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TEACHING NOTE

Facebook (in 2013):

Will Wall Street Hit the “Like” Button?

Structure of the Case

The case opens with Sheryl Sandberg finding herself in the role of chief operating officer for

Facebook alongside its 28-year-old founder/CEO, Mark Zuckerberg. She has just watched

Zuckerberg deliver a keynote speech about the company’s latest product, Graph Search,

which empowers users to search the social network for specific information regarding their

connections. Since Sandberg became COO, she has faced mounting pressures to deliver on

the company’s $100 billion valuation, especially as news hit Wall Street that the company

was filing for an initial public offering.

The case looks back at the history of Facebook, detailing its growth from Harvard’s campus

to Silicon Valley. Facebook went from a Harvard online student directory to a social

network that included 800 colleges and universities and a $12.7 million investment by 2005.

Monthly active users (MAUs) continued to grow and a few more investors joined subsequent

rounds of funding. In 2012, Facebook surpassed one billion MAUs, giving the company an

enviable amount of reach as well as a massive collection of user information. Revenues

reached $5.09 billion in 2012, with the majority of sales generated from ad revenues, and

everything else coming from its gaming platform and platform developers. Still, Facebook

was making only $15 per account, whereas Google and Yahoo averaged about $88 per user.

Facebook’s founder/CEO, Mark Zuckerberg, continues to drive strategy around product

development, although he no longer directly develops for the website. Zuckerberg received

much criticism over his casual appearance and inexperience. In 2008, he recruited Sheryl

Sandberg as his chief operating officer. He thought she would be comfortable as his number

two. Sandberg’s recruitment has softened the criticism against the young CEO while

bringing a sense of urgency to monetizing Facebook’s billion-user base of subscribers.

Zuckerberg brings in the users while Sandberg brings in the money. Sandberg’s impressive

background has brought greater credibility to Facebook’s future.

Newsfeed, Timeline, and Graph Search make up the three “pillars” of Facebook’s product

offering. Newsfeed tells users what is going on in the part of the social graph that they’re a

part of. Timeline provides a quick way to answer the question “who is this person?” since it

provides a chronological ordering of a person’s life posts to the website. Graph Search is the

latest pillar that allows users to query their connections for information unique to them.

Zuckerberg also sees this search feature as a way for users to make new connections. In

addition to the pillars, Facebook has various features that users find useful: a messaging

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service, photo sharing and storage, calendar and event management, notifications,

personalized pages, and a gifting service.

Facebook creates value for marketers and advertisers as well as for application developers.

For marketers, Facebook touts four value propositions: reach, relevance, social context, and

engagement. Online advertising continues to grow and so does the value of Facebook’s

advertising business. With the growing popularity of mobile computing, monetizing these

smaller screens has become a challenge. Advertisements are not the only revenue source for

Facebook; 15 percent of revenues come from its developer platform. Developers can use a

variety of application programming interfaces (API) that allow developers to connect their

products to a user’s social network. Some examples include posting to a user’s newsfeed,

logging in using Facebook credentials, and integrating “Like” and “Subscribe” buttons.

Facebook competes with other social networks including the professional site LinkedIn, the

micro-blogging network Twitter, and the photo-sharing service Instagram. Although

Facebook acquired Instagram on April 19, 2012, for one billion dollars, Twitter and

LinkedIn remain active competitors. By July 2012, Twitter had 500 million accounts, with

27 percent classified as active users. However, Facebook users spend more time on the

website than Twitter users. Facebook ad revenues in 2011 were $3.15 billion compared to

Twitter’s $139.5 million. Unlike Twitter but similar to Facebook, LinkedIn required users to

approve connections. It serves the professional community by creating profiles that are

work-oriented and makes connections more exclusive for networking purposes. In 2012,

LinkedIn was responsible for one million job applications. While LinkedIn does not generate

as much ad revenue or traffic as does Facebook, its stock price doubled quickly after its IPO

and led to a valuation of $9 billion.

Technology giants Microsoft and Google are also competing with Facebook. Microsoft has a

10 percent stake in Facebook and a partnership that uses Skype for Facebook’s video chat

service. There is tension in the online advertising space between Facebook and both

Microsoft and Google. Google’s online advertising services are exhaustive and dominant

compared to Facebook. Immense value for both online marketers stems from their extensive,

intimate knowledge about users of their services. As of yet, Google’s social network,

Google+, has not figured out how to acquire as large an installed base as Facebook.

The Facebook IPO, which took place on May 18, 2012, was rife with trouble. Technical

glitches that shut down trading for several hours and a price that was set too high culminated

in a closing price well below the initial offering. Investors were irate, and court cases were

brought against NASDAQ. Facebook continues to deal with the aftermath of the fumbled

exchange especially as investors demand a return.

Facebook’s network of one billion monthly active users is an enviable number to other

advertising agencies. However, how does Sandberg balance Zuckerberg’s ideal Facebook

interface, users’ privacy concerns, and shareholders’ financial expectations? The answer

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became more complicated with consumers’ increased connectivity through mobile devices.

What business model and monetization strategy should Sheryl Sandberg propose?

Suggested Questions

Analysis: Focus on External and/or Internal Environments

1. What are the vision, mission, and values of Facebook? Critically evaluate their

usefulness to the company’s leaders in formulating strategic intent.

2. What is Graph Search, and why is it so important for Facebook?

3. What “industry” is Facebook competing in, and how is this industry changing? Who

are Facebook’s most important competitors? Why?

4. What are Facebook’s resources and capabilities? What is Facebook’s core competency?

Can its resources and capabilities form the basis of a competitive advantage? Why or

why not?

Formulation: Focus on Business, Corporate, and/or Global Strategy

5. What is Facebook’s business model? How is it currently making money?

6. Which business model would you recommend Sheryl Sandberg implement to justify a

firm valuation of over $100 billon? Does Facebook need to modify its current

approach?

Implementation: Focus on Recommendations and How to Execute Them

7. Given the business model you identified, which implementation roadblocks do you

anticipate? How should Sheryl Sandberg address them?

Analysis: Focus on External and/or Internal Environments

1. What are the vision, mission, and values of Facebook? Critically evaluate their

usefulness to the company’s leaders in formulating strategic intent?

Facebook’s official mission, as stated on its own page, is “to give people the power to share

and make the world more open and connected.” 1 This mission has manifested itself

throughout Facebook’s product development. In order to connect the world’s more than two

billion Internet users, Facebook must overcome a few roadblocks including: Germany where

users are fiercely concerned about privacy issues; Brazil where Google’s social network has

deep roots; Russia where VKontakte has social media dominance; and China where

Facebook is blocked and the Chinese social network RenRen operates free of competition

from Facebook.

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Facebook’s values are consistent with upholding an innovative software development culture

by empowering and encouraging employees to take on difficult problems. Specifically,

Facebook’s values are:

 Focus on Impact

o To have the biggest impact, we need to focus on solving the most important

problems. It sounds simple, but most companies do this poorly and waste a lot of

time. We expect everyone at Facebook to be good at finding the biggest problems

to work on.

 Move Fast

o We have a saying: “Move fast and break things.” The idea is that if you never

break anything, you’re probably not moving fast enough. At Facebook, we’re less

afraid of making mistakes than we are of losing opportunities.

 Be Bold

o We have another saying: “The riskiest thing is to take no risks.” In a world that’s

changing so quickly, you’re guaranteed to fail if you don’t take any risks. We

encourage everyone to make bold decisions, even if that means being wrong

some of the time.

 Be Open

o We believe that a more open world is a better world. The same goes for our

company. Informed people make better decisions and have a greater impact,

which is why we work hard to make sure everyone at Facebook has access to as

much information about the company as possible.

 Build Social Value

o Facebook was created to make the world more open and connected, not just to

build a company. We expect everyone at Facebook to focus every day on how to

build real value for the world in everything they do. 2

For pre-IPO Facebook, these values and the mission statement seemed to be very effective at

developing products that grew the user base. The Facebook website has reached over a

billion people and is a globally recognized brand.

However, after its IPO, Facebook has struggled to reach the valuation expected by the public.

