majedalam
facebook_in_2011.pdf
CASE: E-406
DATE: 05/12/11
Arar Han (MBA ‟09) wrote this case using publicly available sources under the supervision of Thomas M. Siebel
Professor of Business Leadership, Strategy, and Organizations William P. Barnett as the basis for class discussion
rather than to illustrate either effective or ineffective handling of an administrative situation. Historical details of
Facebook are largely drawn from Stanford GSB Case E-220, “Facebook,” revised May 22, 2008.
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FACEBOOK IN 2011
FACEBOOK IN 2004
The original Facebook website went live on February 4, 2004 as a digital directory of
undergraduate students enrolled at Harvard University. It was coded by then-sophomore Mark
Zuckerberg, who wanted to combine the school‟s dorm-exclusive online directories into a
school-wide resource. Those who joined Facebook could create a profile with their first and last
name, photo, residence, contact information, relationship status, personal interests, and even
course schedule. A profile could be viewed by other users who had a confirmed digital “friend”
relationship with the owner of that profile (Exhibit 1: Sample Profile).
Facebook spread quickly. By the end of February, there were 10,000 Harvard users registered on
the site. Students at Columbia, Stanford, and Yale were invited to join on February 25, 26, and
29, respectively. i Over half of the undergraduate student body at Stanford signed up in the first
week. By June, Facebook spanned some 30 colleges and had approximately 150,000 users.
Zuckerberg was surprised by the demand for Facebook‟s services:
Early on, we weren‟t intending this to be a company. We had no cash to run it.
We actually operated it for the first three months for $85 a month – the cost of
renting one server. We had a network of banner ads, but it‟s not like we were
making money. ii
He decided to spend the summer of 2004 in Silicon Valley growing Facebook and fleshing out
its business potential.
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Facebook in 2011 E-406
p. 2
Social Networking Sites
When Zuckerberg arrived at Facebook‟s rented Palo Alto house in June 2004, there were at least
three other companies offering internet-based social networking services:
Friendster, which was founded in 2002, was a prominent dating site with 1.5 million unique visitors in September 2003, up from just 110,000 in April.
iii In October 2003, it rejected a
$30 million buyout offer from Google, instead raising $13 million in a venture round led by
Kleiner Perkins Caufield & Byers and Benchmark Capital. iv
MySpace was founded in July 2003 as a self-described “online community that lets you meet your friends‟ friends.” It offered a range of services such as invitations, events, classified
advertising, and forums, and raised $11 million in a round led by Redpoint Ventures. v
Orkut was started by a Google programmer in January 2004. Membership to Orkut was by invitation only, so the network grew organically through an existing network of trusted
friends. By July 2004, it had over 1 million users, many of whom lived in Brazil.
Facebook was set apart from other social networking sites in that it grew from college to college,
using a dot-edu email address as verification of a new user‟s identity and collegiate affiliation.
Other services did not have explicit divisions within the overall network, nor an expansion
strategy that targeted colleges. Facebook‟s customer support page in 2004 explained that division
by school was for the sake of user privacy:
Facebook was intentionally designed to limit the availability of your profile to
only your friends and other students at your school. This simple but important
security measure promotes local networking and makes sure that your information
is seen by people you want to share it with, and not seen by folks you don‟t.
As Zuckerberg commented:
We‟re not asking anyone to put anything out there that they wouldn‟t be
comfortable with. We‟re not forcing anyone to publicize any information about
themselves. We give people pretty good control over their privacy.
Indeed, Facebook allowed users to restrict who could access their profiles: friends, friends of
friends, and certain networks of users. This was similar to other social networking sites, which
supported similar restrictions, though not by school as Facebook did.
Facebook Becomes a Business
By the end of the summer of 2004, Facebook had achieved the following milestones:
Redesigned and relaunched the Facebook site.
Upgraded and added to Facebook‟s back-end infrastructure.
Appointed Sean Parker, co-founder of Napster and Plaxo, as president.
Received $500,000 in seed capital from prominent venture capitalist Peter Thiel.
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Facebook in 2011 E-406
p. 3
More important, Zuckerberg became convinced of the site‟s potential as a business: “When we
came out to the Bay Area, we realized that no other site really had this kind of activity, that it
could be a big business, and it might be fun to do.” Zuckerberg dropped out of Harvard to pursue
Facebook full time, as its CEO.
2005-2006: GROWTH AND CHALLENGES
Facebook hit 1 million users in December 2004. By May 2005, the site had 2.8 million users at
more than 800 colleges. Its growth reportedly sparked a bidding war among a dozen venture
capital firms eager to participate in Facebook‟s success. The winner was Accel Partners, which
invested $12.7 million in a deal valuing Facebook at $100 million. Thrilled, Accel partner Jim
Breyer praised the Facebook management team as “intellectually honest and breathtakingly
brilliant in understanding the college student experience.”
Facebook was on its way to capturing the 13.4 million U.S.-based college student audience, vi
with a penetration rate of over 80 percent at each of the colleges it served. But $100 million was
a surprising value for a company that had little revenue and served only college students. Breyer
himself said in an interview, “Certainly relative to many other deals, especially deals at this same
stage, the price was significantly higher.” Some in the venture capital industry wondered whether
Accel‟s investment was testament to the return of the internet investment bubble of the 1990s. vii
In September 2005, Facebook entered the 17.1 million student high school market. Existing, i.e.
collegiate, users could invite high school students they knew, and the first wave of high school
students to join could invite their peers. Facebook grew quickly among the high school set.
Although MySpace was already an established player, it took Facebook just seven months to
reach 1 million registered high school users.
In April 2006, Facebook started offering membership to those affiliated with a limited number of
corporations. viii
These included Accenture, Amazon, Apple, EA, Gap, Intel, Intuit, Microsoft,
Pepsi, PWC, and Teach for America. New users could register using their dot-com work email
addresses. Later the same year, Facebook started expanding internationally by offering
memberships to schools like the Indian Institutes of Technology and select high schools in Israel.
