FACEBOOK Case Study (1)

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ISBN-10: ISBN-13:

2014

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Contents

Facebook (in 2013): Will Wall Street Hit the Like Button? 1

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Credits

Facebook (in 2013): Will Wall Street Hit the Like Button?: Strategic Management, Second Edition 1

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JANUARY 15, 2013, 10:03 A.M. Mark Zuckerberg, casually dressed in his hoodie, entered the media event room at Facebook headquarters in Menlo Park, California. This was Facebooks first live introduction of a new product. As he stepped in front of the audience, Zuckerberg noticed the numerous glowing white Apple icons arrayed throughout the auditorium. These images very briefly reminded him of his mentor, the late Steve Jobs, who played a significant role in his professional development and his companys success. Even some of Facebooks current challenges were brought about by Jobs revolution of the mobile industry. Today, Zuckerberg would attempt to engage an audience with a new product in a manner similar to Jobs flashy introductions of new innovations.

Zuckerberg opened with a review of Facebooks mission and described the structure of the companys current social ecosystem. Two current products, Timeline and News Feed, represented two of the three pillars supporting the Facebook ecosystem. These two products allow users to view a portion of their social network by continuously answering the questions, Whats going on? and Who is this? After reviewing the first two pillars, Zuckerberg unveiled the third pillar: Graph Search, which allows users to query their social network directly. He intentionally noted that Graph Search is very different from a normal web search because it filters results based on a users connectivity to his or her social network.

After the presentation, Zuckerberg sat down with Sheryl Sandberg, Facebooks chief operating officer (COO) and second in command, to discuss strategies for monetizing Facebooks data and users. Sandberg knew that she and Zuckerberg had a strong professional relationship, but the topic of modifying Zuckerbergs creation for profit was a subject of debate between them. Zuckerberg is all about building the best product and user experience, while Sandberg, a Harvard MBA, is a driven businesswoman with a keen sense for shareholder value creation.

Sandberg eased into her chair saying, I think that went very well, referring to the Graph Search press event. I believe you will change the way we look for answers from the Internet. It could also be a great tool for advertisersand a way to deliver on the expectations of shareholders.

Zuckerberg answered immediately, I dont like seeing my vision for a connected world smothered with logos and slogans! But that is why youre hereto try to convince me otherwise.

Sandberg responded, There are options for demonstrating the value of our data. Ways that can be a win for everyoneyou, advertisers, shareholders, and users!

So, what are the latest ideas? countered Zuckerberg.

What are the latest ideas? The question stuck in Sandbergs mind. There were many ways to monetize Facebooks user base of one billion people: ads on the mobile platform and the main site; charging users a usage

MHE-FTR-016 0077645065

Facebook (in 2013): Will Wall Street Hit the Like Button?

FRANK T. ROTHAERMEL

SETH TAYLOR

Frank T. Rothaermel and Seth Taylor (GT-MBA14) prepared this case from public sources. This case is developed for the purpose of class discussion. It is not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and omissions, are entirely the authors. The authors thank Andrea Meyer for her editorial assistance and invaluable case writing guidance. by Rothaermel and Taylor, 2015.

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Final PDF to printerFacebook (in 2013): Will Wall Street Hit the Like Button? 1

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fee; traditional banner and skyscraper advertisements. But the method could not be a drastic diversion to the user. As Sandberg considered Zuckerbergs question, she knew that no matter what, it would always be a hard sell to him. At the same time, Facebooks investors were growing more restless as they monitored the young companys share price.

A Brief History of Facebook

While attending Harvard University in the fall of 2003, Mark Zuckerberg and some of his college buddies cre-ated an on-campus website called Facemash, which was similar to Hot or Not a social media site that prompted users to submit photographs that were judged by other users as either hot or not. Zuckerbergs Facemash site placed pictures of two female students next to each other and asked fellow students to choose the more attractive person. To collect student images, Zuckerberg and his friends hacked into Harvards computer network and copied files from campus houses. The site proved popular, attracting 22,000 views within its first four hours online. 1 After a few days, almost all Harvard students had either viewed the site or, at the very least, received an invite to view it. University officials, however, quickly shut down Facemash and placed Zuckerberg on a six-month academic probation for breach of security.

The following semester, Zuckerberg began work on a new websiteThe Facebookthat leveraged some of the features from Facemash. Designed initially to replace Harvards printed student directory, Zuckerberg and several fellow students officially launched The Facebook in February 2004 (the The was dropped shortly there-after). Joining members were allowed to add a picture, major, and hometown to their profile and could link their profile to those of their friends. 2 Half of Harvards undergraduates had signed up within just over a month of the launch. Realizing the sites potential, Zuckerberg opened the platform up to other universities in the Boston area, and to Stanford, Columbia, and Yale. The only requirement to join was an e-mail address ending in .edu. 3

Facebook continued to grow rapidly over the next several years. In May 2005, the website was in use at over 800 colleges and universities and received $12.7 million in investment from venture capital firm Accel Partners. 4 High school and international school networks were added in the fall of 2005. By years end, Facebook had achieved $9 million in revenue and accumulated six million monthly active users (MAUs). 5 The following year was another strong one for the company. In addition to launching Facebook Mobile, it hit 12 million MAUs and earned $48 million in revenue. In April of 2006, Greylock Partners, Meritech Capital Partners, and PayPal co-founder Peter Thiel invested $27.5 million in Facebook. By September, anyone with a verifiable e-mail address could sign up, which paved the way for exponential user growth. More features were added over the next several years to further enhance the sites user functionality, including a developer platform, chat capabilities, the Like button, and an e-commerce payment feature, among other things.