Zuckerberg has been quoted as saying that at Facebook, “We don’t build services to make

money; we make money because we build services.” Since the beginning of Facebook, his

focus has been on developing great products that engage users. Because of this, revenues

would naturally follow the great user experience. The question to ask here is, “Would a user

pay for the services provided by Facebook if they were not free?” Zuckerberg has mentioned

in board meetings that he believes in his strategy, and that firm valuations are not important

to him. Investors would like to see another value added to the list along the lines of “Deliver

on Shareholder Expectations.”

As mentioned in the case, the roles of Zuckerberg and Sandberg have been described as

Zuckerberg brings in the users while Sandberg brings in the money. Sheryl Sandberg’s track

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record as a hardnosed manager who made Google highly profitable as the vice president of

Global Online Sales and Operations has led to a shift in attitude at Facebook toward

delivering on investor expectations. As a Harvard MBA, she focuses on the “show me the

money” attitude in Facebook’s daily operations.

At one point on the Facebook campus in May 2012, posters were put up saying “Advertisers

are users too.*” and below it, “* no srsly,” to indicate in Internet speech, “no seriously.” 3

These posters were obviously a move to shift internal sentiment for advertisers and provoke

innovative solutions for marketers to drive ad revenue.

2. What is Graph Search, and why is it so important for Facebook?

Zuckerberg calls the network of connections between people the social graph. Facebook, as

a product, is an attempt to map the global social graph in the form of a massive database.

Graph Search is a search bar that hovers at the top of every Facebook page. In addition to

acting as a title for the content of that page, Graph Search also allows users to search for

people, places, photos, and interests in their portion of the social graph (i.e., compare the

interests and likes with those of friends and friends of friends.) Zuckerberg stated that Graph

Search is meant to help people “discover and make new connections,” whereas the previous

two pillars helped people maintain their connections. Later releases of the tool will include

information from Open Graph (a tool that allows developers to write coherent stories to a

person’s timeline) and allow users to search Facebook posts. It is also expected to migrate to

Facebook mobile in the future.

Zuckerberg was careful to mention that Graph Search is not like traditional Internet searches

such as Google because it retrieves and organizes content according to the searcher’s

connection with other people and their likes and interests. He was also careful to say that it

was not trying to replace traditional online search engines, that instead it would give more

personally meaningful results for users. Despite his careful introduction of Graph Search, it

has been perceived as a big step toward competing with Google’s search engine. The years

that Facebook spent attracting users and their personal information have come together to

give Facebook an edge over Google’s user database.

In fact, in anticipation of such a move by Facebook, Google launched its own social

networking tool, Google+, in 2011. So far, Google+ has made little headway against

Facebook’s massive head start in the social network space. Facebook search capabilities will

also directly compete with other social-based information services like Yelp, LinkedIn, and

Amazon.com in the areas of finding restaurants and shops, making business connections, and

buying goods.

Graph Search is important to advertisers as well. Lars Rasmussen, a product engineer at

Facebook, mentioned using Graph Search to find a local dentist he could trust based on

pages his friends had liked. These kinds of results could bring in advertising funds from

many local small- to medium-sized businesses. 4

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Google aggregates and organizes information across the Internet to make it quick and easy

for users to retrieve what they need in a search; however, Google does not have access to the

information stored in Facebook’s database to guide the searches. Facebook has gained a

clear competitive advantage over Google with the sheer amount and type of information it

has collected on one billion users of the Internet.

3. What “industry” is Facebook competing in, and how is this industry changing? Who are

Facebook’s most important competitors? Why?

Facebook, like other social media companies, is difficult to place into a specific industry. As

far as industry standard classifications, Facebook is classified with:

 Computer programming, data processing, and computer services (SIC 7370)

 Internet publishing and broadcasting and web search portals (NAICS 519130)

The social media sector has been moving toward the mobile Internet. To be successful in this

space, a company’s product must be everywhere a user goes. Thus, it has become mandatory

to keep up with the rapid pace of mobile-device technologies for the three major mobile

platforms while keeping an eye on emerging technology. This trend is evident in the

evolution of the type of media shared. Originally, only text was exchanged on the social

network. Pictures were the next step, but now users expect video sharing. As an example,

Facebook witnessed the need for innovative photo capabilities as it watched the photo-

sharing service, Instagram, rise in popularity.

