Mark Zuckerberg, the founder of Facebook, got up in front of several hundred journalists, analysts and industry leaders in San Fran-cisco in May at an event the company called F8 (say “fate”).

Entering to Daft Punk’s techno anthem Harder, Better, Faster, Stronger, Zuckerberg, 23, told the audience: “Today, together, we are going to start a movement.”

He was being uncharacteristically modest; the movement was well under way. Across the world more than 24m people regularly use Facebook, a so-called “social network” site, to set up their own personal web pages and communicate with each other, exchanging messages, invites and sharing photos and videos.

They are joined by more than 100,000 new users a day – the company is set to triple in size this year. In America, more people visit the site than go to eBay and, to applause, Zuckerberg said they were working on overtaking Google.

Facebook: The beginner’s guide

Forced to sign up by repeated friend requests? Hit the virtual ground running with our virtual guide

Multimedia

• Facebook section - full coverage

BACKGROUND

• Careless Facebook users ‘open to identity theft’

• Ten essential Facebook accessories

• Parents are turning into online spies

• Networkers who click with 1,000 ‘friends’

Related Links

• Facebook talks may value site at $10bn

• Facebook targeted over child safety

• Facebook passes MySpace in the UK

Facebook has emerged as the star of the latest wave of “Web 2.0” internet companies. Now, Zuckerberg told Fortune magazine, he was about to unveil “the most powerful distribution mechanism that’s been created in a generation”.

It’s the sort of statement guaranteed to stop executives in the technology and media industry in their tracks.

In Seattle, Microsoft was clearly listening. The software giant has struggled in recent years as Google has stolen its thunder, and software services have moved increasingly online. Last week Zuckerberg was at Microsoft’s HQ, where he was reported to be negotiating the sale of a minority stake in the company for $500m (£244m). The price would value Facebook at $10 billion.

There have been rumours Zuckerberg may be holding out for $15 billion. Google, too, is said to be considering an offer.

These are huge numbers for a company that isn’t making real money. This year Facebook reportedly expects to make a profit of $30m on revenue of $150m. Comparisons can be misleading but, just for the sake of scale, last year British Airways, a company valued at £4.4 billion, made profits of £602m.

A $10 billion valuation for the company may seem sky-high but it’s worth it for Microsoft, or arch-rival Google, said Jordan Rohan, analyst at RBC Capital Markets.

“Facebook takes up where Google left off,” said Rohan.

“Google is all about finding information; Facebook is about communicating that information and sharing it efficiently.

“There are still a lot of unknowable things but it’s quite possible that a minority stake is worth $500m to Microsoft or Google,” he added. Not least because it would give it greater insight into what Facebook does while locking the enemy out. LIKE many a success story before it, Facebook’s origins are the subject of a lawsuit. Zuckerberg, like Microsoft’s Bill Gates, is a Harvard drop-out. He set up the site in 2004. The name refers to the paper “facebooks” that US schools and colleges give to incoming students and staff so they can get to know who is who.

Initially the membership was restricted to students of Harvard. It was subsequently expanded to other Boston-area schools (Boston College, Boston University, MIT, Tufts), Rochester, Stanford, NYU, Northwestern, and all the Ivy League schools.

In retrospect it was a cunning plan, giving Facebook a cachet that eludes its rivals and may explain how its more “grown-up” appearance has been winning over older consumers faster than its rivals.

Former colleagues have claimed Zuckerberg stole their ideas, and although legal action continues, it has failed to dent Facebook’s growth. With funding from Paypal founder Peter Thiel and venture capitalists Accel Partners, Facebook expanded its reach to anyone with a university e-mail address. The site really took off in September 2006 when it was opened to anyone with an e-mail address worldwide.

Facebook arrived in Britain little over a year ago and now claims more than 6m users. Figures released last week showed it overtaking MySpace, owned by News Corp, also owner of The Sunday Times, to become the UK’s most popular social website. In the US, MySpace has three times as many users as Facebook but the young upstart is growing five times faster (see tables).

Social networks may be the latest craze but their origins stretch back to 1979, when Tom Truscott and Jim Ellis of Duke University, North Carolina, had the idea of using a software technology called Unix to Unix Copy (UUCP) to transfer files and e-mail between computers. Called Usenet, it let users send messages in categories known as newsgroups.

For several years Usenet and its successors were little more than internal mail systems, gradually developing through the spread of long-distance chess games and chat rooms.

The model for today’s social networking websites took shape in the 1990s with the idea of people wanting to reconnect with old school friends. From there it expanded to more general interest in sharing music and videos, and from there to personal profiles and lifestyle messages.

The first really successful social network site was GeoCities. In 1998, it was the third most-visited site on the web and was valued at $1 billion when it went public.

Then came the dotcom crash. The strong companies that came through that meltdown, such as Amazon, eBay and Google, have gone on to be world-leading businesses. Now the hunt is on to find the next generation of winners. But there are bound to be losers, too.

In 2005, the value of networking sites began to be realised. After Yahoo launched Yahoo 360, News Corp bought MySpace for $580m and a few months later ITV paid £120m for Friends Reunited.

This has sparked a rush to launch increasingly refined sites, offering the ability to upload photos, videos and other material that would take up huge amounts of memory on individuals’ own computers. Those data are attracting growing interest from potential buyers who want access to the millions of network site users.

Zuckerberg’s big announcement in May was that he was opening up development of applications to anyone. Pro-grammers are now looking at tailoring services for Facebook users – better photo-sorting software for photographers, medical newsfeeds for doctors, homework planners for school-children. A million little flowers to bloom in Facebook’s walled garden and – so the company hopes – stop people going elsewhere. “They could have 100,000 new applications next year. That makes Google look slow and Microsoft and Yahoo seem frozen,” said Rohan. NOT everyone is sold on the Facebook story. “$10 billion for a company without a proven business model, significant revenue and/or a defensible position in the market . . . priceless,” said Andrew Keen, author of The Cult of the Amateur, and a vocal critic of the Web 2.0 “revolution”.

Last week David Bradshaw, analyst at the research house Ovum, said the valuation of Facebook showed signs that a bubble was about to burst. (Ominously a Google search for Facebook and bubble throws up more than 2m pages.)

Today’s dot-hot internet properties do have a nasty habit of becoming tomorrow’s dot-whats – look at GeoCities. Of the top 20 most-visited sites in 2003 only nine make the list today.

In some ways Facebook is not so dissimilar to AOL, the internet portal that used its sky-high share price to buy media giant Time Warner in the last dotcom bubble.

Like AOL, Facebook is about building a gated community and offering users more reasons to stay longer and to invite their friends over. It’s a far better mousetrap but the risk remains that everyone could leave for something better. Like Time Warner, Microsoft is a giant that has looked flat-footed in recent years.

Rohan said the position was different. “With hindsight we can now see that both AOL and Time Warner were companies in trouble,” he said. Google may be hurting Microsoft, but it remains a global powerhouse for whom $500m is small change. The AOL deal almost finished off Time Warner. But, he said, “it’s too soon to say who is going to be the winner here”.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive