* Photo: Emily Shur * He didn't have much choice but to sell. It was summer 2006, a little more than two years after Mark Zuckerberg had created Facebook in his Harvard dorm room as a way for him and his friends to better connect with schoolmates. In the intervening years, he'd raised $37.7 million from venture capitalists and transformed his modest Web site into a certified social phenomenon. College kids across the nation clamored for access, which Zuckerberg doled out, school by school. By mid-2006, about 7 million users, most of them college students, had a Facebook account.

But for all of Facebook's success, there were also signs of trouble. Zuckerberg wanted the site to be more than a campus thing. He wanted to supplant and surpass MySpace and make Facebook the largest social network on the planet. He wanted it to become the next Google, a site that people of all ages would find useful in their daily lives. But that hadn't happened. Facebook had cornered the market for college students, but its 11-month-old effort to capture the attention of high school students — and take users away from MySpace — was going nowhere. Indeed, Facebook's growth was leveling off, inching its way toward 8 million members, while MySpace's continued to surge, with 100 million members in August of 2006.

Photo: Emily ShurAt the same time, suitors like Viacom and Microsoft had begun to take a serious look at Facebook, and they were tossing out numbers with lots of zeroes. Some investors and executives began wondering if it was time for Zuckerberg to sell. It was starting to look like Facebook had peaked.

Zuckerberg disagreed, but when Yahoo came calling with a bid of $1 billion in cash, the pressure became too much. He relented in July, verbally agreeing to sell Facebook to Yahoo. Strategically, it seemed like a good match. Yahoo had hundreds of millions of users, but its foray into social networking was struggling. Facebook had cool tools and was looking for a mass audience.

The timing, however, couldn't have been worse. In the days after Zuckerberg agreed to sell, Yahoo announced it was projecting slower sales and earnings growth, and that the launch of its new advertising platform would be delayed. Its stock price plunged 22 percent overnight. Terry Semel, Yahoo's CEO at the time, reacted by cutting his offer from $1 billion to $800 million. Zuckerberg, who had been warned about Semel's reputation for last-minute renegotiations, walked away. Two months later, Semel reissued the original $1 billion bid, but by then Zuckerberg had convinced his board and executive team that Yahoo wasn't a serious partner and that Facebook would be worth more on its own. He rejected the offer and became famous as the cocky youngster who turned down $1 billion.

Today, Zuckerberg, 23, is famous for other reasons. For one thing, analysts think he could be the nation's richest man under 25, with a net worth estimated at $1.5 billion. But more important, he has transformed his company from second-tier social network to full-fledged platform that organizes the entire Internet. As a result, Facebook is the now most buzzed-about company in Silicon Valley, and Zuckerberg is constantly compared to visionaries like Steve Jobs and Bill Gates. Even some of the tech industry's most legendary figures are genuflecting before Zuckerberg. In an entry on his blog, Netscape cofounder Marc Andreessen called Facebook's transformation "an amazing achievement — one of the most significant milestones in the technology industry in this decade." Says Marc Benioff, CEO of Salesforce.com, "I'm in awe." (So am I. I have known one of Facebook's executives since childhood.)

As for those concerns that Facebook's membership had peaked? Well, now it's signing up nearly 1 million new users a week. By the end of August there were 36 million of them. And these aren't just the tweens or college kids you might suspect; the fastest-growing segment of Facebook users is over 35, a group that represents 11 percent of all site users. Total registrations have more than quadrupled over the previous year. The number of employees has tripled, as has revenue. And venture capitalists say that if Facebook were to go public today, investors would value it at more than $5 billion — five times what Yahoo had been prepared to pay.

But Zuckerberg's greatest contribution goes beyond Facebook's success. His company suggests a new model for how connection, communication, and commerce can work online — a radical and ambitious rethinking of the Internet's potential.

Zuckerberg's journey from snot-faced upstart to dotcom deity began in the summer of 2006, just after the demise of the first Yahoo bid. Zuckerberg won't speak directly about this time period, but associates and friends say that, for the first time in his career, the curly-haired tyro found himself facing immense external pressure. Sure, he'd retained control of his company for the time being, but he hadn't solved any of the problems that led him to consider a sale in the first place. Critics were accusing him of hubris and foolhardiness. He had something to prove.