In these categories, Facebook is competing with other social media networks such as Twitter

and LinkedIn. These companies have served many of the same users, are promoted by many

of the same webpages and companies, and also link their services for the convenience of

users. Despite the similarity of their services, Facebook continues to draw the most attention

with 62.4 percent of all media site visits in October 2012. (See Case Exhibit 7.)

The reality is that Facebook provides the services just mentioned but also is an online

advertising agency, electronic gaming platform, and e-commerce retailer. Facebook’s growth

into these categories pits it against other technology giants such as Google, Amazon, and

Microsoft. The industry convergence amongst these technology companies is increasingly

complicating the products offered.

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Table 1: Industry Convergence

Industry Facebook Google Amazon Microsoft

Social

Network

 Facebook.com

 (Primary Service)  Google+  Goodreads  Skype

Online

Search  Graph Search

 Google.com

 (Primary Service)  Bing

eCommerce  Gifts

 Payments

 Google Offers, Wallet, Shopping,

Local, Play

 Amazon.com & affiliate sites

 Amazon Prime

 (Primary Service)

Online Ads  Primary Revenue  AdSense/AdWords

 (Primary Revenue)  Bing Ads

Mobile

Devices  Phone?

 Nexus (phone/tablet)

 Moto X (phone

 Kindle

 Nokia (phone/tablet)

 Surface

Productivity

Software

 Google Docs

 Chrome OS

 Primary Revenue

 Microsoft Office

 Windows

Games  Facebook Platform  Google Play  Windows Store

4. What are Facebook’s resources and capabilities? What is Facebook’s core competency?

Can its resources and capabilities form the basis of a competitive advantage? Why or

why not?

CORE COMPETENCIES

Tangible

Resources

- Server facilities - Cash on-hand

Intangible

Resources

- Website - Software - Network effects (billion+ users) - Talented engineers and managers

- Business processes - User-generated content - Map of social graph - Instagram - Partnership with Microsoft

Several resources and capabilities work together to form a competitive advantage for

Facebook.

Before Facebook, the dominant social network was MySpace (now spelled “Myspace”).

MySpace, started in 2003, was acquired by NewsCorp in 2005. After the acquisition, the

company shifted focus from growing its user base to generating revenue. By the economic

downturn of 2008, Facebook surpassed MySpace as the most popular social network because

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it had been able to focus on growing subscribers without outside pressure to grow the bottom

line. In a market where network effects have a strong influence on the value of your product,

larger user bases give your firm an exponential advantage over competitors. (See

ChapterCase 9 for more information about the Facebook/MySpace rivalry.)

Facebook’s core competency is designing web and mobile tools for mapping the social graph

by engaging users to share information privately and, more importantly, publicly. The

“public” posts are very important for marketers who want to leverage social media to spark

interest in their brand. When users “like” a subscriber or leave comments about a brand, they

are becoming engaged with that product in a way that spreads interest by virtual “word-of-

mouth” and by increasing the user’s likelihood of recalling that product.

Of the resources that Facebook has acquired over time, without its strong user base,

Facebook would not have as compelling an argument for advertisers and marketers. Without

the ability to manage and interpret big data, Facebook would not be able to deliver results to

advertisers. Before all of these, Facebook needed the website to draw in users and convince

them to share vast amounts of information.

Table 2: Resource-Based View – VRIO Framework

Subscriber Base Website Big Data IP Developer Platform Valuable Yes Yes Yes Yes

Rare Yes (on this scale) No Yes (for now) No

Costly to Imitate Yes No Yes No

Organized to

Capture Value Could improve Yes Yes Yes

Facebook has formed a clear competitive advantage with its resources. In order to maintain

this advantage, it must be flexible and sensitive to the wave of changes in how its users are

engaging the world through newer technology. Moreover, startups and other competitors are

trying to enter the valuable social media space.

Formulation: Focus on Business, Corporate, and Global Strategies

5. What is Facebook’s business model? How is it currently making money?

Facebook operates a two-sided platform with a large base of users that act as content

generators on one side of the market, with marketers, advertisers, and developers on the

other side trying to reach them. The marketers act as content generators when they create

free business fan pages, which are similar to users’ timelines. Developers are co-creators

with Facebook in delivering products that keep users engaged.

