Exclusive: Discussing the Future of Facebook and the Facebook Ecosystem with CEO Mark Zuckerberg

Zuckerberg shared his thoughts on recent changes to the Facebook Platform, competitive dynamics he desires amongst developers, the surprising growth of the social games business on Facebook overall, his vision for Facebook Credits, market perceptions of Facebook’s revenue streams and overall revenue numbers, what the company learned from its period of serious interest in Twitter, and Facebook’s company culture around money.

Today, Facebook’s 1,400 employees are working on products to better serve and monetize its nearly 500 million monthly active users around the world – up from 150 million at the start of 2009. We estimate the company did between $600 to $700 million in revenues last year, and will see between $1 and $1.1 billion in overall revenues this year.

As Facebook’s business has grown, so has the Facebook Platform economy. Developers of social games on the Facebook Platform will earn hundreds of million of dollars in revenues in 2010, according to our Inside Virtual Goods: The Future of Social Gaming 2010 report, and tens of thousands of businesses are shifting more of their marketing efforts and dollars to build their Facebook presence.

Justin Smith: What’s the state of the platform right now, in terms of the alignment of incentives between developers and Facebook and users, compared to where it was just after the Platform launched a couple of years ago, and where you want it to be?

Mark Zuckerberg: There’s two parts of the Platform – there’s canvas and then everything outside of Facebook. The focus now is actually the latter – Connect and everything we’re doing with social plugins. We have an all hands meeting later today and I was just told that Connect is now on 1 million sites. That’s definitely an increasing focus, and the last two f8’s have been around that. But I think what you’re asking is about the canvas part.

There are two ways that apps get usage that really define the character of the application. One way is viral distribution – spreading to new people. The other is reengagement. Early on, the viral strength was so much, but there were really no channels for reengagement. So people were using viral channels to reengage people, and you basically had apps that were growing very quickly, and their best way to get a good user count was to get new users and churn through them. That really optimizes for apps that are very viral instead of apps that are high quality and that people want to reengage. So we intentionally weakened the viral channels recently, and intentionally strengthened reengagement with emails, so that there will be better apps. It’s going to be a long process, but I think it’s going reasonably well.

One of the things we did recently was rebalance around games. A lot of users like playing games, but a lot of users just hate games, and that made it a big challenge, because people who like playing games wanted to post updates about their farm or frontier or whatever to their stream. They want all their friends to see their updates, and they want to get all their friends’ updates, but people who don’t care about games want no updates. So we did some rebalancing so that if you aren’t a game player you’re getting less updates.

One of our goals that we have is to make it so that you have just as good of a chance to build a good game if you’re a standalone game shop as if you’re a part of a bigger conglomerate, like Zynga or EA. That is a long term thing, to make sure the market stays competitive around this. CrowdStar has grown pretty quickly in the last 6 months, from very small to now pretty big. That to me shows that it’s definitely not a one company market, and that’s what we’re looking for. A lot of what we’re working on is can a small company succeed in the space.

What do you think about how big the games business has become on the platform? You told me a couple of years ago soon after the Platform launched that you weren’t really thinking about games when you built the Platform.

I was surprised, I was surprised about games. I had a conversation with some folks at Apple at one point, and they were surprised that games was the big thing on the iPhone too. I also heard anecdotally that the people making the first PC operating systems were surprised that games were that big too. So I think people build platforms for utilitarian purposes and then get surprised that games are a killer app, so I don’t think it’s uncommon. But clearly a lot of people like them.

Someone once wrote that I don’t like games, and I think that’s pretty silly. I don’t spend a lot of time playing games myself, but it’s really cool as a first proof example of an industry that’s getting completely disrupted by the whole social movement. All the dynamics of how you play the game, getting neighbors, trade with people, do tasks with people to more efficiently use your resources. It’s the first place where someone completely wove in social dynamics into the dynamics of the industry, and it works really well. The early games like Jetman and Boggle and things like that weren’t that social, but now when you hear gaming companies talk about the next generation of games that they’re creating, everything is about integrating the social stuff more and more deeply into the game.

Now, there are companies like Zynga, EA/Playfish, CrowdStar, but then there’s a Facebook version of Civilization as well, so it’s going in both directions. The Civ game is your traditional high quality game, but the big question there is whether they leverage social dynamics enough. The risk for them is that it might just end up being a good traditional game with very little social integration.

One of the questions that people I talk to have these days is what role Credits will have in the future of the company. How important is Credits in terms of your overall product priorities, do you think it will succeed, and how important will it be in terms of revenue?

It makes sense that there should be one currency. If I go play a CrowdStar game right now and get Credits there, I can’t go use those Credits in a Zynga game, so that kind of sucks. One of the biggest inefficiencies in buying virtual goods is all the friction of having to take your credit card out, so having one store of [virtual currency] that you can use everywhere is both good for users and good for all the apps.

