Facebook Case Essay Example for Free

Facebook Case Essay It has been almost one year since Mark Zuckerberg decided to take his social media site public. Created on the dream of making the world more open and connected, Mark has devoted the past ten years to making that dream come true. Starting while still in college with a product called Facemash, Mark saw the potential for connecting people through the internet. He has devoted his entire adult life to Facebook which took six years to become profitable. Facebook quickly overtook competitors such as MySpace and became the social square of a global village. The user numbers grew exponentially and soon outnumbered the populations of many countries. The resulting global village was seen as ripe for advertising, profiteering, and soap-boxing. Through the growth, Mark was able to maintain and spread a sense of information democracy. All voices and opinions had equal pull and could reach audiences previously inaccessible. Formerly repressed people had an accessible outlet to outsiders. The simultaneous development of the smartphone industry provided portable and affordable platforms for Facebook everywhere. But what is all of this social capital worth? In 2011 an investor purchased a 1% stake in Facebook for $500 Million, which set Facebook’s net worth at $50 Billion. A year later when deciding to take the company public, Facebook negotiated an IPO price of $38 per share for a total company value of $104 Billion dollars. Many were skeptical that a social media company with few physical assets and no physical products was actually worth over $100 Billion. In fact, Facebook’s IPO was the highest initial value of any newly offered company. Mark himself was uneasy and not openly supportive of the jump to IPO. It was not a strategic business decision but rather a necessity based on the SEC’s rules (Facebook, Inc, 2013). Investors and users alike wondered how Facebook would maintain its dominance in the future, and ensure increasing shareholder wealth. Speculation ran wild that Facebook would begin to charge for its traditionally free service. Mark Zuckerberg had to do massive media campaigns on his own platform to regain control of Facebook’s image. The investors were right to be concerned. Facebook (FB) stock lost 35% ercent of its value in the first 10 days of public trade, and to date has not recovered to the initial stock price of $38 per share. Zuckerberg has a history of leaving investors hanging, and even stood up many investors for an entire day in Boston (Gandel, 2012). Mark has more pressure than ever to develop new revenue streams through his Facebook platform to appease shareholders without push ing users away to the ever growing number of competitor social media sites. Mark has stated multiple times that profits are not his primary goal. Now he has to make shareholders happy. Company amp; Management: Facebook headquarters is located in Menlo Park, California. Located in the heart of the US tech world, they are well positioned to attract top talent and stay abreast of all industry occurrences and trends. They have about 10 offices within the United States and more than 20 offices worldwide. Mark Zuckerberg founded Facebook in 2004 and post IPO is Chairman, CEO, and owns 57% of shareholder voting power. Sheryl Sandberg is Chief Operating Officer of the company. Sheryl serves on more than four boards including ONE and the Walt Disney Company. She was formerly the Chief of Staff for the United States Department of the Treasury under the Clinton Administration. She also worked previously as economist for the World Bank. Her responsibilities for Facebook vary from marketing and business development to legalities and human resources for the company (Facebook3, 2013). Facebook’s Chief Financial Officer is David Ebersman. He came from working at Genentech as their Chief Financial Officer and Executive Vice President. Rounding off the management team, the Chief Technology Officer and Vice President of Engineering is Mike Schroepfer (Facebook2, 2013). He comes from Mozilla, where he served as Vice President of Engineering and was instrumental in the development of the Firefox software. The board of directors for Facebook is responsible for the interests of the shareholders and oversees the management of the company. The purpose of management and the board of directors is to fulfill Facebook’s mission of making the world more open and connected. These responsibilities can be at odds with one another. Mark has stated publicly and paraphrased in the 2013 SEC filing that profits are not the main goal, and that he will steer the company owards long term innovation over short term gains. Facebook’s board is comprised of nine members. Two of these nine members are from within Facebook, Mark Zuckerberg, and Sheryl Sandberg. The remaining seven board members are employed at various organizations across the country. Marc Andreessen, Co-founder, and General Partner of Andreessen Horowitz (board member since June 2008) Jim Breye r, Partner at Accel Partners and one of Facebook’s