The global footprint Facebook had achieved by 2012 was astronomical. Facebook tracks the number of monthly active users (MAUs) and daily active users (DAUs) as a means to assess users engagement. Users who have logged into Facebook within a 30-day period are counted as monthly active users. In the same way, daily active users measure the number of users who have logged in within a 24-hour period. In addition to 1.06 billion monthly active users (MAUs), Facebook had 618 million daily active users (DAUs), a 30 percent increase over December 2011. Exhibit 1 shows the MAUs, DAUs, and mobile MAUs from 2009 to 2012. Approximately 80 percent of the sites users live outside the U.S. and Canada, and the website is available in more than 70 languages. 6 Globally, there were, on average, 2.7 billion likes and comments per day and over 100 billion friend connections by the end of 2011. 7

The growing user base also brought more revenues. The increase in MAUs from 2010 to 2012 led to a cor-responding increase in revenues, from $731 million to $1,584 million, respectively. 8 See Exhibit 2 for more information about Facebooks revenue growth. Double-digit growth in monthly active users and annual revenue quickly became the norm.


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In 2012, Facebook brought in $5.09 billion in sales, a 37 percent increase over 2011 ( Exhibit 3 ). The company generated 84 percent of its revenue through advertising services and collected the rest through social gaming fees charged to platform developers. Facebooks ad revenues are predicted to rise to $7.64 billion in 2014 (see Exhibit 4 ), but there is still plenty of room for Facebook to grow. 9 Google and Yahoo make nearly $88 per user of their search engines, whereas Facebook makes only $15 per user account. 10 However, Facebook chooses to focus on average revenue per user (ARPU) as a tool for assessing its ability to monetize its users. Facebooks ARPU ( Exhibit 5 ) provides another metric for measuring how well Facebook is capturing value from its user base. This measure has slowly risen over the years, with most of the growth being generated in North Americas well-developed advertisement industry.

Facebook has ambitious plans for the future. The company has stated that it intends to connect the more than two billion global Internet users. 11 Its success in penetrating different countries, however, has varied. In most of North America, South America, and Europe, Facebook reaches anywhere from 6080 percent of Internet users. Exceptions are Brazil and Germany, where penetration rates are less than 30 percent. In Germany, users are quite concerned about data privacy, while Googles Orkut social network competes with Facebook in Brazil (only recently has Facebook surpassed Orkut in usage). 12 In Russia, Facebook battles VKontakte for dominance, and in China, Facebook is currently blocked by the government. This ban leaves a gap in the companys social network. Facebooks equivalent in China is Renren, a network with roughly 200 million users.

Facebooks Leadership

MARK ZUCKERBERG

Founder Mark Zuckerberg (nicknamed Zuck) remains the CEO and chairman of Facebook, despite the fact that many founders of successful technology startups are asked by venture capitalists to turn over the reins to more experienced, professional managers. Compelled by the companys vision to connect the world by building a great user experience, Zuckerberg wont see his ambitions sidelined by an outsider motivated primarily by increasing shareholder value. Facebook is the obvious fusion of Zuckerbergs academic passions in psychology and com-puter science at Harvard. The website collects data to map out human relationships and social connectivity, which Zuckerberg refers to as a social graph. Taken together, it is a social graph that has mapped one-tenth of the world population in less than seven years.

In the early days, Facebook operated directly under Zuckerberg, who coded much of the original site and then managed the engineering teams in the next phase. As Facebook grew out of its start-up phase, however, some industry observers began to argue that the company was maturing faster than Zuckerberg was as its CEO. At times, Zuckerbergs inexperience and casual appearance have received criticism. On several occasions, Zuckerberg has worn flip-flops and hoodies to meetings with other executives. With his habit of arriving late to work and staying into the middle of the night, even his work schedule hearkens back to college habits. He received more negative press over comments he made in a speech in 2007, when he stated that young people are just smarter. 13 In recent years, it seems that Zuckerberg has actively sought to improve his public image and culled his brashness and activities. He even hired a public speech coach, former president Bill Clintons speech adviser.

Even as Zuckerberg has adapted to his role as a business leader, the way the company has tried to juggle user privacy and the monetization during his tenure has opened him up to additional criticism. In December 2007, Facebook launched a new advertising mechanism called Beacon. The feature was designed to track users activity across all of the websites they visited and share their activity with friends via their Facebook account. Its release prompted condemnation from users and privacy groups alike. A similar situation occurred in 2009, when the com-pany released new privacy controls that, under the new settings, made public some messages originally thought to be private. Addressing privacy concerns effectively remains in the front of Zuckerbergs mind as he considers ways to monetize Facebooks prime audience, mobile users. 14




SHERYL SANDBERG

Sheryl Sandberg joined Facebook as chief operating officer (COO) in 2008, following a six-year stint as Googles vice president of global online sales and operations. In that capacity, she worked with Googles AdSense and AdWords programs; a unit that began with 300 staff but grew to 4,000, or about one-quarter of Googles work force, under Sandbergs leadership. 15 Eric Schmidt, Googles CEO at the time, considered her a superstar, but tension grew between the companies after her departure, partly because Sandberg recruited Google executives and employ-ees to work for Facebook. 16 Sheryl Sandberg attended Harvard for both her undergraduate (economics) and gradu-ate (MBA) degrees. She worked at McKinsey & Company and as chief of staff for Lawrence Summers at the U.S. Department of Treasury prior to working at Google. 17 Time magazine considers her one of the 100 Most Influential People in the World, and Fortune places Sandberg as one of the 50 Most Powerful Women in Business.

