In the pre-IPO (initial public offering, or flotation) phase it was mostly about valuation. Since the IPO, the hot air has been generated by topics such as whether it would be able to master the mobile market as it had the desktop world, whether its spectacular growth could continue, and the nature of its business model.
Above all, the media frenzy has been about those mythical creatures known as "teens". Since the perception was that Facebook's growth had been driven by young people – who are known to be fickle and flighty in their affiliations – Facebook's share price came to be correlated with rumours that teens were, or were not, getting bored with it. The latest version of this is that teenagers will be repelled by the fact that their parents and even grandparents are now piling into Facebook.
An amusing example of the depths to which these speculations have sunk came from a technical paper by Princeton University researchers in which they used an epidemiological approach to model social-networking affiliations. Joining a network was, they conjectured, analogous to infection by a contagious disease, while abandonment was analogous to recovery. They concluded that Facebook had just entered the abandonment phase and that its user base would soon decline rapidly.
This was countered by three Facebook researchers, who first skewered the methodology used by the academics, before applying it to online data about Princeton. "In keeping with the scientific principle 'correlation equals causation'," they concluded, "our research unequivocally demonstrated that Princeton may be in danger of disappearing entirely."
In fact, the most significant question is not whether teenagers will abandon Facebook, but whether its adoption by huge numbers of adults will result in the fulfilment of Zuckerberg's vision of owning "the world's social graph" – the network of humanity's online social connections. If it does, then our society's move into completely uncharted territory will be complete.
The reason for this is that, in a strange way, Facebook's business model is analogous to that of the US National Security Agency. Both need to use surveillance of both intimate and public online activity to make inferences about behaviour. The NSA claims that this enables it to spot and thwart terrorism and other bad stuff. Facebook's implicit – but rarely explicitly articulated – claim is that intensive monitoring of what its users do enables it to both tailor services to their needs and provide precise targeting information for advertisers.
The difference is that while it's impossible to know whether the NSA's surveillance is a cost-effective way of achieving its mission, there's no doubt that Facebook's monitoring of its users is paying off, big time – as evidenced by its quarterly results, released last week. The company had revenues of $2.59bn for the three months ending 31 December – up 63% from the same time last year; and for 2013 as a whole it had revenues of $7.87bn, up 55% year-on-year. Its profit last year was $1.5bn.
All of which is pretty good for an outfit created by a Harvard undergraduate in his dorm room 10 years ago. What then of the next 10 years? As with most internet ventures, it's impossible to say. On the one hand, permissionless innovation might spring another surprise on the world. After all, software is pure thought-stuff and there's no shortage of geniuses in the profession. This is why many online moguls have Andy Grove's motto – "only the paranoid survive" – engraved on their psyches. The future of Facebook will be determined by the outcome of a struggle between Metcalfe's law and the capacity of the net to spring disruptive surprises.
A few years ago, when I was doing research for my book, I discovered to my astonishment that some senior politicians thought that the world wide web was the same as the internet. One day I mentioned this to Tim Berners-Lee, the inventor of the web, over coffee at a symposium. "It's even worse than that," he replied. "There are hundreds of millions in the people in the world today who think that Facebook is the internet."
Which is why we should be concerned about Zuckerberg's achievement.