first major investors (board member since April 2005) Susan Desmond-Hellmann, Chancellor of the University of California, San Francisco (UCSF) (board member since March 2013) Donald E. Graham, Chairman, and CEO of The Washington Post Company (board member since March 2009) Reed Hastings, Chairman, and CEO of Netflix (board member since June 2011) Erskine Bowles, President Emeritus at The University of North Carolina (board member since September 2011) Peter Thiel, Partner at the Founders Fund (board member since April 2005). Original Facebook investor and founder of PayPal (Facebook3, 2013). Facebook grew from 3200 employees in December 2011 to 4619 employees in December 2012. These employees are distributed across the approximately 30 worksites. The Facebook tagline for employees is â€Å"we don’t have rules, we have values† (Facebook6, 2013). The company has a variety of job areas; such as technical staff, sales and marketing, general, and administrative personnel, software engineers, and product designers (Facebook, Inc, 2013). Between 2011 and 2012 there was a 73% growth in engineering, design, and product management hiring; while at the same time there was a 19% increase employees supporting global sales, business development, and customer service jobs. History of Facebook: Facebook began as Facemash in 2003. Facemash was a social rating system for Mark’s Harvard classmates. Members were able to look at two peoples photos and rate them either ‘hot’ or ‘not’. However, the photos were not obtained consensually and the site was shut down. Though short lived, Facemash provided insight that people really enjoyed using the internet to look at photos of friends. In early 2004, Thefacebook. com was launched with a mission to connect people across the university. Three hundred university students were invited to use the site, and within twenty-four hours, more than 1,200 had signed up. This exponential growth drew the attention of other IT inventors and entrepreneurs. By June 2004, Sean Parker co-founder of Napster, and Peter Thiel founder of PayPal had joined forces with Facebook. At year end, Facebook had reached 1 million users. Facebook user growth focused exclusively on college campuses (Zeevi, 2013). In 2005, Accel partners invested $12. 7 million while user-ship continued to expand globally amongst students. Prior to September 2006, Facebook only allowed students and certain company employees (including Apple and Microsoft) to sign up. On September 26, 2006, Facebook became open to anyone over the age of 13 that had an email address. This not only allowed for an explosion of growth but the development of business pages and a new form of advertisement. The growth continued steadily and in September of 2009 Facebook finally became cash flow positive (Zeevi, 2013). By 2011 Facebook was completely mainstream and an important focus for business owners and marketers. The same year they partnered with Skype to allow video chat, and continued updating the look and functionality of the site. Facebook acquired mobile photo-editing company Instagram prior to their IPO in May 2012. Facebook’s move from private to public was not a strategic business decision but mandatory by the Security and Exchange Commission law. Since going public Facebook has tested and launched several new revenue generating service streams, cognizant of shareholder expectations. Currently the site hosts 50 million pages, 10 million applications, and 300+ million photos (Facebook8, 2013). Facebook Products and Services: Facebook has three main customer groups: users, software developers, and marketers. It has developed certain products and services to create value for each group and maximize their interconnectivity. Facebook has also been careful that the products for certain customers, namely developers, do not cannibalize on business from other customer groups. One of Facebook’s fears is that its developer friendly platforms will allow users to view the same content on third party sites. The delivery method for Facebook’s products and services is via the internet over any computer, laptop, or tablet. Recently Facebook has been focusing on expanding their mobile availability. Most smartphone platforms in the US have access to the Facebook application. Products for users include personal or business pages, events, groups, photo and video sharing, messaging, graph search, and news feeds. Pages allow companies, organizations, groups, or individuals to be visible within the Facebook community with a unique profile. Users have control over the information they share and who they share it with. Many businesses have pages in hopes of gaining an outside interest and understanding their customers. Updates to pages are posted in the newsfeed of a person who has â€Å"liked† that page. An algorithm determines whom the user interacts the most with and makes those updates more easily accessible. A new feature is the ability to mark a user as an acquaintance rather than a friend. This has given users more control over their privacy. The events product allows a