The other thing about Credits from our business perspective is that payments and Credits is a significantly lower margin business than ads. Ads are 20%, 30%, 40%. A lot of people are skeptical of when we say we are doing this primarily for the developer ecosystem, but that’s really how we think about it. A lot of the apps so far are games, a lot of games monetize a lot better through virtual goods than through ads, and a big goal for us is to build this level ecosystem. So if Zynga or any one player can allow cross payments within their games, but that doesn’t extend to other games, then that ends up being a big barrier to entry for other startups. Making it so that there is one currency that people can take everywhere levels the playing field a bit, which is good.

We want to make it as easy as possible for users to build up a liquidity of Credits themselves, so we’re planning on pouring all the money that we make on Credits back into things like different offers or cards that people can buy in stores, to lubricate the economy so people will buy more stuff in apps. Overall we think it’s better for everyone for us to be in that place. Now if we fail, we fail, and someone else will succeed. But I think that over the long term this will end up being a pretty valuable thing.

When we spoke in the spring of 2009, you said you felt like there were misperceptions in the market around Facebook’s revenues, and soon thereafter you guys released some financial data points to adjust people’s expectations. Do you think that expectations today are more accurate? We estimate your 2010 revenues at $1 to $1.1 billion.

I think it’s really hard to predict this stuff. The biggest driver for revenues and costs for us is the number of users. Last year, we went from 150 to 350 million users – how could you predict that? Over a longer time horizon, it doesn’t matter that much. For how early social media is, you want to be looking at longer trends. You can have blips over a six month or one year period, but it doesn’t necesarily say that much.

The reason we corrected it last year is because it was hurting us. People thought it was too low. Now what I would say is that the estimates are not so far off in either direction that it’s causing us any pain, so we feel no need to correct it. Also, if it was too high, we would want to correct it too, because we don’t want expectations to be too high and we don’t want people to be disappointed if they joined. I think people are getting a better feel for it, but in general I think people underestimate the value of the whole thing.

There was a time over the last year and a half when you and the company became more engaged with Twitter, and then there was a time when you weren’t. What did you learn from that?

At first I think we learned that they do a lot of things really well. It’s a very nice, simple service. They do one thing really well – that’s powerful.

I think the main thing was we looked at their growth rate and – well, we saw our exponential growth rate continue for a very long period of time, and it still does at a super-linear rate, though not quite 3% a week any more. I looked at their rate and thought if this continues for 12 months or 18 months, then in a year they’re going to be bigger than us. I guess I extrapolated too much from our own experience of what was possible, but it just turned out that that their growth rate was kind of unnatural. They got a lot of media attention, and it grew very quickly for a little period of time.

Most of the lessons I take away from the whole thing now are that, as good as I think they are, I think I personally just paid too much attention to it. I don’t think we over-rotated as a company on it, but it was interesting because we’re a pretty young company, and we haven’t had that many other companies in our space. Learning how you work with other companies is an interesting thing that I’ll hopefully figure out over the next decade, and it was just interesting learning from watching them.

What particular product insights did you gain from that experience?

The way that people use the products are pretty different. It’s just interesting that they do some things that we explicitly don’t want to do, but do them well. For example, they don’t do real names, and they have themes. It’s a lot more around self expression than real identity, but I think it works for them. But that doesn’t mean we want to be that. Watching them is going to be really interesting over the next few years, and the same with FourSquare, and a lot of other social companies.

Can you talk any more about your plans for your location products?

Well, we’re developing something, but nothing besides that. We want to make sure that we do it well, and we’re taking the time to do that.

From what I’ve observed, it appears as though you’ve established a culture here that does not respect people who cash out early. Could you talk about the role that money plays in building the organization?

I guess we have a pretty utilitarian view towards money. Sometimes what I say gets misinterpreted as I don’t care about money, but that’s really not true. I think building a company is the best way to change the world, because it’s the best way to align the interests of a lot of smart people and a lot of partners to build something that’s great and that serves people. You can’t do that if you’re an individual, because it’s just you and there’s no one to align, and you can’t do it if you’re a non-profit, because you have no resources and you’re constantly out trying to raise money instead of generating it and being self-sufficient. That’s I guess the view.

At this point in the company’s evolution, I don’t see a huge need for the company to be throwing off a huge amount of profit. What’s the point? If we believe that we can build a lot more value for users, developers, and advertisers by taking any excess money we can make and investing it back in, then we’re just going to grow those communities and markets faster, and we’re going to end up with greater potential in the long run. If you prematurely optimize, you might get a bigger piece of a smaller thing. I feel like we’re really early on in the start of this movement toward everything being social.

But even people who are very smart, a lot of times throughout the history of the company, have underestimated how far it would go. That’s been difficult, because when you have key people who have that attitude, it’s hard to get stuff done. Especially around selling the company early on and choosing not to do that – that was a big learning moment for the company in terms of what kind of people we wanted to have here. I just want the people we have here to be focused on building stuff, and that’s how we run it.