Sheryl Sandberg is a vocal advocate for women in leadership. Her TED talk entitled Why We Have Too Few Women Leaders has some three million views, 18 and her book Lean In is a bestseller. In both, Sandberg speaks about the low number of female leaders in todays society and how to overcome this situation. 19

As COO and Zuckerbergs second in command at Facebook, Sandberg focuses on operations, revenue, and international reach. She was also tapped for her sales, business development, public policy, and communications prowess. Given Zuckerbergs public relations challenges, many consider Sandberg the professional face of Facebook. 20 Zuckerberg sought out Sandberg amid a shake-up of his executive team. He was looking for some-one who would be comfortable serving as his No. 2 within the company, allowing him to maintain a tight rein on Facebooks activities. To some extent, the leadership dynamic between the CEO and his COO can be explained in simple terms: Zuckerberg brings in the users, while Sandberg brings in the money. The dynamic between the two is respected within both Facebook and its board of directors.

Sandberg has been able to attract high-profile advertisers by showing them how targeted their ads can be when theyre hooked into a network as intimately familiar with its users as Facebook is. She has also stepped up in unex-pected areas when needed, such as when she completed a round of funding for Facebook when its chief financial officer (CFO) left suddenly. 21 Sandberg is known for her ability to form teams and break deadlocks, bringing an analytics perspective and authentic communication to bear on the issues. In this way, Sandberg has been a key figure in reshaping Facebooks business model. She is now working hard to help Zuckerberg find a viable business model that will monetize the companys mobile users. 22

DAVID EBERSMAN

After the departure of Facebooks chief financial officer Gideon Yu in 2009, the company sought a CFO with public company experience that could help it prepare to go public in the next few years. 23 The search turned up David Ebersman, who was in his 15 th year as CFO at the biotech company Genentech Inc. Prior to working at Genentech, Ebersman, who received an undergraduate degree in economics from Brown University, held posi-tions with Oppenheimer & Co. Inc. and the U.S. Department of Treasury. 24

Ebersman was indispensable to the launch of Facebooks IPO on May 18, 2012, working closely with advis-ers from the institutions underwriting the offering, particularly those at J. P. Morgan. The SEC and the media criticized Ebersman for his decision to raise the number of shares offered in Facebooks IPO three days before Zuckerberg rang the NASDAQ bell, even going so far as to blame this decision for the stagnant stock price on the day the IPO was issued. 25

Three Pillars of a Business Model

Mark Zuckerbergs Graph Search announcement on January 15, 2013, launched the third pillar of Facebooks social ecosystem. The three pillars consist of News Feed, Timeline, and Graph Search.




5

NEWS FEED

Released in September 2006, News Feed quickly became a core feature of Facebook. It is at the heart of a users homepage and provides regular updates of friends posts, photos, events, group memberships, and so on. The priority of items displayed in the News Feed is based on a complex algorithm. Several factors, such as the number of friend comments on an item, who posted the original item, and the actual content, play a critical part in the priority ranking. 26 The success of the logic behind News Feed has kept users engaged and has contributed to the immense popularity of the site. Zuckerberg claims that News Feed answers the question, Whats going on in the world around you? 27

TIMELINE

An updated version of the profile page, called Timeline, was launched in September 2011. It allows each user to paint a complete life story on his or her profile. Users can select what information to share and with whom to share it. Milestones older than 2004 (Facebooks launch year) are now easily represented on a graphical display. Inspiration for this product came when its creator, Sam Lessin, viewed a hard copy of his profile stretched across the office. 28 According to Zuckerberg, Timeline answers the question, Who is this person? 29

GRAPH SEARCH

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. Zuckerberg stated that Graph Search is meant to help people discover and make new connections, 30 whereas the previous two pillars helped people maintain their connections. Later releases of the tool will include information from Open Graph (described in the following Creating Value for Developers section) and allow users to search Facebook posts. It is also expected to migrate to Facebook mobile.

Facebook has taken a giant step into Googles territory with the release of Graph Search. The years that Facebook spent attracting users and their personal information have come together to give Facebook an edge over Googles user database. In fact, in anticipation of such a move by Facebook, Google launched its own social networking tool, Google1 in 2011. So far, Google1 has made little headway against Facebooks massive head start in the social network space. 31 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. 32

Facebooks Products for Users

Facebook has evolved tremendously over its eight years of operation. The company strives to build the tools necessary for users to connect, share, and communicate with each other across the Internet.

MESSAGES

Included with the initial launch of Facebook, messaging has remained a core feature of the social networking site. Today, Facebooks messaging products include e-mail (i.e., users can opt to utilize a [email protected] e-mail address), chat, and text messaging. Since November 2010, users have seamlessly accessed all three products in one integrated location. A separate mobile application (app) called Messenger was launched in November 2012. This app allows users to quickly message with their Facebook friends and supports image attachment and audio messages.




GROUPS

Facebook Groups provide users with an online space to discuss common interests. Examples of Groups include family, sports teams, and church groups. Launched in September 2004, the feature allows users to control the content they sharefor example, pictures, calendars, and commentsvia customizable privacy settings.

EVENTS

The Event feature lets users create an event, invite other Facebook users to the event, and track RSVPs for the event. An event can include a map location for the address and a host for the event who is also a Facebook user. In addition, guests can communicate with each other on the event page. A new version of Facebook Events was launched in May 2010. This upgrade made it easier for users to create events from their homepage while adding more details about an event.

PLACES

Launched in August 2010, Places is a Facebook mobile feature that lets users share their physical location with other users by checking in. Users can tag other Facebook users who are with them as well and, if their Facebook friends have visited the same location and left comments about their experience, users can see that information.