user to organize a group meeting or gathering, send virtual invitations, and track respondents. It also creates a forum for discussion so any question asked, for example â€Å"What is dress code? † is visible to all other members, streamlining event planning work. Groups combine a set of people into one space within Facebook to streamline communication within the members and only for those members. Groups can be fan pages, memorial areas, or family members. Facebook also has video and photo sharing options. Similar to Snapfish or Flickr, a person can upload albums of photos and/or video within Facebook for sharing amongst friends and family. This allows people to be â€Å"tagged† within photos, which in turn link the photo to the specified person’s profile page. In August 2012, Facebook acquired Instagram, a photo editing site, which has enhanced their photo service offerings. As of January 2013, Instagram had 90 million frequent users, and it is easily integrated with mobile devices. The Facebook mobile application enables users to link messaging via text, email, and chat so that the messages stay as one continuous conversation. Timeline, a recent improvement, allows users to show their profile based on dates that are most important to them. It allows control over specific sections of the timeline, limiting viewers to enhance privacy. Newsfeed is a consistently updated and ongoing list of connections, likes, pages, etc. that others are able to comment on or like and that is available as the center focus of the service page. This list is personalized to the interests of the owner of the newsfeed algorithmically. Finally, Facebook offers graph search, which allows one to search using small phrases in order to in order to find people, friends, photos, etc. throughout the Facebook realm. In 2012, Facebook updated their iPad, mobile, iPhone, and Android applications to update speed and ensure a consistent experience for users. For software developers, Facebook offers development tools and application programming interfaces (APIs). These allow third party site developers to integrate their content with Facebook. The integration helps boost the rating of the third party site and allows them to take advantage of Facebook’s network of 1 billion users. As of year-end 2012, over 10 million aps and webpages had been designed and integrated with Facebook’s platforms. Social Plugin’s are a very short section of code offered by Facebook to enable the â€Å"Like Button† on other sites for easy social connection. These also increase the website’s rating when searched on Google. com. Facebook also provides a secure payments platform allowing users to buy services directly. This is most widely used for the purchase of games and virtual goods. An example is Farmville where players can purchase virtual farm goods to support the game via the platform. Marketers have access to all the products of a user, plus Ad analytics and insights. These services allow the tracking of ad campaigns and their effectiveness. Campaign data including number of viewers, region viewers are from, unique clicks and opens are all available in a quick view format and as raw data. This allows marketing clients to tailor ad campaigns and increase effectiveness quickly. Newer products introduced in 2012 are Facebook Custom Audiences that allows marketers to find their customers on Facebook, and Facebook Exchange that allows marketers to bid for ads in real time (Facebook2, 2013). Customer Profile: One out of 7 people on the earth use Facebook regularly. Facebook has 1. 06 Billion monthly users, 680 million of which are mobile users. Over 80% of Facebook users live outside the United States. User-ship increased nearly 25 percent from 2011 to 2012. Much of this growth came from Brazil, India, and Indonesia whose growth rates are 81%, 54%, and 25% respectively. By comparison growth in the United States during the same timeframe was only 8%. The company made an average of $5. 32 of revenue per user in 2012, a 6% increase from 2011. In 2011 the average user age was 38 and the average number of friends was 229. The average user also had never met face-to-face with 7% of those friends (Bosker, 2011). The figure above shows the dominant social networking sites globally. Pale grey areas are regions where social media has not yet penetrated in a meaningful way. Currently there are no Facebook users in China, as it is prohibited by the government. Facebook expects with the increase in mobile platforms that user-ship in underserved areas will increase since the availability of Wi-Fi continues to outpace infrastructure construction. Financial: Mark delayed taking Facebook public as long as possible. He was eventually forced to by the rules of the Securities and Exchange Commission (SEC) (Gandel, 2012). The Facebook IPO was a global financial buzz. The IPO was the largest to date, $104 Billion at $38 per share. In comparison, the Facebook IPO was 6 times larger than Google’s and 8 times larger than Apple’s (Gandel, 2012). It is a benchmark for future tech IPO’s. The bulk of