Competition
By the end of 2006, Facebook was the second largest social networking site after MySpace. At
12 million active users, it was about a quarter of MySpace‟s estimated 43 million. ix
The average
Facebook user spent about one hour on the site per day, a figure that grew each month, while the
equivalent metric for MySpace, which was purchased by News Corp. in 2005 for $580 million,
was holding steady at about two hours. x According to web traffic monitor comScore, MySpace
was the fifth most popular website in the U.S. as measured by number of page views. It was said
to have become a music destination, with over 350,000 bands and artists using it as a platform
for publicity and communications with fans. xi
With 36 million members worldwide, Friendster
also remained a prominent social networking site, though it was unclear how many of its
members were active users. xii
Orkut was the dominant social networking site in Brazil and had
launched in India, to promising results.
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Facebook in 2011 E-406
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In addition to the growth of the big four social networking sites, the social networking industry
saw aggressive investment into technology applications with a social focus:
Blogger was started in 1999 and bought by Google in 2003 for an undisclosed sum.
Flickr, a photo sharing site, was launched by a Canadian gaming company in 2004 and purchased by Yahoo! in 2005 for $35 million.
Yelp, a social restaurant and business review site founded in 2004, had received a total of $12 million in venture capital financing by 2006.
Twitter, a microblog site with RSS functionality, launched in 2006 and in 2007 received between $1 million and $5 million in venture loans in a deal valuing it at $20 million.
xiii
The boom in social networking businesses was a worldwide phenomenon. Beyond Orkut in
Brazil and India, Facebook lookalike Bebo was founded in San Francisco in 2005 and gaining a
dominant position in the United Kingdom, Ireland, and New Zealand. xiv
“Chinese Facebook”
RenRen 1 also launched in 2005. Some, like South Korea‟s Cyworld, predated Facebook, and had
already achieved a penetration rate of 25 percent of the entire South Korean market, population
50 million. xv
Privacy
Limiting its user base to college-aged students with dot-edu email addresses had enabled
Facebook to verify that its users were who they said they were. While the site still required
members to use their real first and last names, opening up membership to others outside of the
dot-edu network in September 2005 suspended Facebook‟s ability to confirm their identity and
affiliation. This led to a range of concerns about privacy in the network:
Press reports warned users against posting phone numbers and residential addresses.
College newspapers claimed that prospective employers were using Facebook and other social networks to screen job candidates.
High school students feared that college admissions officers would do the same – particularly that they would reject applicants on the basis of any evidence of illegal drug use or underage
drinking found on student profiles.
Such concerns created a tension between Facebook‟s interest in fostering “a freer flow of
information,” as Zuckerberg put it, and a justifiable interest on the part of parents, school
administrators, and law enforcement officials to protect students from the potential risks of
disclosing private information in a semi-public realm. While Facebook took precautions to
protect its members from predatory users and encouraged them to report any suspicious
activities, it stopped short of censoring them or placing restrictions on anything it regarded as
their ability to express themselves.
Accel partner Breyer regarded the issue of privacy at Facebook as akin to the same at eBay in its
early stages:
1 RenRen was founded by Stanford GSB MBA Joe Chen (‟99).
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Facebook in 2011 E-406
p. 5
We certainly spend a lot of time thinking about what are the privacy issues…
Medium and long term, perhaps the closest model out there would be how eBay
had to make some fundamental decisions along the way relative to the
democratization, if you will, of their user base.
What constituted an appropriate level of privacy was not easy to define. Like the U.S.
government, Facebook was scrupulous to steer clear of intervening in „citizen‟ self expression.
However, its policy was also to keep its college and high school networks discrete – a move that
drew controversy when college users realized they could not view any high school profiles
without first being confirmed “Friends.” xvi
Facebook‟s FAQ page at the time noted:
The high school and college networks are completely separate. This means that
features like search, messaging, poking, and inviting people to be friends are
restricted to the network you use. This is primarily for security reasons, but also
because many people prefer it this way.
User Revolt
In September 2006, Facebook inadvertently challenged user expectations of privacy with the
launch of “News Feed” and “Mini Feed.” Before the launch, users had to visit their friends‟
individual profile pages to see a log of their activity on the site. Afterwards, the two features
harvested user activity on Facebook and added them to an RSS-like queue to the user‟s friends.
News Feed was set as all users‟ homepage after login (Exhibit 2: Sample News Feed).
User response to the new feeds was strongly negative. For example:
You went a bit too far this time, Facebook. Very few of us want everyone
automatically knowing what we update. We want to feel just a LITTLE bit of
privacy, even if it is Facebook. News Feed is just too creepy, too stalker-esque,
and a feature that has to go.
Some Facebook users began to organize a boycott of the site on September 12, 2006. xvii
After several misdirected attempts to quell angry users, Facebook introduced modifications to
News Feed and Mini Feed that gave them more control over what would go into the feeds and
who would be allowed to see them. In addition, Facebook introduced new privacy controls.
These included the ability to block certain users from accessing one‟s profile, the option of
restricting directory searches from returning one‟s profile or picture, and a range of user controls
for who or which networks would be allowed to see various parts of one‟s profile.
Then, on September 26, 2006, Facebook announced it was open to the public at large.
Investments and Purchase Offers
In April 2006, Facebook had raised $27.5 million in a round of financing led by Greylock
Partners and Meritech Capital Partners. The deal valued Facebook at $550 million. Shortly
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Facebook in 2011 E-406
p. 6
thereafter, Yahoo! offered to buy a majority stake in Facebook for $1 billion cash, based on a $2
billion valuation. Facebook rejected this offer and announced in December that Facebook was
not for sale. As Zuckerberg explained in an interview:
We are not necessarily focused on what the exit is going to be – whether it‟s
selling the company or an IPO or when that‟s going to be. But we obviously think
that there‟s a lot of potential to keep growing. xviii
2007-2008: A STREAM OF NEW FEATURES
Resolved to grow the business organically, Facebook hired new employees – especially
programmers (“developers”) – at a brisk pace. At 300 employees in November 2007, it was said
to be targeting roughly 700 by the end of 2008. xix
Google was a frequent target of Facebook‟s
recruiting efforts. As reported in TechCrunch:
Facebook has already claimed YouTube CFO Gideon Yu, e-commerce product
lead Benjamin Ling and GDrive developer Justin Rosenstein. But ex-Googlers
inside Facebook are saying that the problem goes further than a few high profile
exits caused by vesting stock. Facebook just seems a hell of a lot “sexier” than
Google. A steady stream of Google employees is making the switch to Facebook,
and competition for top college grads is fierce as well.
