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Should You Buy Facebook Stock?

BuzzFeed CEO Jonah Peretti sits down with himself for a hard-hitting self-interview on the future of Facebook.

Posted on May 17, 2012, at 1:03 p.m. ET

Whoa, slow down. Let's work our way up to that one. I'll tell you whether to buy the stock at the end of the interview, ok?

Yes! The world has never seen a company like this.

A few reasons. The first is historical. When the world shifted from portals to search, Google was the big winner. Now the shift is from search to social, with Facebook as the big winner. The mega-trend is Portals → Search → Social. That's the big defining shift on the web and we are at the very beginning of the transition to social.

Portals are about impressions, search is about queries, and social is about sharing. It turns out that sharing is a richer, more human currency. Portals have devolved into endless pageview-generating slideshows adorned with banner ads that don't work, videos with annoying pre-roll, and fluff stories that are interesting to everyone and no one. Search results are polluted with SEO gaming sites and pages that rank high that are more readable to a robot than a human. Social is avoiding these problems by directly measuring human actions. That is a better signal because humans are what ultimately matter. Facebook has a huge opportunity to build a defining company that directly impacts people's lives.

The second reason is that Facebook is epically successful at inspiring user engagement. According to Foursquare/Tumblr/Twitter/Zynga investor Fred Wilson, the best social media companies and services manage to get around 30% of their users to stay active each month and 10% each day. He says these numbers are basically a "law of physics."

That means Facebook is breaking the laws of physics. Facebook simply blows away every other social site when it comes to engagement. The majority of Facebook users stay active and their daily active user numbers are MORE than half their monthly numbers, meaning the MAJORITY of people login each day. It is freakin' crazy. And this engagement is happening at the scale of almost a BILLION active users, not just among social media folks or hipsters or celebs or any particular group. Facebook is used by more people, more regularly, with higher engagement than anything we have seen in the history of the web.

The third big reason is that Facebook solved a huge problem. In the 60s and 70s social scientists like Stanley Milgram hashed out concepts like “6 Degrees of Separation,” explaining how everyone is connected to everyone else on Earth through just 6 steps. This research has since been elaborated on by Duncan Watts and others. The concept of “Small Worlds”—networks where each node can be connected to any other with a few short hops—are at the core of the new “science of networks” that has emerged in the last few decades. More here and here and here.

In Milgram’s day, it was true that in theory each of us could reach anyone in the world through a few short steps. But in practice there wasn’t an easy way for information to spread from person to person. So these were intellectual curiosities without practical applications. But then the web came along, starting with email, and everyone could reach everyone else on the network.

One curiosity emerged, namely "email forwards," where a message created by one person could get forwarded from friend to friend and reach millions of people through sharing. For the first time, this highlighted how the 6 degrees concept could matter in practice. A new form of communication and distribution was created — social distribution that made viral media possible. It was thrilling but messy and broken! The same person would get an email forward 20 times, spam and fraud was rampant, Bill Gates wasn't really giving away his fortune, that Nigerian guy wasn't really a Prince in exile, and headers with FWD: FWD: FWD: FWD: FWD: weren't exactly elegant.

Part of the problem was the decentralized nature of email and the inability of anybody to see the structure of the entire network from a god's eye view. Facebook is the first company to fix the mess and deliver on the promise of these powerful ideas about networks. By combining true identity, the social graph, and newsfeed, Facebook had all the pieces it needed. Users can share things they love with their friends; News Feed can remove duplicates, filter based on your interests, and improve the experience based on data across the entire network. Stanley Milgram is probably doing back flips in his grave.

They already make billions of dollars!

I'm not a financial analyst, never went to business school, and don't know how to interpret an S-1 filing. But I do know that the big shift to social is starting to happen in advertising, too.