the company’s worth comes from ad revenue and intangibles. Last minute analyses pointed that the company was not in as comfortable a position as initially thought, causing many large investors to withdraw their interest (Sloan, 2012). This revenue mix still continues. The IPO made millionaire and billionaires overnight, both for Facebook executive staff and Morgan Stanley who underwrote the IPO. Morgan Stanley profited more than expected due to the immediate drop in share prices. They had pre-sold stock to clients at the IPO price beyond the stock they actually had. They were able to purchase the additional shares directly from the market, making a larger profit (Gandel, 2012). The mix of Facebook stock sold was unbalanced. Facebook early investors, including Mark Zuckerberg, sold more than 241 million shares, while only 180 million were sold directly from the company. Shares sold by early investors accounted for 57% of the total shares sold in the IPO. Facebook has two classes of stock. The common stock sold to the public allows one vote per share. The preferred stocks owned by Zuckerberg and a select few allow 10 votes per share. As of May 2012, Mark Zuckerberg owned only 18% of Facebook’s stock, but had a majority control (57%) of votes, allowing him to maintain control of the company (Gandel, 2012). Mark is now responsible for continued growth and profit to his company and to employees, but to the external public shareholders who are already soured and skeptical by the lack luster IPO. One source of revenues is advertisements on Facebook. More than 80% of Facebook’s revenues come from advertising on its social network. The growth of the revenues directly depends on the growth of users. At the same time, Facebook has a lower click-through-rate (CTR) than an average website, which is only 0. 05% and about 4% respectively. In order to earn more income from the advertisements Facebook has to change the way it displays the ads (advertisements on wall posts have more than 6% CTR) but without interfering users’ experience. This leaves company very vulnerable and dependent on continuous growth of users, which will eventually be only marginal as the social network matures and saturates all possible markets. Though the company enjoyed a $32 million income in 2012, their revenue balance is insecure and uncertain. Additionally growth rates have been slowing. From 2009 to 2010 the company revenue grew 154%, from 2010 to 2011 it was 88%, and most recently from 2011 to 2012 it was only 37% (See financial reports at end). The company will eventually hit a saturation rate of customers, which has driven the revenue growth. The average amount spent per user has not increased dramatically. Mark expects that growth may become flat or decline once past the user saturation point (Facebook, Inc, 2013). History of Social Media: According to The Washington Post, researchers at Microsoft studied records of 30 billion electronic conversations among 180 million people in various countries and announced that any two strangers are, on average, distanced by precisely 6. 6 degrees of separation (Smith, 2008). This was the first time a planetary-scale social network has been available. Facebook, the online social network, may reduce a degree or two: Barack Obama already has well over a million Facebook friends. While the internet was born in the 1970’s it did not start playing a role that could be described as social media until the mid-1990’s. It started with the Bulletin Board System (BBS), where a piece of social information was posted for many to see, but each individual reacted to it separately without a way of communicating their reaction readily to others. Among other avenues for social interaction was CompuServe, a service that allowed members to not only share files and access news and events but also join any of CompuServe’s thousands of discussion forums to ‘yap’ with thousands of other members on virtually any important subject of the day. Those forums proved tremendously popular and paved the way for the modern iterations we know today. The dotcom boom and rise of AOL began the first mainstream wave of social media. Communication became instantaneous with more avenues of expression. The Internet Boom epic started in 1995. Nostalgic users rediscover long lost friends on Classmates. com, a social service founded to reconnect former elementary, high school and college classmates. In the world of business and commerce, the dot. com bubble burst in 2000 and the future online seemed bleak as the millennium turned. At this time only seventy million computers were connected to the internet. Currently, there are more than 1. 