Senior VPs at Google have dubbed it “the Facebook problem” according to a
number of sources. At least ten “top performers” have made the switch over the
last two months. Ex-Googlers expect to continue seeing at least two to four more
leave for Facebook each month. That doesn‟t sound like much, but Facebook is
targeting the cream of the crop. The best Googlers are being actively recruited,
and many are leaving.
Powered by its growing team of talented developers, Facebook launched a number of new
features during 2006 and 2007. These included:
Social Bookmarking (October 2006): allowed users to share items of interest from within Facebook or across the Internet with friends or post them to their profiles.
m.facebook.com (January 2007): Facebook optimized for mobile phones. Users could upload photos and notes to Facebook and receive message from Facebook using SMS.
Virtual Gifts (February 2007): a small icon constituting a gift could be given and received among Facebook users and posted to user profiles. The first gift was free; subsequent gifts
cost $1 each. Proceeds were donated to charity.
Flyers Pro (September 2007): an advertising market allowing advertisers to stipulate the maximum price they would pay for each time a user clicked on their ad. Using Facebook‟s
knowledge of users‟ gender, age, location, political views, relationship status, education
status, workplace, and key words, the ads could be finely targeted to relevant users.
Social Ads (November 2007): an advertising platform. Brands and businesses could create profile pages akin to user profile pages. Called “Pages,” these profiles contained information
like the company location, website, hours of operation, members, and the like.
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Facebook in 2011 E-406
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Facebook Chat (April 2008): instant messenger for Facebook friends.
Mini Feed extension (April 2008): users could import updates from other web services like Flickr, Deli.cio.us, Digg, Picasa, and Yelp into their profiles.
People You May Know (April 2008): allowed users to connect with additional users that Facebook‟s algorithm suggested.
Facebook Connect (May 2008): enabled users to login to third-party websites using their Facebook credentials and allow them to access their profile information. When users
activated feature with a third-party site, the third-party could access as much user data as
Facebook could access. xx
Facebook Beta (July 2008): a new graphic user interface for Facebook. Users were initially invited to opt in to the new look, which integrated Mini Feed with the user‟s profile Wall,
among other attempts to create a less cluttered look and feel.
F8 and the Social Graph
In addition to building new features, Facebook launched a platform 2 called F8 in May 2007 for
developers to build applications that could run within the site. F8 allowed third-party developers
to create applications that users could then add to the six standard Facebook applications: photos,
events, groups, gifts, birthdays, and marketplace (also launched in May). Facebook Query
Language and Facebook Markup Language were concurrently released to support developers in
their efforts. F8 launched with 85 applications from 65 partners including Microsoft and
Amazon. By June, 40,000 developers had launched more than 1,500 new Facebook applications.
At the unveiling of F8, Zuckerberg spoke of a concept called the “social graph” as foundational
to the Facebook user experience and to the site‟s growth potential. The term “social graph” and a
broader school of thought on “social networks” had been popularized in the mid-fifties by social
scientists who used nodes and lines to graphically illustrate linkages among people. xxi3
Zuckerberg described Facebook as the largest social graph in the world.
On pace to hit 50 million users by the end of 2007, Facebook was adding 100,000 new users a
day. The company had a record of all the links among its members, as well as the members‟ links
to sites and places outside of the network. This data constituted Facebook‟s social graph, a
highly leverageable asset for Facebook and a tremendous advantage it had vis-à-vis other
companies seeking to reach anyone who was in the Facebook network. Simply put, Facebook
had more information about people‟s relationships and preferences than any other business did.
Moreover, it was voluntarily given and highly reliable.
At the F8 conference, Facebook invited application developers to tap into its social graph. As
Zuckerberg described:
2 A technology platform prescribes a programming language and environment for an operating system or user
community. Developers create applications, or other additions or improvements to the platform, building out the
system‟s functionality or buttressing the community‟s offerings. Facebook was based on the Internet. Over time, it
was accessible through the company‟s website, through cell phones, so-called “smart” phones, and even cars
preinstalled with advanced telecommunications tools. 3 This school of thought included the work of sociologist Duncan J. Watts, who researched and wrote about
structure and randomness in social networks in his 1999 book Small Worlds (Princeton University Press).
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Facebook in 2011 E-406
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The Facebook platform is optimized for building applications in Facebook, and
with more value for people to develop on our base than we could do on our own.
People are already building social apps, but they have to reconstruct the social
graph all by themselves. We are going to allow developers worldwide to do
complete new things. Today social networks are completely closed nets…today
we are going to end that. With this [framework] any developer worldwide can
build full applications on top of the social graph inside the Facebook Platform. xxii
More Investments, Competitive Responses, and a Privacy Problem
It was hard to overestimate the potential value of Facebook‟s platform. A few months after the
launch of F8, Facebook announced a $10 million fund for Facebook application developers.
Called the fbFund and administered by the Founders Fund and Accel Partners, the fund would
provide $25,000 to $250,000 in grants to aspiring application developers. 4
Successful investors to Facebook in 2007 and 2008 were Microsoft; Hong Kong billionaire Li
Ka-Shing; German brothers Marc, Oliver, and Alexander Samwer; and TriplePoint Capital.
Together, they invested a total of $475 million in five transactions all valuing Facebook at $15
billion (Exhibit 3: Facebook Valuation September 2004 to January 2011).
Google, which had competed with Microsoft to invest in Facebook, responded by launching
OpenSocial in November 2007. While not a direct competitor to F8, given their discrete
operating environments, OpenSocial was also an application platform. Instead of prescribing its
own language, as F8 did, developers could use common programming languages like Javascript
and HTML to build social applications on the Internet. Social network companies like Orkut,
Salesforce, LinkedIn, Plaxo, and Friendster all joined the OpenSocial platform. In March 2008,
MySpace and Yahoo! joined Google to jointly foster the development of OpenSocial.
Microsoft pointed to Facebook‟s enormous advertising potential to justify its $240 million
investment. Indeed, at no other time had so many people gathered in one place to willingly
divulge valuable marketing information about themselves, and at no other time was this
information so accessible, harvestable, and actionable. In June 2008, Facebook surpassed
MySpace to become the largest social network. xxiii
The engine driving the growth of Facebook‟s social graph was Beacon, a feature in Facebook‟s
Social Ads platform that took Social Bookmarking to a new level. Beacon enabled users to
connect their profiles to 44 external partner sites. Beacon not only collected data on user
activities on those sites, it also published user activity on external sites to News Feeds – all
without notifying users or obtaining their permission.
