Facebook is the "It" Company of 2007

The Young Guns Original Facebooker Adam D'Angelo, third from right, came back to lead the platform team: from right, Eric Zamore, James Wang, Ari Steinberg, Dave Fetterman, and Charlie Cheever. For their photo, they wore T-shirts designed by vacationing colleague Julie Zhuo.

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I'm not sure what it means." Facebook CEO Mark Zuckerberg is talking about a new application created by an outside developer that allows his site's users to throw sheep at one another. The sheep aren't real, of course; they're just a playful digital expression--of, well, who knows what?--that users can send to each others' online profiles. "Who knew that people would have liked that?" Zuckerberg muses. The sheep could rake in over a million dollars in ad revenue this year for their shepherd, a company called Slide.

The world has Facebook fever. Launched just three years ago by Zuckerberg--a college dropout and acknowledged hacker who famously turned down a $1 billion buyout offer from Yahoo in 2006--Facebook has become the "it" company of the tech world. An entire industry has sprouted up around the site seemingly overnight, as everyone from software wizards to marketing honchos rush to figure out how to make money from a user base that has ballooned to 41 million. In May, Facebook opened its software platform to applications from outside developers, preempting every major Web 2.0 competitor. Since then, some 80,000 developers have added more than 4,000 new applications, from virtual bookshelves to, yes, sheep throwing. Developer conferences have been selling out, venture funds have formed to hunt for promising Facebook-specific ideas, and more than a dozen advertising networks have popped up to help developers monetize applications. Stanford's computer-science department is even offering a course on creating Facebook applications. And instant "experts" are proliferating. Nick O'Neill, 25, started the blog AllFacebook, then hung out a shingle as a consultant. His client list already includes several Fortune 100 companies. "The phone is ringing off the hook," O'Neill says.

The rub for Facebook: The company itself won't make a dime from the sheep-throwing business. Or, in fact, from any of what could turn out to be hundreds or even thousands of other wildly successful new applications now running on its site. And for some reason, Zuckerberg says that's just fine with him, claiming, "It's good for the ecosystem, good for the product, and good for the users."

Yet the question remains, if Facebook is a business, how will it eventually monetize the opportunity that Zuckerberg has created? And how soon will the race for cash flow begin? Already there is rampant speculation about potential advertising models and other next-stage transformations of the business model. Microsoft is said to be angling to buy a 5% stake that could value Facebook at $10 billion--a huge sum for a company that's on track for revenue of $150 million this year. Google and venture funds also reportedly want a piece of the company. None of the parties are willing to comment, but one person close to Facebook says that, for Zuckerberg, it's a question of finding a good match that could provide cash to help the company ramp up to meet demand.

Inside the eye of the Facebook maelstrom, in the company's three-building headquarters in Palo Alto, the mood is calm. The offices still have the heady feel of a startup: iconoclastic murals on the walls, beanbag chairs strewn about, periodic all-night "hackathons" by coders and engineers. The staff size has increased by 50% in the past six months. But this is not the Googleplex, with its 10,000 employees. There are just 300 Facebookers, and things still feel a little rough around the edges--ad hoc yet optimistic, with the invincibility of youthful exuberance. They see themselves as calculated risk takers. "We may not always be that way," shrugs chief technology officer Adam D'Angelo, 23, with a smile. "But we're that way now."

Zuckerberg is now visibly more comfortable in his CEO's skin than when I first met him six months ago ("Hacker, Dropout, CEO," May). Back then, he was confident but guarded. Facebook had done well since he rebuffed the Yahoo offer: He'd signed a big ad deal with Microsoft, and the user base was growing briskly. But Zuckerberg still hadn't proved that his vision of Facebook changing the world wasn't simply wishful thinking. "For a long time, we resisted even forming a company," Zuckerberg told me on that visit, recalling the early days when he and his pals coded Facebook all night in sublet apartments and he tooled around in a beat-up Craigslist car.