5 billion internet users on personal computers and more than 3 billion mobile users globally (Facebook, Inc, 2013) In 2002, social networking began in earnest with the launch of Friendster, which opened to the public solely in the U. S. and grew to three million users within three months. Friendster refined a degree of separation concept into a routine dubbed the â€Å"Circle of Friends† (wherein the pathways connecting two people are displayed). This concept is the key to social media as it is currently experienced. Introduced just a year later in 2003, LinkedIn differentiated itself as a serious, business-oriented social networking site for professionals. Social networking evolved in 2003 when MySpace launched, just a few months prior to Facebook. MySpace was a favorite site for the younger U. S. emographic and quickly became the number one social media site. MySpace held that title until May of 2009 when Facebook finally surpassed it in users and traffic (Zeevi, 2013). The most recent launched social network website is Google+, Google’s full-featured social networking tool. It differentiated itself early on with the ability to create multiple circles allowing users to better manage their professi onal and personal image, and the ability to edit previous posts, both for grammar and content. Another key feature is Google Hangouts, which allows instant video chats for up to 10 people at a time. Lastly, Pinterest a social scrapbooking launched in 2010 has captured attention for attaining 10 million users faster than any other standalone site in history, in only 22 months. Currently Pinterest attracts 11 million new users a week. The image and definition of social media has grown and shifted in the past 15 years. The most important changes have been in the scope and interactivity of the media. Social media has moved beyond connecting people to connecting ideas, companies, interests, and locations. Social media sites include Foursquare, Pinterest, and Twitter. Their delivery and business methods are very different from the original Friendster model. Secondly, the media has become ‘smart’ and interacts back to users. Algorithms drive the way posts appear, the ads displayed, and the friend suggestions that are made, changing the nature of the relationship to the software. Global Impact: Facebook has changed the way people communicate, and shifted the boundaries of communication. Facebook as a communication method has allowed users to relate experiences in real time, in a full range of media. Facebook’s platform and newsfeed has developed a feeling of immediacy for many people that is reflected in non-social media outlets. There is a constant desire to have new information. Facebook is both a service company and a data repository. The individual experiences of its 1+ billion users are stored in multi-media. This allows for information democracy on a new scale. As a social site with fluid boundaries, information can move more quickly and unconventionally. This attribute was a major player in the Arab Spring of 2011. Facebook on mobile hones allowed instant updates across large groups of people. It allowed the viewing of images and video by millions of people where they previously would have been censored. What color video was to the Vietnam War, Facebook was to the Arab Spring. The world was able to watch an uprising unfold in real time, uncensored, from multiple viewpoints. Facebook has also affected the criminal justice system. The public availability of photo and video media posted on the site provides law enforcement more evidence. Individual posts and friends’ lists have made finding people easier. Facebook posts are admissible in a court of law and have been used to prove violations of parole, abuses of child custody, and other crimes. Facebook as a platform has also shifted the concept of goods. Within the Facebook platform, users can buy virtual items for real money. Facebook used to prompt users on a friend’s birthday to buy them virtual flowers. The company has recently updated this feature to allow the purchase of a tangible gift. However, purchase of virtual goods for games like FarmVille is still extremely popular. The virtual goods industry revenue for 2011 was $2 billion. Industry: Two social networking sites are currently considered direct competitors of Facebook in the US- Twitter and Google+. Twitter has roughly half the users of Facebook, and a revenue model that focuses on sponsored tweets. Twitter is not exactly a direct competitor. Tweets integrate with Facebook status updates and many users actively participate in both services. Google+ currently has only 343 million users, roughly one third the user base of Facebook. Google+ is in direct competition with Facebook and has a very similar look and feel. While smaller by user base, Google+ 2012 revenue from highly targeted ads was $40 billion, eight times Facebook’s revenue for the same year. According to market survey, 83% of marketers indicate that social media is important for their business; however more marketers (76%) are planning on increasing use of YouTube and video marketing than any other form. The current top five social media tools for marketers are as follows: Facebook, Twitter, LinkedIn, blogs, and YouTube. Facebook will need to increase its ability to show video ads if it intends to keep the number one spot. In a five forces analysis of the industry climate, the bargaining power of consumers is high. There are many substitutes available and