NOTIFICATIONS

Introduced in May 2009, Facebook Notifications are visual alerts that signal users to activity on their page or within their social graph. Separate notifications appear for friend requests, messages, and general activ-ity. Notifications accumulate and are displayed as numbers within red notification bubbles located on the Facebook page.

PHOTOS AND VIDEOS

Originally designed by a single engineer and designer in October 2005, the ability to share pictures is one of Facebooks most popular features. Users upload more than 250 million photos on average each and every day, making it the most popular photo uploading service on the web. 33 Users can share an unlimited number of photos, photo albums, and videos with friends, family, or the world, depending on their profiles privacy settings. They can also add captions and locations to their photos and identify other users by tagging them. On May 22, 2012, Facebook released a Facebook Camera mobile app that made it easier for mobile users to take pictures and upload them to their account directly from their phone.

FRIENDS LISTS

Launched in December 2007, Friends Lists added another layer to the News Feed algorithm. Users can use Friends Lists to create Smart lists or Friends and Acquaintances lists to ensure that content from specific friends is given the highest priority on their homepage. Friends Lists was updated in September 2011 to compete with circles on Google1, which some considered superior to Facebooks solution. 34 Lists, like Googles circles, help users focus on content that they are immediately interested in reviewing, eliminating the need to wade through mundane updates from those to whom they arent as closely connected. This feature also provides users with a way to share information privately. 35




7

PAGES

Also launched in late 2007, Facebook Pages allow any individual or group (e.g., celebrities, public figures, businesses, colleges, or organizations) to create a public profile page in order to interact with the Facebook com-munity. When users like a page, they automatically sign up for any and all content published through that page; this content is then posted to the users News Feeds. Pages operate similarly to the model of Facebook competitor Twitter in that the owner of a Facebook Page need not approve likes from users (unlike a friendship between indi-vidual Facebook users, which requires dual acceptance). Through effective use of pages, an owner can increase his or her exposure by taking advantage of the algorithms associated with the News Feed. By the end of 2011, there were more than 37 million Facebook Pages, including ones for most Fortune 500 companies, a large number of public and private universities, and many national and local celebrities. 36

VIDEO CALLING

In the summer of 2011, Facebook partnered with Skype (which had been purchased by Microsoft in May 2011) to form Video Calling, a feature intended to compete directly with the Hangouts feature on Google1. Video Calling enabled users to call friends for free directly from Facebook after installing the Skype plug-in.

SUBSCRIBE

September 2011 brought another new feature to Facebook: Subscribe, which promotes the further customiza-tion of the Facebook experience. The Subscribe feature gives users the option to tailor what they pull into their News Feed, allowing them to turn on or off comments, photos, life events, or games from individual Facebook friends. In addition, a user can subscribe to articles authored by his or her favorite journalists from sites such as CNN, USA Today, The Wall Street Journal, and Forbes. From then on, any time a favorite journalist authors an article, it is posted to the Facebook users News Feed.

GIFTS

The Facebook Gifts feature was rolled out in December 2012 as a way to capitalize on e-commerce beyond the cut that Facebook takes from game developers on the Facebook platform. Users can visit a friends Timeline, click Give Gift, select a gift, insert a message, and send a physical gift to that friend. Currently, this feature is only available in the United States, but Facebook plans to expand it to other countries.

Facebooks Business Areas

In a Securities and Exchange Commission (SEC) filing in early 2012, Mark Zuckerberg stated, Simply put: we dont build services to make money; we make money to build better services. 37 Such a dismissal of the impor-tance of monetization scares investors. Still, Zuckerberg and Sandberg know that developing an effective business model is crucial to Facebooks future success.

CREATING VALUE FOR ADVERTISERS AND MARKETERS

Advertisements on Facebook revolve around the creation of a Facebook Page for an organization. Once an organization creates a Facebook Page, the company may launch ads, sponsor content about its business, and check advertisement analytics to gauge the success of its campaigns. Facebook has identified four value propositions for advertisers and marketers: reach, relevance, social context, and engagement. 38




Reach. With more than one billion MAUs, if Facebook were a country, it would be the third largest in the world by populationthat amounts to quite a reach. Companies have the ability to purchase lists of the users who sub-scribe to the pages of other companies, which can be used to target a specific audience. As an example, in 2010 IronPlanet Motors (a competitor to eBay Motors) purchased the BMW and Mercedes-Benz Fan Page subscriber lists in order to advertise the launch of its new car auction website to those users. Similarly, movie studios can notify fans on their page of an upcoming movie release. Paramount Studios, for example, reached 65 million fans in one day when it advertised the release of Transformers: Dark of the Moon on Facebook. 39 Facebook also offers free tools for tracking the performance of ads called the Ads Manager. With the release of Graph Search, Facebook intends to open up a new opportunity for advertisers and marketers: Companies that have a page can be discovered by users as a result of their Graph Search queries based on the information the organization posts on its page. 40

Relevance. Relevance is important to advertisers because, in todays economy, marketers are being asked to do more with less. This is where Facebook can play a vital role. Users identify themselves based on many demo-graphic factorsfor example, age, gender, race, location, education level, and special interestswhich allows Facebook to deliver targeted ads with a higher success rate than industry averages (90 percent versus 35 percent, according to a recent study). 41 A good example of a targeted advertising campaign is that of CM Photographics, a wedding photography company based in Minneapolis, Minnesota. With Facebooks help, CMPhotographics, on a limited budget of $1,544, targeted recently engaged women aged 24 to 30 who lived in close proximity to CMs location. 42 The targeted campaign led to a substantial increase in revenue during the ensuing 12 months.