Each party creates value in the Facebook ecosystem. While users access content and

participate in the social graph for free, their participation is valuable to the advertisers and

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marketers who are willing to pay per click for highly targeted advertisement banners located

on the right side of a user’s newsfeed. These advertisements are targeted toward users based

on their profile information. Thus, Facebook benefits greatly from attracting new users and

making it easy, fun, and meaningful to volunteer detailed information about them. In

addition to banner ads, marketers can pay Facebook to promote posts to users with the same

targeting mechanics as with banner ads.

Each customer has at least one channel for generating revenue for Facebook. Users can buy

gifts for each other through Facebook, and a small percentage of those transactions become

revenue. Advertisers pay Facebook for the target ads and promoted posts based on the

number of people who interact or see them. Developers make money through in-game

purchases and share a portion of those proceeds with Facebook.

Facebook has invested in products and tools for each participant in their ecosystem. Users

have the many features of the website to access for free. Most user products entice users to

volunteer more information about themselves which can be used to better target ads.

Advertisers have the products mentioned earlier that include a dashboard tool for creating

advertisements, selecting customer profiles, monitoring campaigns, and controlling the

payments for campaigns. Developers have access to many tools that help them integrate

websites and applications with Facebook profiles and develop games for the Facebook

platform.

Table 3: Business Model – Two-Sided Platform Participants

Social Subscribers Developers Advertisers/Marketers

Role/Level of Engagement - Content generators - Co-creators - Content generators

Cost to User

- Free access to social

graph

- % of proceeds from

gift purchases

- Free access to

Software Development

Kit (SDK)

- % of proceeds from

in-game purchases

- Pay per click

- Pay to promote posts

- Free access to company

pages

Products

- Newsfeed

- Timeline

- Graph Search

- Messages

- Photos/Video

- Subscribe

- Pages

- Events

- Places

- Gifts

- SDK

- Open Graph

- Social plugins

- Social channels

- Graph API

- Login

- Payments

- Banner ads

- Business fan pages

- Promoted posts

6. Which business model would you recommend Sheryl Sandberg implement to justify a firm

valuation of over $100 billion? Does Facebook need to modify its current approach?

The answers to this question could be many and varied; however, the key is that Facebook’s

business model as of January 15, 2013, is not likely to yield a $100 billion valuation.

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A firm valuation at the time of the case would be helpful, if not necessary, for the analysis of

this question. At first glance, a $100 billion valuation would suggest that, at a discount rate

of 15 percent, Facebook needs a terminal value net income of $15 billion. The average

revenue per user (ARPU) required is then $50, assuming the user base of one billion remains

constant and a profit margin of 30 percent is achieved. In comparison, Google and Yahoo

currently capture about $88 per user, suggesting that it is feasible for Facebook to achieve

$50 per user. Facebook captures $15 per account during the time of the case; therefore, the

current business model is not sufficient, and Facebook must contrive one that more than

triples ARPU.

Possible business models may include:

 Charge users a nominal fee to access the website.

o Charge everyone. While this approach would bring in additional revenue, it is

not likely to be a complete remedy in itself and would certainly remove some

users from filling in gaps in the social graph. Zuckerberg is not likely to

approve of such a move. (Note: Facebook’s login page promises users that the

service “is free and always will be.”)

o Implement a freemium model, similar to LinkedIn, in which users are granted

privileged access for a nominal fee. The widely debatable questions here are:

How many users would adopt a premium account? And, what is their

willingness to pay compared to the incremental cost to Facebook for such

accounts?

 Find new ways to increase advertisers spending.

o Charge access fees for company pages. At the time of the case, Facebook

allowed companies to create business fan pages for free. By either charging

companies a fee to maintain these pages or by adding premium services,

Facebook could increase ad revenues substantially. The downside to this

strategy is that some small businesses might be priced out of the ecosystem

which not only would reflect poorly on Facebook but also would alienate a

large demographic who adds value for subscribers.

o Create a dynamic variety of products for the diverse companies interested in

social media. A Wall Street Journal article posted after the case date talks

about Facebook’s success with this approach. The article mentioned that the

online men’s shopping retailer, JackThreads.com, doubled its spending

because it found more products with which to experiment. JackThreads had

moved from purchasing only right-hand column ads to using photo and link

ads as well as mobile newsfeed promotions. 5

 Build out additional ad features for mobile users that capitalize on the unique abilities

of the mobile platform.