Zuckerberg designed Facebook to re-create online what he calls the "social graph" — the web of people's real-world relationships. That was different than most social networks. Sites like MySpace practically encouraged users to create new identities and meet and link to people they barely knew. Zuckerberg didn't care about using the Internet to make new friends. "People already have their friends, acquaintances, and business connections," he explains. "So rather than building new connections, what we are doing is just mapping them out."

To that end, Facebook has always emphasized two qualities that tend to be undervalued online: authenticity and identity. Users are encouraged to post personal information — colleges attended, workplaces, email addresses. Facebook also emphasizes honesty: Because users typically can view profiles only of people they're linked to, and they can't link to them unless both partners confirm the relationship, there's little point in creating a fake identity.

Zuckerberg saw that if he could successfully map the social graph, he'd create a powerful new model of communication — a giant word-of-mouth engine. Imagine if, every time you logged on, you weren't greeted by NYTimes.com or even a Google News like aggregator, but a collection of headlines and blog postings, written or handpicked by your closest friends and relatives. Instead of information spreading hub-and-spoke like from major media outlets, it would flow to consumers the way it does at a dinner party, through people they know and trust. The result, Zuckerberg says, is that "it may no longer be optimal to have a few big media companies in the center controlling the flow of information."

When Zuckerberg walked away from Yahoo in July 2006, his grand vision had yet to be realized. He had a network of 7 million students, not an alternative media empire. To transform his company he would have to accomplish three things: First, make it easier for friends to communicate with one another; then extend Facebook's membership to the entire world; and finally, open the site to developers and encourage them to build Facebook applications that would keep people signing up and coming back to the site.

Zuckerberg's first step was almost his last. Previously, Facebook users had to visit one another's pages or send an email to see what they were up to — what features they'd added, announcements they'd posted, new friends they'd linked to. Zuckerberg wanted to streamline that process . His solution: News Feed, a feature that automatically broadcasts users' most important activities to everyone in their networks. Add a friend, post a photo, install a feature — almost anything you did was filtered through Facebook's computers, which then sent bulletins to all of your friends, notifying them every time they logged on to the site.

News Feed was announced on September 5, 2006 — about a month before Zuckerberg turned down Yahoo's second bid — and launched the same day. The freak-out began almost immediately. The new service didn't look like a means of easing communication between friends; it looked like Facebook was manipulating and spreading their information without permission. Hundreds of thousands of Facebook users emailed to protest. A student at the University of Florida organized a boycott, calling it A Day Without Facebook. "The New Facebook is too... well, creepy," wrote Carlos Maycotte in The Cornell Daily Sun. "It just makes too much information visible."

The easiest thing for Zuckerberg to do was simply dismantle News Feed. But he refused. News Feed was not just any feature. It was the infrastructure to undergird the social graph. So, three days after the feature launched, he posted a 485-word open letter to his users, apologizing for the surprise and explaining how they could opt out of News Feed if they wished. The tactic worked; the controversy ended as quickly as it began, with no real impact on user growth.

With the News Feed engine in place, the next step was obvious, if terrifying. So far Zuckerberg had tightly controlled Facebook's user base, opening membership slowly to colleges, high schools, and a few businesses. Now it was time to let anyone in the world join.

The notion was risky. When Facebook opened registration to high school students, the tepid response helped spur talk of a sale. A similar showing would make it even harder for Zuckerberg to keep prospective buyers at bay. But this time, open registration turned out to be a huge success. Adults, many of whom had yet to sign up on a social network, were drawn to Facebook's relatively staid and conservative structure. By January 2007, Facebook's user base had grown to nearly 14 million, up from almost 9 million in September.

Fully engaging those new users proved to be more difficult. They were happy to log on, share photos, and send quick messages, but when they wanted to do something a bit more complicated, like keep track of their eBay auctions, for instance, they had to leave Facebook to do it. Zuckerberg knew the site needed more applications, but he also knew that his development team wouldn't be able to satisfy every whim of his user base. "We said, ‘This is a problem,'" says Dustin Moskovitz, one of Facebook's cofounders. "What people really want is one online identity to do all these different things. What users wanted was the long tail of applications." It was time for Facebook's third, and most audacious, step.