Zuckerberg publicly apologized to Facebook‟s angry users:
We‟ve made a lot of mistakes building this feature, but we‟ve made even more
with how we‟ve handled them. We simply did a bad job with this release and I
4 In its second year, fbFund offered investments instead of grants. It was quietly discontinued in 2010.
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Facebook in 2011 E-406
p. 9
apologize for it… We were excited about Beacon because we believe a lot of
information people want to share isn‟t on Facebook, and if we found the right
balance, Beacon would give people an easy and controlled way to share more of
that information with their friends. But we missed the right balance… People
need to be able to explicitly choose what they share, and they need to be able to
turn Beacon off completely if they don‟t want to use it. xxiv
But the damage was done. Facebook eventually shut down Beacon in September 2009 as part of
the settlement for a successful class action lawsuit. 5 Then, in December 2009, it announced a
new set of privacy standards that defaulted its users to sharing more profile information publicly.
Again, users were aghast:
These new “privacy” changes are clearly intended to push Facebook users to
publicly share even more information than before. The privacy “transition tool”
that guides users through the configuration will “recommend” – preselect by
default – the setting to share the content they post to Facebook, such as status
messages and wall posts, with everyone on the Internet, even though the default
privacy level that those users had accepted previously was limited to “Your
Networks and Friends” on Facebook.
On a human level, one can look at the new privacy changes as akin to going to
sleep at night with the assumption that the various doors and windows of your
house were locked, only to wake up and realize that while you were sleeping, the
'locksmith' decided that you/they were better served if the doors were left
unlocked. xxv
2009-2010: CONTINUED GROWTH AND A SOARING VALUATION
Throughout 2009, stories of lawsuits dominated public news reports about Facebook and
Zuckerberg. Since 2004, Facebook had been mired in several suits alleging that Zuckerberg was
not the originator and founder of the site.
The drama surrounding its origins notwithstanding, Facebook continued to rapidly grow its
organization. By the end of 2010, there were 2,174 Facebook employees listed on the career
networking site LinkedIn. One in five also listed Google as a former employer. xxvi
Key hires
from Google included former Google VP Sheryl Sandberg, who became Facebook‟s COO in
2009, and former Google public relations chief Elliot Schrage, who became head of Facebook‟s
public relations in 2008.
As a response to the flow of its employees to Facebook and other hot startups, Google
announced in November 2010 that it would give a 10 percent raise to all employees. The Wall
Street Journal reported:
The pay hike comes as Google ramps up its battle with competitors, especially
neighboring Facebook Inc., in a fight to secure talented staff… Over the past year
5 See http://www.beaconclasssettlement.com for full details.
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several former Google executives who helped run the company's advertising
business, as well as Google product managers and engineers involved in Chrome
and Android software projects, joined Facebook. xxvii
Facebook‟s growing developer team launched a range of new features including:
“Like” button (February 2009): A small “Like” button was added to each item that appeared on News Feed or on users‟ profile pages. Users could click that button to indicate a simple
endorsement of the item “liked,” and could also add a comment below. xxviii
“Usernames” (June 2009): Users could register for a web address to their profile within Facebook.com containing a username of choice. Instead of being a numbered profile whose
page was accessible by going to http://www.facebook.com/profile.php?id=20439234879,
users could choose a name and instead be accessible via http://www.facebook.com/JohnDoe.
“Messages” (November 2010): “Messages” was an integrated communications platform that combined text messaging, instant messaging, emails, and regular Facebook messages. It
reportedly took 15 months to develop. xxix
Each new feature tacitly invited speculation about Facebook‟s strategic intent in creating and
releasing it. For example, when “Messages” launched, many wondered if it would ultimately be
an “e-mail killer.” When “Usernames” launched, observers speculated that Facebook would soon
supplant or replace independent business websites. However, when Facebook announced “Open
Graph” in April 2010, pundits immediately hailed it as “a clear effort to make Facebook the
centerpiece of any individual‟s Web experience.” xxx
Launched with 30 external site partners, Open Graph was essentially a revamped Beacon. It
allowed users to “Like” external content, such as a news article on CNN.com, and that activity
would be treated just as a “Like” was within the Facebook site, i.e. published to users‟ walls and
News Feeds. Users‟ friends would also see on the article itself on the external site that the user
had “Liked” it. Open Graph spanned news articles to e-commerce sites, movie and music sites,
sports teams, and more. Crucially, Open Graph allowed users to individually opt in to each
external site and allow activity on it to be announced back to Facebook.
Analysts concluded that as a result of Open Graph:
Facebook can essentially build a database of anyone‟s “Likes” that ranges across
all categories. Most importantly, because of Facebook‟s focus on authenticity, the
suggestions generated by Facebook‟s database are much more likely to be useful
to a user (and advertisers). xxxi
Potential implementations of Open Graph data included:
Suggestions to other products and services that a user might also like by using the user‟s “Likes” and comparing them to other users‟ “Likes” and creating a proprietary algorithm
much like Pandora did to generate song suggestions to its listeners.
Recommendations of Facebook Pages to a user based on “Likes” from friends.
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In addition, pointed out one analyst, Facebook could determine from patterns of News Feeds and “Likes” who among a user‟s friends was most influential to that user and others in the
relevant network. Advertisers could use that information to specifically target a campaign
targeted toward those users. xxxii
Open Graph immediately took off as sites throughout the web implemented the “Like” button.
After falling to $9 billion following the market crash of October 2008, Facebook rose to an
implied valuation of $35 billion in November 2010, when Accel sold 17 percent of its stake for
$516 million.
2011: AN AMBITIOUS OUTLOOK
By January 2011, Facebook comprised some 600 million users around the world xxxiii
(Exhibit 4:
Average User Facts and Figures). It attained a valuation of $50 billion in a $500 million
investment from Goldman Sachs and Russian investment group Digital Sky Technologies.
Amid Facebook‟s rapid growth in services and features, it became difficult to describe the
business, and where its value came from. According to Wikipedia:
Facebook is a social networking service and website launched in February 2004,
operated and privately owned by Facebook, Inc. Users may create a personal
profile, add other users as friends, and exchange messages, including automatic
notifications when they update their profile. Additionally, users may join common
interest user groups, organized by workplace, school or college, or other
characteristics.