 Consider natural extensions of Facebook’s services that focus on its core

competencies.

 Continue to attract new users. The problem with this solution is that the cost to

acquire a new customer will grow as the users left to acquire become increasingly

harder to reach.

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Implementation: Focus on Recommendations and How to Implement Them

7. Given the business model you identified, which implementation roadblocks do you

anticipate? How should Sheryl Sandberg address them?

No matter which business model is suggested, it will likely involve a significant change to

the way Facebook managers and engineers think about which problems to address, as well as

the solutions to those problems. In fact, since the event data for this case, the culture at

Facebook has undergone a change to its organizational design and organizational structure.

Managers and some engineers at Facebook have shifted their focus from growing the user

base to growing revenue by giving them responsibility for revenue targets. The result has

been a 36 percent growth in ad revenues from the previous quarter. Despite the significant

change, the stock price remained 31 percent below the initial offering price at the time the

article commented on the change. It was at this time that Facebook started running ads on

mobile devices through posts to a user’s newsfeed. David Fischer, vice president of

marketing commented that, “More leaders need to be accountable [for revenue].” Engineers

were asked to solve revenue-related problems. In fact, some of them changed positions. The

creator of the Newsfeed became the head of advertising engineering.

The fact that many within Facebook were able to change and create new positions indicates

that Facebook is, at least in part, an organic organization. Other changes that empowered

change within the organization were the education of managers about how their products

influenced advertisers and revenue. Next, teams were formed between ad employees and

product developers to disseminate knowledge throughout Facebook. Finally, select

employees were taken to P&G to undertake a crash course in advertising. 6

Elements of the “Unfreeze – Change – Refreeze” model of change management can be seen

in the shift from a user growth–oriented to a revenue growth–oriented business model.

Step 1: Unfreeze the culture (get the organization ready for change).

- Establish a sense of urgency to change the culture by communicating a new vision

and strategic initiatives.

- Form a coalition with enough power to lead the change.

Facebook has developed a strong culture focused on innovative product design. Much of the

development has centered on developing “neat” products for users. According to Facebook’s

stated values, engineers have the autonomy to pursue projects that they believe solve the

biggest challenges at Facebook. Graph Search itself was created from this mentality. Two

engineers saw an opportunity to create a search engine that could navigate the privacy-

restricted content tailored to each user.

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With a culture used to a high degree of autonomy and freedom to explore almost any idea, it

becomes a significant effort to direct their efforts to focus on something as stifling as

revenue generation. For Sandberg to make this happen, she must strategically communicate

the changes that need to take place, their significance, and how the change is consistent with

the current culture while driving Facebook to a profitable future. Sandberg must show

managers and engineers how concerning themselves with revenue in every activity

ultimately is an excellent exercise of their tremendous talent and not a waste of that talent.

Furthermore, she must punctuate her message with how the company’s mission of creating a

more open and connected world is achieved through the focus on revenue.

Step 2: Change the culture (implement the changes).

- Put managers in place who agree with the new strategy.

- Empower employees to act on the new vision.

As mentioned in the Wall Street Journal article cited at the beginning of this question,

Sandberg can employee many techniques for creating the revenue-centric culture needed to

drive innovative ad / mobile ad products. First, identify a few key leaders who are willing

and enthusiastic about taking on new roles, such as advertising engineer. Encourage these

leaders to spread the word and ignite a new passion for the change by espousing the benefits

communicated in step one.

Next, Sandberg can provide educational opportunities for managers and engineers to learn

about marketing techniques through traditional workshops (sending employees to a P&G

advertising bootcamp) and creating cross-functional teams to expedite knowledge transfer

and collaboration. Finally, by encouraging employees to move between product development

and marketing functions, Sandberg may encourage faster dissemination of knowledge

between these business units.