At my company, BuzzFeed, we don't accept any traditional banner ads and make all our revenue from social advertising. At first this made it very hard for us to sell ads but we stuck to our guns because it was clear to us that banner ads don't really work. In the past year, we have seen a huge change where advertisers now specifically request social ads, don't want banners, and are looking for paid media that converts to earned media. Now we have run campaigns with Toyota, Pepsi, JetBlue, GE, and all the top cable networks and movie studios. And these native social ads perform so much better than standard display: 5x to 10x the click through rate, users who share ads instead of ignoring and hating them, free traffic coming through social.

Facebook is starting to do something very similar to BuzzFeed but on a much larger scale: they are looking at how people use their product and making social ads that match that experience. Some people call this "native advertising" and it just works so much better than cramming banners into a web service. This native, social approach will result in MUCH better ads than traditional display and big budgets will continue to shift to FB. Facebook is just starting to really focus on ads for the first time. In fact, they recently released a new native unit that is so good BuzzFeed will literally spend millions of dollars on it in the coming year as part of our social discovery programs that helps brands distribute their content on Buzzfeed, Facebook, Twitter, and other social platforms.

Twitter is for your mind, Facebook is for your heart. Twitter lets you indulge intellectually and is more about connecting with information than people. I love both services but think they fill different roles.

Google's core business is search. Search is private and nobody sees what you search for. As a result people search for things like nude celebrities, weight loss tips, and tax forms—all things that are too embarrassing or boring to share with you friends.

Facebook is for stuff that you want to share...humorous content lets friends laugh together, cute animals let you say awwww together, a charity drive lets you help people together, and emotionally charged shared experiences let people remember together.

As Facebook grows and evolves, more and more content is shifting into the Facebook bucket. Facebook isn't killing Google, but it is putting Google in a smaller and smaller box. In a few years, Google might be entirely for porn, diet pills, and finding things that you discovered on Facebook but want to look back on a few days later. I am exaggerating a little but if I were Google, I'd be scared.

Yes, I met him in NYC and had dinner with him in Palo Alto and spoke with him for over an hour both times. I was very impressed. He has a sense of humor, he is very focused on a big long-term vision, and no matter how quickly I talked he always got what I was saying right away and asked insightful questions that took the conversation to the next level. Also considering that he is Mark Fucking Zuckerberg, he was surprisingly humble, or at least his curiosity caused him to push the conversation to areas where he had less knowledge, instead of focusing on what he already knows. He also has a great team. Chris Cox is an amazing combo geek/product guy/exec with a high IQ and EQ and I've met with him a couple times too.

No of course not, I'm just answering the questions you are asking me!

Stop! I'm not answering these questions! Let's talk more about Facebook, ok?

The impression was the currency of the portals, the query is the currency of search, and the share is the currency of social. Sharing means something. Sharing is important. You learn in kindergarten that "sharing is caring" and it really is. That isn't just a saying. The problem with automatic sharing is that it leads to sharing without caring. It debases the core metric of social. This creates lots of problems, including all my friends seeing that I clicked a story about Snooki being pregnant.

Of course it is hard to not click that story—I mean Snooki is f'ing prego?!! Who is the baby daddy??! And it is totally fine that you want to click that story, you just don't want to put the full force of your identity behind it and recommend it to everyone you know: "I, Jonah Peretti, recommend that you, my dear friend, read this story about Snooki being pregnant"— it just feels off. The problem is that these so-called social readers turn clicks (which aren't actually social!!) into shares (which are). Clicks aren't social, they are a portal era metric, and you can't turn lead into gold. So I don't like any app that makes it look like you shared something when you really didn't, when you don't want your identity to be associated with the content, and when you wouldn't actually recommend it.

I've only met Zuck twice, we aren't friends! And no I don't think he messed up. I just don't think most of the news reader apps are working. But the idea of Open Graph is really cool and promising. Automatic sharing makes much more sense for music and location and games, especially if it is clear from the Facebook interface that the sharing happened automatically in the background. And Open Graph is about much more than just reading activity—it can also record more deliberate actions that people will be more excited to share. So I think there is big potential for Open Graph to be a way to broadcast to the world what you are doing when you don't care enough about something to explicitly share it.