The name of the service stems from the colloquial name for the book given to
students at the start of the academic year by university administrations in the
United States to help students get to know each other better. Facebook allows
anyone who declares themselves to be at least 13 years old to become a registered
user of the website…According to Social Media Today, in April 2010 an
estimated 41.6% of the U.S. population had a Facebook account. xxxiv
While Wikipedia‟s description was basically right, many felt that Facebook was more than a
social network. One mobile application company cited the variety and range of exchanges that
occurred on the site and through its mobile access points, and took to calling it a
“communication platform.” xxxv
Facebook COO Sheryl Sandberg went as far as to position her
employer as a “core” of commercial and social activity. “We think every industry in going to be
rebuilt around social engagement,” she declared in an interview. xxxvi
Indeed, the Wall Street Journal reported that by February 2011, Facebook‟s Open Graph
included “some 2.5 million websites” that had incorporated the “Like” button into their product
and media content. xxxvii
Dan Rose, Facebook‟s vice president of partnerships and platform marketing, agreed and hinted
at the high potential of future growth: “The foundation of a platform is one where people want to
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build on top because there is equal value exchange.” xxxviii
He affirmed his intent to find new
industries and businesses as partners to engage in this “value exchange.”
Applications
One industry that was profoundly disrupted by Facebook was gaming, which dominated the list
of most popular applications in Facebook. Less than a year following the launch of the F8
platform, Slide and RockYou! had become the leading application developers, occupying six of
the top ten app slots. xxxix
They created then-popular apps like Super Wall and Top Friends, which
had extended standard functionality on Facebook and had been installed by 28 million and 26
million users, respectively.
By the end of 2007, there were more than 10,000 Facebook applications. By mid-2009, Venture
Beat declared that Facebook‟s platform developers were on track to “see $500 million in
revenue” that year, mostly through the sale of virtual goods like poker chips and accoutrement
for other social games. xl
In 2011, there were more than 550,000 actively used applications offered on the Facebook
Platform. The top ten list was dominated by game apps, particularly those by game developer
Zynga, which had raised over $500 million from Google, Kleiner Perkins Caufield & Byers, and
others since it started in 2007. xli
Zynga commanded a higher valuation than Electronic Arts, the
offline game company that had produced Madden NFL and The Sims, among other dominant
hits. As analysts noted, “As of January 14, 2011,…of the ten most-popular Facebook
applications by Monthly Active Users, seven are games; of which Zynga developed six.” xlii
The popularity of gaming apps had the potential to further shift the demographic mix of the
Facebook user base, about half of whom were aged 25 and under (see Exhibit 5). Industry
surveys revealed:
[W]omen in their 50s were the most common demographic for social games,
[with] the three most common age groups [being] people in their 50s (22%), 30s
(21%), and 40s (20%). The number of gamers 60 and older (16%) is almost three
times greater than the number of gamers 21 years old or younger (6%). xliii
While much of the developer energy around Facebook apps was centered around gaming,
Sandberg thought that Facebook would have a similar impact as a platform for other businesses:
“[Like gaming,] news, health, finance, shopping and commerce – we think similarly, all of these
things will be rebuilt by companies that work with us to put social at the core.” xliv
Such grand proclamations triggered media predictions that “Facebook is likely to tread on more
toes as it builds out [its] platform.” xlv
The question was: How did Facebook intend to penetrate
new industries, and on whose toes would it inevitably tread? Online marketing proved to be an
early battleground.
Online Marketing
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In February 2011, The Wall Street Journal reported:
In just two years, Facebook‟s share of online display ads has surged to 13.6
percent from 2.9 percent of the U.S. market, which reached $8.88 billion in 2010.
Facebook‟s growth comes at the expense of companies such as Yahoo and AOL
Inc., and the site is also likely taking ad money away from traditional media like
newspapers and TV.
Yahoo has stopped trying to compete directly with the social network and instead
integrates Facebook features into its sites, hoping to halt a slide in the time its
users spend on Yahoo each month. Myspace, which like Yahoo has struck some
partnerships with Facebook, declined to comment… Jeff Levick, the president of
AOL advertising, said he viewed the rise of Facebook as „complementary‟
because the companies are „running two very, very different businesses.‟
…Facebook likely had revenue of $1.9 billion to $2 billion [in 2010], mostly in
advertising. xlvi
Unlike traditional web-based advertisements, ads shown to a user in Facebook could be
accompanied by a social endorsement by a friend of the user if that friend had previously clicked
a button labeled “Become a Fan.” Similar to the “Like” button, this endorsement was carried on
News Feeds and noted in homepage ads.
A white paper by Facebook and Nielsen demonstrated the power of these new, social ads. It
stated that without a social endorsement, ad recall for an ad within the Facebook homepage was
10 percent and purchase intent, just 2 percent. By contrast, homepage ads that referenced user
friends who had become fans of or “liked” a company or product drove recall to 16 percent and
quadrupled purchase intent. And when users saw their friends‟ “Likes” or fan-dom appear in
News Feeds, ad recall rose to a whopping 33 percent, while purchase intent jumped to 15
percent. xlvii
Besides an increase in advertising effectiveness, a benefit of Facebook as an advertising vehicle
was the range of tools Facebook made available to advertisers: xlviii
Ways to offer free samples to customers, something ketchup maker Heinz has used.
The ability to attract the attention of smartphone users making local check-ins. Clothing retailer The Gap gave away 10,000 pairs of jeans to the first 10,000 customers to use the
Facebook local check-in service. Mazda sold 100 cars with a 20-percent-off offer at five
U.K. auto dealerships.
The ability to build e-commerce sites into Facebook pages. Max Factor didn‟t want to lose visitors to its Facebook page to another site when customers were ready to buy something, so
a partnership with Amazon let customers buy products without leaving.
„Reach block‟ ads that change as many as five times in a 24-hour period to send a sequence of ad messages to Facebook users.
Surveys that let companies try to engage customers in company decisions. VitaminWater used voting, among other mechanisms, to generate 1.3 million connections with possible
customers during its “find a new flavor” marketing campaign.
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Applications built atop Facebook‟s interface let companies create custom-made interactive programs.