Social Context. With sponsored stories and social ads, Facebook provides a rich social context for advertis-ers. As of January 2012, sponsored stories (e.g., a friend checking in to a Starbucks) are prominently displayed directly in a users News Feed. The friend has now automatically become an advocate for the company across his or her social graph, driving company awareness. Social ads allow marketers to add context to their ads. This enables product differentiation and, according to a recent Nielsen study, increases ad recall by more than 50 percent. 43

Engagement. The social web is an evolving species, and Facebook has been a leader in identifying new advertis-ing tactics that improve user engagement. For instance, dynamic ads that include a poll, hit upon a users special interest, or encourage feedback all improve awareness. For example, through its Facebook page, the Chinese res-taurant P.F. Changs offered a free lettuce wrap to all customers during a three-week period. 44 All of P.F. Changs fans and friends of those fans saw the ad. Over 50,000 customers took advantage of the offer; 40 percent of them were first-time customers. 45

Market Opportunities. Facebook ads can display in multiple locations on the screen, and Facebooks ad system guarantees a fixed number of ad impressions for a fixed price. Most important, Facebook invests in technology that dynamically decides the best available ad to display to a user depending on that users unique attributes. The system does a real-time comparison of the bids that different advertisers have offered to pay to advertise to that type of user. This type of technology helps Facebook maximize ad revenue.

As Facebook continues to expand its advertising offering, it expects its ad revenue to follow suit. Additional advertising opportunities for Facebook could arise from three main areas: traditional offline branded advertising, online advertising, and mobile advertising. In 2010, traditional offline advertisingtelevision, print, and radiowas a $363 billion industry, representing 62 percent of the total worldwide advertising spent. 46 As marketers continue to gravitate toward online advertising, a large percentage of this offline budget will be allocated to adver-tisers such as Google and Facebook. Similarly, the global mobile advertising market is expected to grow from $1.5 billion to $17.6 billion by 2015. 47 Currently, Facebooks mobile app is one of the most popular downloads; Facebook boasts 680 million mobile MAUs. However, the mobile path has an added challenge in that greater mobile use generally reduces ads per user, given the smaller screen size of mobile devices. 48




9

CREATING VALUE FOR DEVELOPERS

Approximately 15 percent of Facebooks revenue is generated through its developer platform, which was first launched in May 2007 with 85 developers and 65 apps. 49 The platform is a set of development tools and application programming interfaces (APIs) that enables software and web developers to create innova-tive experiences for the Facebook community. Facebooks f8 conferences, held near-annually, bring together developers, entrepreneurs, and innovators to collaborate on new websites, apps, and devices that take advan-tage of the Facebook platform. 50 Zynga, creator of the game FarmVille and many other wildly popular games, is currently the largest developer; the fees collected from Zynga accounted for 12 percent of Facebooks revenue in 2011, but declined in 2012 51 as the popularity of Zyngas games declined. 52 Other examples of developer integration using the platform include the ability for users to listen to music on Spotify, read news and sports articles on Yahoo, track runs via MapMyRun, and use the Nike1 mobile app to share their exercise activity.

Through products such as Open Graph, Social Plugins, and Payments, Facebook offers significant value to developers.

Open Graph. Open Graph allows app developers to map the content of their apps and see how users can inter-act with it. In this way, developers can learn how to connect user Facebook accounts from within their app. This enables users to share personal content generated by the app with their friends on Facebook through their News Feed and Timeline. Spotify is an excellent example. Through Spotify, a users current songs are shared through Facebook. 53

Social Plugins. The Facebook platform can carry over the social experience from Facebook to any website that has the Facebook social plugins enabled. Social plugins include the Like, Send, Subscribe, and Login but-tons, comments, the activity feed, registration, and the Facepile feature, which displays thumbnails of friends profile pictures. Social Plugins give website owners the opportunity to broadcast interests from one friend to another non-connected friend. As an example, the Yahoo Social Plugin shares articles directly to Facebooks News Feed.

Social Channels. Social channels provide a way for developers to integrate with News Feeds and requests. Content can be generated from the app and distributed to a users News Feed using Social Channels. Developers can also integrate with requests that allow a Facebook user to encourage other friends to use an app.

Graph API. This application programming interface feature of the Facebook platform allows apps to read and write data to Facebook.

Login. Users can log in to an app or website using their Facebook credentials, speeding up the registration pro-cess. LinkedIn and Google have deployed similar login methods.

Payments. Finally, payments, through the use of Facebook Credits, create an infrastructure for developers to receive funds for the purchase of their virtual and digital goods. This well-established, safe, and secure sys-tem has streamlined the transactions between users and third-party developers. 54 Currently, fees collected from Facebook Payments almost exclusively come from the purchase of virtual goods used in social games. According to Facebooks S-1 filing with the SEC, The worldwide revenue generated from the sale of virtual goods increased from $2 billion in 2007 to $7 billion in 2010, and is forecasted to increase to $15 billion by 2014. 55 The projected increase in social gaming will undoubtedly provide future revenue for Facebook. However, extending beyond the core area of gaming, for example, by allowing users to purchase songs from iTunes that a friend listened to, could open up new opportunities for Facebook.



10


Current Competitors

INSTAGRAM

Instagram, a photo-sharing service for iPhones and Android phones, was founded in October 2010 and quickly became a leader in online photo sharing. In March, CEO Kevin Systrom announced that registered Instagram users had nearly doubled from 15 million to 27 million in the previous three months. 56 On April 9, 2012, Facebook acquired Instagram for $1 billion, the largest deal ever for Facebook.