On May 24 of this year, when Zuckerberg announced he was opening Facebook to independent developers, it was clear to Jonathan Sposato that the company had done something revolutionary. He knew how to develop and successfully distribute software: In 2005, Sposato, a former group manager at Microsoft, started a company that made it easy to create software widgets, and he sold it to Google later that year. In mid-2006, he and two fellow Microsoft alumni created Picnik, a slick online photo-editing site.

But even Sposato was surprised at the response from Facebook users when Picnik was included as one of the 85 initial applications in Facebook Platform, the new development tool. Within three days, more than 100,000 users downloaded his program — about 10 times more than he'd anticipated. Because News Feed instantly and automatically notified friends whenever someone downloaded Picnik, word of the application spread exponentially. Sposato called colleagues in a desperate — and ultimately successful — hunt for extra server capacity and bandwidth to avoid outages. Currently almost 250,000 Facebook users have installed Picnik on their pages, making it the network's top photo-editing tool.

Sposato's experience shows the power of Facebook Platform as a new model for disseminating software. The plummeting costs of bandwidth, processing power, and storage had driven down the price of application development. But unless you could figure out a way onto the Google homepage, it was still tricky to tell the world what you'd created. Facebook now gave even the most modest developer the opportunity to win instant and mammoth distribution through its word-of-mouth engine. Users no longer need to search for applications that they may not even know they want; instead, the applications find them.

Since then, more than 3,200 new applications have sprung up on the site, a number that is growing by about 180 a week. Those offerings have made Facebook a fully functioning social hub, where users can keep track of one another's favorite music and videos, share and compare movie reviews, and hit one another up for contributions to pet causes. Facebook promises to become an online identity for recruiters, bosses, and colleagues looking to hire and promote; a souped-up business card for job hunters; and a dossier of people's likes and dislikes that vendors can use to provide targeted products and services. Salesforce's Benioff even imagines Facebook pages serving as universal health records.

And by turning itself into a platform for new applications, Facebook has launched a whole new branch of the software development industry, just like Bill Gates did with MS-DOS in the 1980s. By allowing developers to charge for their wares or collect the advertising revenue they generate, Zuckerberg set up a system for every programmer to get paid for their efforts. Now venture capitalists like Bay Partners are scrambling to fund almost anyone who has an idea for a Facebook application.

Skeptics may argue that we've seen this movie before — in 1999, say, when anyone with a vague concept for a Web site could get VC backing. And, they point out, nobody actually does pay for Facebook applications. Still, the startup costs for developers are extremely low, and the potential is high. For the Internet, email was the killer app — a program so useful that it transformed the platform into a massive communications tool. There's no killer app for Facebook yet. But if someone can develop one, they will be sitting on a gold mine.

For all the excitement, one sobering fact remains: Facebook has yet to prove itself as a business. The site's nearly 40 million active users generate more than a billion pageviews a day, but ad clickthrough rates are low. An estimated half of its $150 million in revenue comes from an advertising deal with Microsoft. Independent developers are drawn to Facebook because Zuckerberg lets them keep any advertising revenue their applications generate; if Facebook can't prove itself as an advertising venue, the deluge of new applications will slow to a trickle.

Nevertheless, Zuckerberg's notion of the social graph has proven so powerful that almost every other company in the Valley is trying to replicate it. Jeff Weiner, one of Yahoo's top executives, refers to users of Yahoo Mail as a Facebook-esque "dormant social network" that his company "needs to activate." And MySpace is expected to respond to Facebook's challenge; CEO Chris DeWolfe has made vague statements about the site's "evolution."

Whatever ultimately becomes of Facebook, Zuckerberg has already had an impact. A year ago, the Valley wondered if this cocky youngster had turned down his only shot at $1 billion. Now it's wondering if he has defined the future of the Internet.

Contributing editor Fred Vogelstein (fred_vogelstein@wired.com) wrote about blogger Michael Arrington in issue 15.07.