Of course the stuff people explicitly share will always be much more awesome. Below are three BuzzFeed posts that spread to millions of people through intentional sharing and they are 1000% more exciting than anything you are likely to find from a read edge app:

Millions of people shared these posts because they loved them so much they wanted all their friends to see them, too, so it makes sense that this will be better content than something a friend of yours happened to click. This is why the real action will be in the main Facebook News Feed and not in special modules where Facebook is experimenting with new ideas. A technical trick or clever API integration will never be the key to long-term success on Facebook. The press spends too much time focused on the specifics of minor changes to the Facebook interface and has exaggerated the power Facebook has to promote or kill individual partners. What matters long-term is creating things that inspire people to share and react and engage and that is mostly about actual human behavior and not Facebook's interface or algorithms. Any machine learning algorithm that powers the News Feed will heavily favor content that yields real human engagement because that is what makes Facebook, Facebook.

F' you. Next question.

The rise of Facebook will be good for journalism! Facebook started out as a way to get news about your friends. Then people started using it to share pictures of cute kittens, funny jokes, and other purely social content. Now people share EVERYTHING on Facebook, including substantive articles, reporting, stories about the Arab Spring, breaking news, and opinion.

BuzzFeed recently hired Ben Smith as our editor in chief and Ben has built an amazing team of digitally native reporters who are breaking news and getting scoops. Social media was evolving quickly beyond kittens and BuzzFeed is evolving along with it. And it turns out that news scoops are inherently social content. Telling people something NEW is a great strategy if you want people to share your content. BuzzFeed broke the news that John McCain would endorse Mitt Romney, we exposed the mistreatment of young veterans by the federal government, we ran a first hand account from a call girl about sex on Wall Street, and many many more. We have Michael Hastings covering the Obama campaign, reporters in the pool covering Romney, a sports section, and even a tech section that was the first to chronicle the broad decline in traffic to Facebook's social readers.

Another big benefit to the rise of social is that it frees reporters to go after scoops because new information is so highly valued on Facebook and Twitter. Good journalists hate aggregating and summarizing and rewriting news. Aggregation works great for generating Google traffic but on Facebook you are rewarded for original, substantive work. Not to get too grandiose, but reporters focused on breaking new stories and uncovering new information is good for society and democracy!

This is a dumb question, but I'll try to answer with a story. Imagine you are a French intellectual at a Cafe. You are reading Sartre and Le Monde. You are thinking about big ideas and the issues of the day. And then you notice, as is often the case in Paris cafes, a cute dog sitting under the table next to you. You pause for a moment to pet and admire the dog. Clearly you do not suddenly become stupid while petting the dog. Having love and empathy for another living thing doesn't make you dumber.

Then you notice a friend sitting two tables over and you spend some time talking with her, discussing the cuteness of the dog, the front page of Le Monde, and the subtle distinction between "good faith" and "bad faith" in Sartre's theory of inauthenticity. Talking about a wide range of topics with your friends is part of being human and it makes sense that people send lots of time on Facebook, and in cafes, socializing with their friends. We are complex creatures with contradictory needs and a love of animals or conversation doesn't prevent us from reading investigative journalism, philosophy, or breaking news.

Facebook has figured out the humans like the French cafe. We don't like the media we consume to be neatly separated and segregated. The Facebook News Feed mashes everything together: news about your friends, humor, cute animals, and substantive journalism. It is an exciting time to be a journalist and Facebook is part of the reason why.

The short answer is "yes."

The team at Facebook is thinking very long-term, and the financial markets and press are obsessed with the IPO and the very short-term stock price. This creates a mismatch and Facebook's stock will probably bounce around a bunch in the short-term. You should be very careful that you invest in the company and not the noise and random fluctuations. That means you probably want to build your investment over several months and then you want to hold your position for several years. Facebook is thinking long-term, investors should too.

Yes it's a big no-no. The only thing worse is interviewing yourself.

A BuzzFeed News investigation, in partnership with the International Consortium of Investigative Journalists, based on thousands of documents the government didn't want you to see.