Local advertisers in Facebook could use two new products just for them: “Places,” which
competed directly with the start-up foursquare, allowed users to share with Facebook friends
their location when they were at businesses or other public places. “Places” enabled Facebook to
introduce “Deals,” which competed with group coupon giant Groupon, offering users discounts
and other promotions based on their locations. xlix
In May 2011, news outlets reported that Facebook had captured nearly a third of the U.S. online
display advertising market in Q1 of 2011. It was followed by Yahoo! with about a tenth of the
market, and Microsoft with just under a twentieth. AOL and Google had smaller shares. l
Payment Processing via Facebook Credits
Facebook planned its foray into payments with the launch of its proprietary currency, which it
called “Credits.” Starting in June 2011, Facebook mandated the use of “Credits” to process
transactions that took place within its applications, including games like those offered by Zynga. li
Facebook would assess a 30 percent fee on each transaction, a rate previously set by Apple for
in-application transactions that took place within its platform. lii
According to analysts, the logic behind “Credits” was that:
[I]t is much easier for a consumer to purchase a large balance in virtual currency
and make many small purchases using the virtual currency than to make multiple
small purchases using a traditional method of payment, like a credit card.
Essentially, virtual currencies reduce the purchasing friction between the
consumer and the application.” liii
They projected that “Credits” would be a big source of revenue:
Facebook credits will likely become a lucrative business for Facebook, and there
is potential over the longer term to move the service off Facebook, such as e-
commerce payments (like PayPal), or even real-world payments via mobile
devices (like a credit card, except near-field-communication via mobile phone is
the method in which account information is transmitted to a retailer). liv
The promise of “Credits” as a revenue driver led the Wall Street Journal to speculate that:
Facebook could later extend its Credits system to other areas of commerce,
including physical goods, potentially making it a competitor to PayPal and
Amazon.com Inc… PayPal President Scott Thompson plays down any rivalry
with Facebook… „Payments is really, really hard to do,‟ he said. lv
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RISKS
Many celebrated the social networking giant‟s prowess across industries and foresaw sempiternal
dominance for Facebook. “It‟s basically Facebook‟s to lose,” said Zynga CEO Mark Pincus. lvi
Others cautioned against such exuberance. The Economist warned:
Not so long ago, exactly the same thing might have been said of MySpace. The
site was riding high when News Corp bought it for $580 million in 2005. But a
few years later it was going downhill. Some see this as a sign that large social
networks are destined to disintegrate when they become too big. lvii
While nobody knew for certain what Facebook‟s ultimate path would be, there were at least six
known risks to Facebook‟s future growth:
Privacy and Security
A Pew survey revealed that 60 percent of users restricted access to their Facebook profiles, some
very tightly to a small group of friends. Facebook clearly had an interest in protecting users and
potential users, making them feel safe to use the site as intended, i.e. to share information about
themselves. However, said the Economist, this posed a risk to Facebook‟s revenue potential:
In order to attract users, sites need to offer ways for members to restrict the
information about themselves that gets shared with a wider public. Without
effective controls people would be reluctant to sign up. But if a site allows
members to keep too much of their information private, there will be less traffic
that can be turned into profit through advertising and various other means, so the
network‟s business will suffer. lviii
To what extent and in what ways could Facebook push its users to be more open? Were its users
essentially a captive audience, or was there a point at which they would disengage or even quit,
as one user did, publishing his reasons to his syndicated blog (see Exhibit 6: “Top Ten Reasons
You Should Quit Facebook”):
I often hear people talking about Facebook as though they were some sort of
monopoly or public trust. Well, they aren't. They owe us nothing. They can do
whatever they want, within the bounds of the laws. (And keep in mind, even those
criteria are pretty murky when it comes to social networking.) But that doesn't
mean we have to actually put up with them. Furthermore, their long-term success
is by no means guaranteed - have we all forgotten MySpace? Oh, right, we
have…Facebook isn't the only game in town. I don't like their application nor how
they do business. I've made my choice to use other providers. And so can you.
At the time of writing, the post had 850,000 page views.
A closely related issue to user privacy was personal and corporate security. Security breaches
leading to the compromise of profile data was a widespread concern as more people accessed
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secure sites on unsecured public airwaves. In addition, experts warned of the unintentional
disclosure of private and organizational information about corporations. For example:
By analyzing LinkedIn profiles and monitoring the information feeds from
Facebook and Twitter accounts, [security firm] Cyberoam uncovered things such
as the companies‟ hierarchy, decision makers, employee morale, intellectual
property, and financial health, all of which could be useful to competitors. Of the
companies examined, 40 percent disclosed confidential information. lix
Mobile
Facebook was most often accessed through its full site, through computers with full-sized
screens. However, a growing trend was to use it on the go, through mobile phones and smart
phones with small screens and site limited functionality.
Accessing social-networking sites, particularly Facebook, was among the fastest-
growing activities over the past year among cell phone users, comScore said…
Nearly 58 million people n the Unites States went onto a social-networking site
using a cell phone at least once in December, up 56 percent from the same time in
2009, comScore said in its 2010 Mobile Year in Review. Most of that growth was
led by Facebook, which reached 90 percent of U.S. social media users and grew
more than 120 percent over the past year. lx
This trend posed a challenge to Facebook‟s ability to collect revenue, as advertisements were
difficult to place on Facebook‟s mobile application without compromising the user experience.
Was a paid Facebook mobile app the solution? Or would new ways of monetizing the user – for
example location-based technologies available on mobile phones – provide opportunities for
other efforts that took the place of traditional ads?
Or would mobile networks eventually supplant the Facebook network? As one press report
projected:
[The] next big wave of social networking will revolve around mobile phones and
the places that people take them to. A new crop of networking firms has already
sprung up to capitalize on the opportunities offered by mobile phones. That opens
up the prospect of even broader changes in the social-networking landscape. lxi
Forced IPO
Another risk pertained to Facebook‟s ability to stay a private company. Its growing number of
private owners could trigger a United States Securities and Exchange Commission (SEC) rule
that required private companies with 500 or more owners or ownership entities to abide by the
accounting and disclosure practices required of public companies by the Sarbanes-Oxley Act of
2002. Already, there was an SEC probe underway following Goldman Sachs and Digital Sky
Technologies‟ $500 million investment in January 2011. lxii
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The Economist noted: “Faced with such obligations, most firms seek a public listing. This rule
was one of the reasons that Google ultimately decided to go public in 2004.” lxiii
Would Facebook
need to have an initial public offering (IPO) in the near future?