little cost to switching. The threat of substitute products is therefor also very high since there is a saturated market and the differentiation between brands and has been decreasing. New entrants have low barriers to entry because of low initial investment, and only moderate brand loyalty, however they need to be sufficiently interesting and innovative to capture the number of users necessary to be a major player. The bargaining power of suppliers is low. Server space providers and hosts exist almost in a commodity market with little differentiation in product or price. As in most tech industries the threat of rivalry in social media is extremely high (Tran, 2013). There are cut throat battles for patents on features and modes of use, and companies need to constantly innovate and update to stay relevant. Another threat to Facebook’s revenue stream is ad-block extensions. Users can install ad-blocks to view the site ad-free. As these increase in popularity, revenue may decrease. Privacy: Privacy is a current concern of most media users. Depending how the company manages its user’s privacy, it can be a strategic advantage or a threat. Facebook has already endured public scrutiny and backlash for its privacy control. It has a history of changing privacy settings and defaulting them to the most open and universal option, putting the onus on customers to activate a more private mode. In December 2012, Instagram (now owned by Facebook) changed their terms of use policy to state that it could sell and profit off its user’s photos. The customer backlash was intense and Instagram reverted its use policy. The possibility of being hacked and losing customer data is also a real risk. While Facebook does not store social security numbers it warehouses thousands of passwords, and captures information about individuals’ daily lives that could be misused. Virtual or real identity thefts could seriously harm the company. Facebook offers the bulk of its products for free, and its ad revenue is generated from the ability to make details about users’ demographics and interests available to marketers. This information is freely given by users after consenting to the terms of use agreement, and housed by Facebook, so they have the right to use it. The problem is that privacy laws are lagging behind internet use and technology. What is a major revenue source for the company today could be deemed illegal in the near future. Aside from legislation, bad press regarding a privacy incident could just as swiftly hurt the company and cause users to shift to substitute services. Facebook has made it easy for users to spread information instantaneously- even bad news about itself! As big data and data mining become more important for companies, Facebook may want to capitalize on its data resources buy selling information in the aggregate. The company will have to be very careful to remove identifying names and tags, but even more careful how the endeavor is presented to the public. Facebook’s Future: Facebook has been an incredible social force and an industry trail blazer. The concurrent move to a publicly traded company and into a mature lifecycle segment poses large challenges. Both revenue growth and user growth are slowing. There are multiple substitutes in the industry and the competition is rapidly innovating. Future legislation on privacy and rights ownership may require a complete rework of business strategy. Pressure from public shareholders is on Mark to create more value and increase stock prices. The company is looking to expand into large population markets such as Brazil, India, Mexico, and Japan (Facebook, Inc, 2013). The recent change of leadership in China may eventually provide an opening for Facebook services there. Increasing the focus on mobile applications will also slow the inevitable market saturation by making services available in regions with little infrastructure. Continued acquisition of promising start ups will also help the company stay cutting edge while removing future competition. However, Facebook needs to develop new revenue streams beyond advertisements, while still staying true to its mission. The company needs to define these projects before the falling growth rate triggers a major decline in the Class A stock rate. Mark himself is unsure if they can monetize their current business more than currently without alienating users (Facebook, Inc, 2013). One option is to create spin-off services that are paid, such as aggregate data sales. Another is to focus a Facebook platform on job search and recruitment. A third natural move would be to offer a unique, differentiated online dating experience (Tran, 2013). Mark Zuckerberg and his company have an incredible advantage. In the new data economy he has billions of data points that each tell a story and can be used in thousands of ways. Google Fiber installation that increases internet speed by 100 fold will allow his innovative staff to develop services that are not feasible yet. He will just need to keep one step ahead or diversify to avoid being the next,