Step 3: Refreeze the culture (solidify the change into the “new normal”).

Finally, Sandberg must continue to monitor, adjust, and reinforce the changes that have

taken place. Otherwise, the new culture will relapse into old habits. Many of Facebook’s

product innovations have been a result of an emergent strategy. The move to drive forward a

culture that seeks revenue opportunities while developing great products is the intended

strategy.

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Recent Updates

 Zuckerberg’s Web Access Program: Staying true to his vision of creating a more

open and connected world, Zuckerberg announced that Facebook will be involved in

a program called internet.org to provide Internet access for the four billion people in

the world who cannot afford Internet services. 7

 Facebook Reader: Facebook has been working on a newsreader application that

would aggregate information from several sources. The play is an attempt to get users

to use the Facebook mobile application more frequently while consuming more ad

content. 8

 Mobile Ad Success: Mobile advertisement revenue was up 76 percent in July 2013. 9

 Facebook Market Value Tops $100 Billion: Facebook’s market capitalization has

finally surpassed its IPO market capitalization. The stock price has grown 55 percent

in 2013, compared to the S&P 500’s 16 percent growth. 10

Exhibit 1 in these teaching

notes is an extension of Exhibit 13 in the main case. This figure includes what has

happened since the case’s end date.

 Facebook to Show Video Ads: Facebook has promised advertisers since the summer

of 2013 that they would be able to show short (15-second) clips in users’ newsfeeds.

Technical obstacles have slowed and delayed progress. This service could generate

$2.2 million per day per brand. 11

 Twitter’s IPO on November 7, 2013: Twitter launched its IPO on November 7, 2013.

Trying not to repeat Facebook’s fumbled IPO, Twitter was listed on the New York

Stock Exchange instead of the NASDAQ. The company experienced an opening

“pop” of 73 percent in its price and closed $19 above the initial price. 12

 Instagram to Start Carrying Ads: As a part of its mobile monetization strategy,

Facebook intends to display ads within Instagram. Facebook has not made a return

on the billion-dollar investment yet. The goal is to start inserting a few photos and

videos from major brands. The problem is that major brands (Nike) have already

figured out how to launch viral campaigns on Instagram without paying for it. Sheryl

Sandberg was instrumental in bringing Emily White, a former Google executive, to

Instagram. She will be leading the advertising rollout. 13

 Facebook Teen Numbers Are Down: Teen usage has gone down and an ad-density

limit has been reached, 14

but the Snapchat acquisition hoped to boost those numbers

while following new media trends. 15

Facebook’s teen policy was such that their posts

could only be posted privately. However, Facebook has decided to allow teens to

post publicly, opening the door for advertisers to reach these previously inaccessible

users. 16

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Case Strategic Financial Analysis (SFA)

Financial analysis spreadsheets for this case can be found in Connect.

Additional Resources (Videos)

1. Building Graph Search.

https://www.facebook.com/about/graphsearch (3:19). Facebook.

2. Why We Have too Few Women Leaders.

http://bit.ly/hcnwRz (14.58). TED Talk, Sheryl Sandberg.

Exhibit 1 Update to Facebook’s Historical Market Capitalization

Source: Authors’ depiction and extension of data from “Facebook Investors Cash Out,” The Wall Street

Journal, August 17, 2012, http://on.wsj.com/ZX1r4W.

https://www.facebook.com/about/graphsearch

http://bit.ly/hcnwRz

http://on.wsj.com/ZX1r4W

Teaching Note

Exhibit 2 Update to Financial Statements through Q2 2013

Fiscal Year/Quarter 2010 2011 2012 2013

03/31/2012 06/30/2012 09/30/2012 12/31/2012 03/31/2013 06/30/2013

Cash and short-term investments 1,785 3,908 3,910 10,188 10,452 9,626 9,472 10,252

Receivables – total 373 547 482 1,145 1,202 1,170 1,085 782

Inventories – total - - - - - - - -

Property, plant, and equipment – total (net) 574 1,475 1,855 2,105 2,289 2,391 2,533 2,577

Depreciation, depletion, and amortization (accumulated)