Zuckerberg saw the acquisition as a milestone for the company and said, We dont plan on doing many more of these, if any at all. 57 Photo sharing, which is one of Facebooks core features, has been a vital element in the companys success and efforts to drive user engagement. By acquiring Instagram, Facebook has eliminated a potential competitor and gained access to the talent that created the robust Instagram app for iPhone and Android. For now, Facebook plans to retain Instagram as a separate business unit, but it will be expected to share some of its talent and innovation with the parent company.

TWITTER

Launched in July 2006, Twitter has become an extremely popular free micro-blogging and social networking service. As of July 30, 2012, Twitter had over 500 million accounts with 27 percent designated as active users, according to the French analytics firm, Semiocast. The most popular method of using Twitters service has been through the companys main website, which is accessed through desktop computers rather than through mobile devices. This accounts for 27.6 percent of worldwide activity. 58

Twitter gives users the ability to communicate with friends and family via text-based posts in real time. Users submit a tweet, which is limited to 140 characters in length, to their profile page. A subscriber to the users page (known as a follower) then receives the tweet automatically. Unlike Facebook, which requires the dual acceptance of friend requests, Twitter stimulates interaction between complete strangers because users dont need to approve who follows them.

Individuals, organizations, and companies have quickly realized the benefit of this type of interaction: the ability to reach an unlimited, yet targeted, audience. TV channels such as CNN, MSNBC, and ESPN now use Twitter as part of their broadcasts. And celebrities, athletes, and politicians have accepted the technology as well; 75 percent of NBA players, 82 percent of U.S. Congress members, and 85 percent of U.S. Senators are active Twitter users. 59 Former vice president of product, Jason Goldman, attributes Twitters appeal to the fact that it delivers interesting, relevant timelines ... about the people and places that matter to you. Giving people bet-ter information about the world around them and the things they care about has become the cornerstone of the product offering. 60

Even though mainstream adoption has quickly become a reality, Twitter is still growing its business model. Twitters 2011 ad revenue was $139.5 million. While analysts estimate that it will grow to $540 million by 2014, the percent change in revenue is expected to decline year over year during that time (see Exhibit 6 ). 61 Meanwhile, Facebooks ad revenue was $3.15 billion in 2011 alone. 62 In addition, users of Facebook spend significantly more time on the website each month than users of Twitter. Of all social media site visits in October 2012, Facebook captured 62.39 percent, while Twitter captured only 1.85 percent (see Exhibit 7 ). 63

For the time being, Twitter generates only a fraction of the ad revenue and user interest of Facebook; however, as Twitter continues to grow, the chance of users spending more time with it communicating with friends and family will grow as well. Professor Tim Loughran of Notre Dame summed it up as follows: Facebook is in the business of communication. Anybody who can facilitate a more precise or quicker communication should be perceived as a threat to Facebook. 64




11

GOOGLE

Founded in 1998 as a provider of Internet search results, Google has become a leader in cloud computing and advertising, particularly since its highly successful IPO in 2004, which raised $1.9 billion on a valuation of $23 billion (see Exhibit 8 ). The companys strategic growth, both organically and through acquisitions, beyond its initial core competency of Internet search is evident in its stock performance (see Exhibit 9 ).

A major driver of revenue for Google, just as with Facebook, is online advertising. In the large $40 billion U.S. online advertising market, Google holds a commanding lead over its competitors. It currently has a 44.9 percent share of the market, while Yahoo and Facebook hold 7.4 percent and 6.5 percent, respectively (see Exhibit 10 ). 65 In 2014, Google is projected to have a 47.4 percent share of the industry, which will then have grown to $53 bil-lion. While Facebook is expected to oust Yahoo from its second-place position during that same time, it is still projected to claim only a 7.1 percent share of the market. 66

In the online display advertising market, a subset of the overall online advertising market, Google and Facebook are more evenly matched. In this $15 billion industry, the two companies each hold about 16 percent of the mar-ket. However, Google is projected to supplant Facebook as the leader in online display ad revenue by 2013 and grow its market share further in 2014, by which time it is expected to account for 21.7 percent of the market, while Facebook slips to 17.1 percent (see Exhibit 11 ). 67 Google also added to its revenue by acquiring Motorolas mobile divisionin 2012, 8 percent of Googles revenues came from the hardware and services of Motorola Mobile. 68

For Facebook, another area of concern is Google1. Google1 has several improved and additional features over Facebook. Google1 circles allow users to organize the people they are connected to and give them better control over their privacy settings. Hangouts is a video chat feature that allows up to 10 friends to communi-cate through videoconferencing. The integration of Google1 with YouTube and the image organizer and viewer, Picasa, allows for improved video and photo sharing. Whats more, the third-party developer platform associated with Google1 (which is similar to Facebooks developer platform) is completely free, while Facebook charges a 30 percent commission. This incentive could drive developers away from Facebook and to the Google1 platform, which would parallel Googles initiative of driving iPhone developers to the Android operating system through more attractive developer commissions.

Yet, Google1 lacks Facebooks installed base of users as of late 2012. Google1 had 235 million active users at the end of December 2012, up from 150 million in June of that same year. However, even with this increase, Google1 claimed only 1.32 percent of social media site visits ( Exhibit 7 ). 69 Meanwhile, Facebooks one billion active users comprise 62.39 percent of social media site visits. 70 Still, Google has seen a boost in click-through rates on some display ads of anywhere from 2 percent to 15 percent due to the additional user information pro-vided by its social media product. 71

Googles drive for Internet dominance and social strategy includes a suite of products and services (e.g., Chrome, Google.com , Picasa photo software, YouTube, Translate, Analytics, AdWords, and others). Rather than focusing on any single product, what matters most to Google is how much time users spend within the Google ecosystem once logged in to their account. 72 Now that all of these products and services are linked to Google1, Google will be able to paint a more complete picture of each of its users. Such fine-grained data will be vital in Googles push to become the dominant online presence delivering customized advertising.