Organization
While it remained a popular recruiter, Facebook itself had lost some of its own key hires. It
suffered a natural loss of traction with some young employees as they grew out of late
adolescence or decided to pursue other interests (sometimes both). However, the reasons for
employee departures were diverse, as online tech magazine Gigaom noted:
Many Facebook employees started at the company just out of college and have
grown up together. [Some] left college to join. Others are getting engaged and
married (sometimes to each other) and starting to have kids. They‟re far removed
from the early days of Facebook Proms and a company-sponsored Tahoe party
cabin.
One frustration of early employees is that they‟ve had limited upward mobility as
Facebook has matured…Another factor in the recent exodus could be that
Facebook offered employees the ability to cash out up to $1 million worth of
stock options with the help of investor Digital Sky Technologies, in part to
alleviate pressure toward an IPO. lxiv
International User Growth
As Facebook gained dominance in the domestic U.S. market, it needed more international users
to keep growing its user base, much as it had turned to high schools to add to its maturing
collegiate user growth rate in 2005. 6 Facebook had initially relied solely on some 300,000 users
who volunteered their time to build out versions of the site in other languages. lxv
By 2008,
Facebook maintained a small but growing team of post-MBA country marketing managers
whose role it was to drum up interest in and signups to Facebook in whatever ways possible.
This was an easier pursuit in countries where social networking had not caught on the way it had
in the United States. In others with a dominant player or regulatory pressure, growth was more
challenging:
In Spain, Tuenti 7 held a dominant position since 2006 and was positioned in much the
same way that Facebook was in the United States.
Facebook started a Chinese-language site in 2008. The following year, Facebook was deemed noncompliant to censorship rules by the Chinese government for Internet-based
media companies. It was blocked by the so-called “Great Firewall of China,” resulting in
6 As of February 2011, MySpace was put on sale by News Corp. After reaching a peak valuation of $12 billion in
2007, it was estimated to be worth $50 million to $200 million (Source: Reuters). It was unclear how many active
users MySpace had, although some estimates put the figure at about 43 million, or virtually unchanged from 2007. 7 Tuenti was co-founded by a team that included Stanford GSB MBA Adeyemi de Ajao (‟10).
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a dramatic decline in its user base: one million to 14,000. Renren, started in 2005, role to
prominence and planned a U.S. IPO in 2011. It had 160 million users. lxvi
In 2010, Facebook met a similar fate in Vietnam as it had in China. lxvii
Still, Facebook showed promise, even in countries that had a dominant incumbent. In India, for
example, Facebook overtook Google‟s Orkut in July 2010 and strove to capture the country‟s
1.14 billion people lxviii
(see top ten international Facebook markets in Exhibit 4).
Certainly Facebook showed no signs of shying away from a good growth challenge. It was
rumored that Facebook entered new countries in order of advertising market size rather than
based on the presence or absence of a dominant incumbent. Some including the Google head of
display ads estimated the size of the global display ad market in 2011 to be north of $20
billion. lxix
The Weight of Expectation
A final risk was the weight of expectation. By February, share sales taking place on secondary
exchanges like SecondMarket placed Facebook‟s implied valuation at $84 billion from the $50
billion valuation of Goldman and Digital Sky Technologies deal. “This marketplace is like the
early days of the „junk‟-bond market,” remarked one analyst. lxx
Online venture capital journal VentureBeat allowed that Facebook enjoyed a high valuation but
wondered whether the valuation would be borne out over time:
Using historical numbers and comparing them to as „like‟ or similar companies
the valuations are very rich. But their growth rates are as high as the expectations.
While lofty valuations leave them little room to underexecute, some of them will
exceed these expectations. (Remember the naysayers who said Google‟s valuation
was too high at the IPO?) Nothing is certain and hopping on yesterday‟s trend or
today‟s overpriced trend is dangerous. lxxi
Were investors to Facebook simply risk-hungry, or did they know something that the public
market did not?
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Exhibit 1:
Sample Facebook Profile (2004)
Source: Mike Harkey and William P. Barnett. “Facebook,” Stanford GSB Case E-220. May 3, 2006. 17.
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Exhibit 2:
Sample News Feed and Mini Feed
Source: Ziad Mokhtar, G. Tavridis, and W. P. Barnett. “Facebook,” Stanford GSB Case E-220. May 22, 2008
(Revised). 20.
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Exhibit 3:
Facebook Valuation (September 2004-January 2011)
Source: Alexia Tsotsis. “The Rise of Facebook‟s Valuation from 2004-2011,” TechCrunch
<http://techcrunch.com/2011/01/10/facebook-5/> (accessed March 31, 2011). January 10, 2011.
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Exhibit 4:
Facebook.com Figures and Facts
Facebook generates 770 billion page views per month
More than 30 billion pieces of content are shared each day
200 million people access Facebook via a mobile device each day
Users than access Facebook on mobile devices are twice as active on Facebook compared to non-mobile users
Average user o has 130 friends on the site o sends 8 friend requests per month o spends an average 15 hours and 33 minutes on Facebook per month o visits the site 40 times per month o spends an 23 minutes (23:20 to be precise) on each visit o is connected to 80 community pages, groups and events o creates 90 pieces of content each month
Countries with the most Facebook users as of May 2011: 1. United States 154,828,140
2. Indonesia 36,479,400
3. United Kingdom 29,781,920
4. Turkey 28,309,920
5. India 25,028,420
6. Mexico 23,757,820
7. Philippines 23,209,840
8. France 21,909,300
9. Italy 19,180,900
10. Germany 18,264,560
Source: facebook.com, pingdom.com via http://socialmediatoday.com/kenburbary/276356/facebook-demographics-
revisited-2011-statistics (accessed April 22, 2011). Also, http://www.checkfacebook.com/ (accessed May 4, 2011).
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Exhibit 5:
Facebook Users by Gender and Age
Source: Ken Burbary. “Facebook Demographics Revisited – 2011 Statistics,” SocialMediaToday
<http://socialmediatoday.com/kenburbary/276356/facebook-demographics-revisited-2011-statistics> (accessed
March 31, 2011). March 7, 2011.