246 450 537 629 734 882 1,002 1,014

Assets – total 2,990 6,331 6,859 14,928 16,038 15,103 15,163 15,724

Accounts payable – trade 29 63 129 43 59 65 75 55

Long-term debt 367 398 404 394 530 1,991 1,920 1,851

Liabilities – total 828 1,432 1,587 1,619 1,864 3,348 3,339 3,375

Stockholders’ equity – total 2,162 4,899 5,272 13,309 14,174 11,755 11,824 12,349

Sales (net) 1,974 3,711 1,058 1,184 1,262 1,585 1,458 1,813

Cost of goods sold 354 537 167 228 147 173 180 235

Selling, general, and administrative expense 449 1,095 400 1,560 562 665 672 786

Income taxes 402 695 177 (608) 431 441 134 212

Income before extraordinary items 606 1,000 205 (157) (59) 64 219 333

Net income (loss) 606 1,000 205 (157) (59) 64 219 333

Earnings per share (basic) excluding extraordinary items

0.28 0.47 0.10 (0.07) (0.02) 0.03 0.09 0.14

Earnings per share (diluted) excluding extraordinary items

0.28 0.47 0.10 (0.07) (0.02) 0.03 0.09 0.13

Source: Compustat.

Teaching Note

McGraw-Hill Education.

Exhibit 3 Facebook Cost-per-Click in Various Countries for November 2012

Country Cost-per-Click

Russia 1.26

Japan 1.25

Australia 1.08

United States 1.05

Norway 0.82

United Kingdom 0.81

Nigeria 0.78

Switzerland 0.78

New Zealand 0.75

American Samoa 0.73

Guernsey 0.72

South Africa 0.70

Canada 0.67

Sweden 0.66

Denmark 0.65

Source: Statista Industry Statistics (STATIS), November 10, 2013. http://bit.ly/18fk8ng.

http://bit.ly/18fk8ng

Teaching Note

McGraw-Hill Education.

1 “Facebook’s profile,” Facebook, http://www.facebook.com/facebook.

2 “Careers,” Facebook, http://on.fb.me/1jcQ50X.

3 Rusli, E. M. (2013), “After IPO, Facebook gets serious about making money,” The Wall Street Journal, May

16. http://on.wsj.com/1ijwjTB. 4 “Building Graph Search,” Facebook. http://on.fb.me/1in4tpA (3:19).

5 Rusli, E. M. (2103), “After IPO, Facebook gets serious about making money.”

6 Ibid.

7 Rusli, E., and D. Clark (2013), “Facebook’s Zuckerberg sets forth web access program,” The Wall Street

Journal, August 21. http://on.wsj.com/1bkXlFy. 8 Rusli, E. (2013), “Facebook, with a focus on mobile, works on project for news via users,” The Wall Street

Journal, June 23. http://on.wsj.com/1aae6Rh. 9 Winkler, R. (2013),“Facebook is on road to redemption,” The Wall Street Journal, July 25.

http://on.wsj.com/1bW0i3F. 10

Womack, B. (2013), “Facebook market value tops $100 billion amid mobile push,” Bloomberg, August 26.

http://bloom.bg/17YqjbY. 11

Rusli, E., and S. Vranica (2013), “Facebook’s slow-motion video push,” The Wall Street Journal, August 9. 12

Demos, T., C. Dieterich, and Y. Kohn (2013), “Twitter IPO: Relief, riches and a $25 billion finish,” The Wall

Street Journal. http://on.wsj.com/HQvl3h. 13

Albergotti, R. (2013) “Instagram will begin carrying ads,” The Wall Street Journal, October 3.

http://on.wsj.com/1gbtnYn. 14

Albergotti, R. (2013), “Facebook status: Big gains, but worries ahead,” The Wall Street Journal, October 31.

http://on.wsj.com/1d2eIQq. 15

Rusli, E. M. and D. MacMillan, (2013),“Messaging service Snapchat spurned $3 billion Facebook bid.” The

Wall Street Journal. November 13. http://on.wsj.com/18AD6kr. 16

Albergotti, R. (2013), “Facebook’s new teen policy draws fire,” The Wall Street Journal, October 17.

http://on.wsj.com/18qGe5y.