MICROSOFT

Even though it owns a 10 percent equity stake in Facebook (which it bought in 2007 for $240 million), Microsoft remains a Facebook competitor across several market segments. Similar to Google, Microsoft commands a large percentage of advertising revenue and both online and offline user interaction. Microsoft offers a fleet of products



12


and services that competes directly with Facebook. Windows Mobile, the Xbox 360, the Bing search engine, and MSN (a portal to news, sports, games, shopping, and videos) all drive traffic away from Facebook and Google. In 2012 alone, Microsoft accounted for 5.7 percent of U.S. online advertising revenue and was projected to remain third behind Google and Facebook over the next several years (see Exhibit 10 ).

On the other hand, Facebook and Microsoft have formed a strategic partnership that enables the two compa-nies to compete directly with Google on several fronts. In May 2011, Microsoft purchased Skype for $8.5 billion and soon after partnered with Facebook to challenge Google1s videoconferencing capabilities. 73 At the time of the deal, Zuckerberg said, We have a really good relationship with Microsoft. Now that Skype is owned by Microsoft, that gives us the sense of stability that its going to be with a company we can trustthat we know we have a longstanding relationship with. 74 The truth of this statement seemed evident in May 2012, when Microsoft sold $550 million worth of patents and licenses to Facebook. 75

Previously mentioned as a competitor in the area of user interaction, Microsofts Bing search engine has also formed an alliance with Facebook in an effort to improve the breadth and depth of its social search data. Bing is now the default search engine within Facebook. This partnership will compete directly with Google1 and Google.com search results. Moreover, Bing search queries conducted within Facebook are not directly accessible to Google for further data analysis.

LINKEDIN

Started in 2002 in co-founder Reid Hoffmans living room, LinkedIn has grown into the worlds largest pro-fessional network. 76 In February 2012, the company had more than 150 million members accessing the site from more than 200 countries in 17 languages; 60 percent of LinkedIn members live outside the U.S. 77 All Fortune 500 companies have at least one executive with a LinkedIn profile, and 82 Fortune 100 companies use the recruiting tools provided by LinkedIn. At the beginning of 2012, there were more than two million LinkedIn Company Pages (which are similar to Facebook Pages) and almost one million online job applications originating from within LinkedIn. 78

LinkedIn held its IPO on May 19, 2011, at a price of $45 per share. The stock quickly jumped to over $90 per share, making the company worth around $9 billion (see Exhibit 9 ). 79 In 2011, the company recorded $522 million in revenue with earnings of $11.91 million, which equates to a very healthy price-to-earnings ratio (P/E) of approximately 850. 80 However, LinkedIns ad revenue drags behind Facebooks. It was $154.6 million in 2011, and is projected to increase to $405.6 million by 2014 (see Exhibit 12 ). 81 Meanwhile, Facebooks ad revenue was $3.15 billion in 2011. 82 In addition, LinkedIn site visits accounted for only 0.83 percent of all social media site visits in October 2012 (see Exhibit 7 ). 83 Still, although LinkedIn users spend much less time on the site than Facebook users do on Facebook, LinkedIn brings in $1.30 per user-hour spent on its site, while Facebook brings in only $0.06. 84 In addition, LinkedIn has added more user-friendly features, making it more akin to a network that allows for professional connections embedded within social interactions.

LinkedIn operates on a business model called freemium, in which it offers its core product for free but then charges for premium services. LinkedIn offers premium products to individuals as well as to companies. For example, users have a choice of three subscription levels, getting access to a larger number of services at each level. Premium services enable users to see who has viewed their profile, do premium searches that let them build job leads, see full profiles beyond second-degree connections, and send messages to people with whom users are not connected. For their part, companies can purchase LinkedIn products, such as LinkedIn Recruiter Corporate, that help them find qualified employees and contact those individuals directly. Another product, LinkedIn Sales Navigator, helps salespeople build better prospect lists.




13

Facebooks Initial Public Offering (IPO)

Facebooks IPO on May 18, 2012, was one of the largest in U.S. history, dwarfing even that of Google in 2004. 85 With an IPO price set at $38 per share, Facebook was valued at $104 billion and planned to raise approxi-mately $18.4 billion through its IPO. 86 Facebook valuations historically have been optimistic. Before its IPO, Facebook was valued by several companiesYahoo offered $1 billion for the company, Microsoft invested in October 2005 at a valuation of $15 billion, Accel Partners sold its stake at a $35 billion valuation in November 2010, and Goldman Sachs led funding at a $50 billion valuation in January 2011. These valuations and the hype around Facebooks IPO made it one of the most anticipated public offerings to date (see Exhibit 13 ). In 2011, Facebook had earned $3.71 billion in revenue and $1 billion in net income. These recent earnings, combined with Facebooks lofty valuation, equated to a high P/E of 104 for Facebook. In comparison, other large-cap NASDAQ-based companies have much lower P/Es: Apple has a ratio of 18.2, Google sits at 21.33, and Microsoft is at 11.33. To match these expectations, Facebook knew it would have to grow its earnings quickly in 2013 and beyond.