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Exhibit 6:
“Top Ten Reasons You Should Quit Facebook”
10. Facebook's Terms Of Service are completely one-sided
Let's start with the basics. Facebook's Terms Of Service state that not only do they own your data (section 2.1), but
if you don't keep it up to date and accurate (section 4.6), they can terminate your account (section 14). You could
argue that the terms are just protecting Facebook's interests, and are not in practice enforced, but in the context of
their other activities, this defense is pretty weak. As you'll see, there's no reason to give them the benefit of the
doubt. Essentially, they see their customers as unpaid employees for crowd-sourcing ad-targeting data.
9. Facebook's CEO has a documented history of unethical behavior
From the very beginning of Facebook's existence, there are questions about Zuckerberg's ethics. According to
BusinessInsider.com, he used Facebook user data to guess email passwords and read personal email in order to
discredit his rivals. These allegations, albeit unproven and somewhat dated, nonetheless raise troubling questions
about the ethics of the CEO of the world's largest social network. They're particularly compelling given that
Facebook chose to fork over $65M to settle a related lawsuit alleging that Zuckerberg had actually stolen the idea
for Facebook.
8. Facebook has flat out declared war on privacy
Founder and CEO of Facebook, in defense of Facebook's privacy changes last January: "People have really gotten
comfortable not only sharing more information and different kinds, but more openly and with more people. That
social norm is just something that has evolved over time." More recently, in introducing the Open Graph API: "...
the default is now social." Essentially, this means Facebook not only wants to know everything about you, and own
that data, but to make it available to everybody. Which would not, by itself, necessarily be unethical, except that ...
7. Facebook is pulling a classic bait-and-switch
At the same time that they're telling developers how to access your data with new APIs, they are relatively quiet
about explaining the implications of that to members. What this amounts to is a bait-and-switch. Facebook gets you
to share information that you might not otherwise share, and then they make it publicly available. Since they are in
the business of monetizing information about you for advertising purposes, this amounts to tricking their users into
giving advertisers information about themselves. This is why Facebook is so much worse than Twitter in this regard:
Twitter has made only the simplest (and thus, more credible) privacy claims and their customers know up front that
all their tweets are public. It's also why the FTC is getting involved, and people are suing them (and winning).
6. Facebook is a bully
When Pete Warden demonstrated just how this bait-and-switch works (by crawling all the data that Facebook's
privacy settings changes had inadvertently made public) they sued him. Keep in mind, this happened just before they
announced the Open Graph API and stated that the "default is now social." So why sue an independent software
developer and fledgling entrepreneur for making data publicly available when you're actually already planning to do
that yourself? Their real agenda is pretty clear: they don't want their membership to know how much data is really
available. It's one thing to talk to developers about how great all this sharing is going to be; quite another to actually
see what that means in the form of files anyone can download and load into MatLab.
5. Even your private data is shared with applications
At this point, all your data is shared with applications that you install. Which means now you're not only trusting
Facebook, but the application developers, too, many of whom are too small to worry much about keeping your data
secure. And some of whom might be even more ethically challenged than Facebook. In practice, what this means is
that all your data - all of it - must be effectively considered public, unless you simply never use any Facebook
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applications at all. Coupled with the OpenGraph API, you are no longer trusting Facebook, but the Facebook
ecosystem.
4. Facebook is not technically competent enough to be trusted
Even if we weren't talking about ethical issues here, I can't trust Facebook's technical competence to make sure my
data isn't hijacked. For example, their recent introduction of their "Like" button makes it rather easy for spammers to
gain access to my feed and spam my social network. Or how about this gem for harvesting profile data? These are
just the latest of a series of Keystone Kops mistakes, such as accidentally making users' profiles completely public,
or the cross-site scripting hole that took them over two weeks to fix. They either don't care too much about your
privacy or don't really have very good engineers, or perhaps both.
3. Facebook makes it incredibly difficult to truly delete your account
It's one thing to make data public or even mislead users about doing so; but where I really draw the line is that, once
you decide you've had enough, it's pretty tricky to really delete your account. They make no promises about deleting
your data and every application you've used may keep it as well. On top of that, account deletion is incredibly (and
intentionally) confusing. When you go to your account settings, you're given an option to deactivate your account,
which turns out not to be the same thing as deleting it. Deactivating means you can still be tagged in photos and be
spammed by Facebook (you actually have to opt out of getting emails as part of the deactivation, an incredibly easy
detail to overlook, since you think you're deleting your account). Finally, the moment you log back in, you're back
like nothing ever happened! In fact, it's really not much different from not logging in for awhile. To actually delete
your account, you have to find a link buried in the on-line help (by "buried" I mean it takes five clicks to get there).
Or you can just click here. Basically, Facebook is trying to trick their users into allowing them to keep their data
even after they've "deleted" their account.
2. Facebook doesn't (really) support the Open Web
The so-called Open Graph API is named so as to disguise its fundamentally closed nature. It's bad enough that the
idea here is that we all pitch in and make it easier than ever to help Facebook collect more data about you. It's bad
enough that most consumers will have no idea that this data is basically public. It's bad enough that they claim to
own this data and are aiming to be the one source for accessing it. But then they are disingenuous enough to call it
"open," when, in fact, it is completely proprietary to Facebook. You can't use this feature unless you're on Facebook.
A truly open implementation would work with whichever social network we prefer, and it would look something
like OpenLike. Similarly, they implement just enough of OpenID to claim they support it, while aggressively
promoting a proprietary alternative, Facebook Connect.
1. The Facebook application itself sucks
Between the farms and the mafia wars and the "top news" (which always guesses wrong - is that configurable
somehow?) and the myriad privacy settings and the annoying ads (with all that data about me, the best they can
apparently do is promote dating sites, because, uh, I'm single) and the thousands upon thousands of crappy
applications, Facebook is almost completely useless to me at this point. Yes, I could probably customize it better,
but the navigation is ridiculous, so I don't bother. (And, yet, somehow, I can't even change colors or apply themes or
do anything to make my page look personalized.) Let's not even get into how slowly your feed page loads. Basically,
at this point, Facebook is more annoying than anything else.
Facebook is clearly determined to add every feature of every competing social network in an attempt to take over the
Web (this is a never-ending quest that goes back to AOL and those damn CDs that were practically falling out of the
sky). While Twitter isn't the most usable thing in the world, at least they've tried to stay focused and aren't trying to
be everything to everyone.
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