STUMBLING OUT OF THE GATE

As if signaling future disaster, problems arose just moments before Facebooks initial public offering. To start, the NASDAQ exchanges system entered an automated loop that delayed trading by 30 minutes. Another glitch occurred once trading started, when investors were unable to check the size or value of their trades because con-firmations on orders from the NASDAQ system were delayed three hours. 87 Errors of this variety and magnitude had never occurred during an IPO and made it appear as though fate was against a publicly traded Facebook. The calamitous opening may have cost firms as much as $500 million in investments, leaving many investors with an unpleasant feeling about Facebook stock. 88

The accuracy of Facebooks pre-IPO assessments was to be tested as Wall Street determined the market-driven public value of the social network. After one month of public trading, the stock price had fallen from $38 to $32, and early investors suffered significant losses. Despite the suffering stock price, analyst ratings remained optimistic about Facebooks future, believing that the company would lead an Internet revolution and estimating that its user base would grow 70 percent by 2014. Morgan Stanley, J. P. Morgan, and Goldman Sachs rated the stock as a buy and gave price targets of $38, $45, and $42, respectively (see Exhibit 14 ). 89 J. P. Morgans Doug Anmuth wrote:

We believe Facebooks virtual ownership of the social graph, strong competitive moat, and unwavering focus on the user experience position the company to significantly improve monetization over time and to become an enduring, blue-chip company built for the long term. 90

Only one analyst, Daniel Salmon at BMO Capital Markets, called for an underperform rating and gave a price target of $25, citing his concern about Facebooks advertising revenue. 91

Facebook stock continued its downward trend in July and August of 2012 ( Exhibit 9 ). The market cap as of August 16 was $48 billion, 54.2 percent ($56.8 billion) less than the IPO market cap. 92 In the months following the IPO, Facebook far underperformed its closest comparable IPOs: Google and LinkedIn. Google grew much faster than the NASDAQ 100 in its first six months, while LinkedIn grew at roughly the same rate as the NASDAQ 100 over the same period. Even investors who anticipated that Facebook would perform no worse than LinkedIn were disappointed.

UNDER SCRUTINY

Discussions over the declining stock prices put Morgan Stanley, the NASDAQ exchange, and Facebook execu-tives under great public scrutiny. Morgan Stanley and Facebooks CFO have been criticized for making changes to the price and number of shares just before the offering. These shares and prices were set at the far upper end of



14


the limit for the company. 93 As a result, the NASDAQ faces a review of its systems and procedures by the SEC. 94 Perhaps the sharpest criticism may have been offered against Mark Zuckerberg, whom many have perceived as an untested CEO. 95

For her part, chief operating officer, Sheryl Sandberg, has been fielding questions about Facebooks adver-tising strategies and pointing to positive signals and moves. At Facebooks first earnings call after its IPO, Sandberg called Facebook a platform company, saying, We want to take social companies and make them big, and take big companies and make them social. Her approach highlighted the growth that Facebook was seeing in its social ads, which are sponsored stories that show up in a users News Feed. Sandberg has noted Facebooks commitment to scrutinizing sponsored stories, saying, Were looking at the social context to make sure its really relevant. 96 Facebook also monitors user reactions to make sure the ads are adding value and not alienating users, because News Feed is so core to the user experience. Sandberg added that sponsored stories perform multiple times better than ads in Facebooks sidebar, because they are more like a recommendation from a friend.

Another advantage that Sandberg sees for Facebook is in the area of local business advertising. Local busi-nesses represent a huge opportunity for Facebook, Sandberg said, adding that local is the Holy Grail of Internet. 97 Local businesses are typically not very tech-savvy, and more than 40 percent of them have no web presence at all, Sandberg said. This gives Facebook an advantage because many business owners are Facebook users in their private lives. If they see messages from other businesses, they can imagine ads working for their businesses as well, and they know how to set up their profiles and timelines, which are very similar to business pages.

DEFENSIVE MEASURES

After a disappointing start, concerns about Facebooks stock price deepened in the fall of 2012, as investors prepared for the release of a large portion of public shares scheduled to hit the market in late November (see Exhibit 15 ). Zuckerberg and other company executives had indicated on September 5, 2012, that they would not sell more shares than were necessary to cover their tax liabilities. This measure was taken as a statement of faith in the companys future. Facebook also sought to protect its stock prices by buying back 101 million shares before the lockup periods expired and more shares become available for sale. 98

In an interview with Michael Arrington at TechCrunchs Disrupt conference on September 11, 2012, Zuckerberg publicly confessed to feeling disappointed in Facebooks stock performance and conceded that it wasnt good for company morale. Even so, Zuckerberg reassured shareholders, employees remained motivated by their desire to [build] stuff they are proud of. 99 In addition, he issued formal responses to rumors, denying development of a Facebook phone and hinting at future work with search engines. More important, he revealed the strategic focus for Facebooks future: mobile devices. After admitting that Facebook had made a mistake in its early mobile strat-egy by focusing development on HTML5, Zuckerberg said the company would concentrate on native applications for mobile devices going forward. While there was no mention of immediate opportunities in the mobile market, Zuckerberg did explain how the task of monetizing Facebook mobile products was up to the product development teams.

Since Facebooks services have already captured 600 million of 5 billion mobile Internet users, Facebooks mobile days may be its brightest if it can replicate Twitters recent success. 100 Digital marketing research com-pany eMarketer cites a marketing campaign launched by P.F. Changs as the reason Twitters ad revenue jumped from $139.5 million to $259.9 million in 2012. P.F. Changs Lunar New Year advertisement generated one million clicks70 percent of which were from mobile devicesin just four days. 101




15

A New Business Model?

Facebooks IPO has put tremendous pressure on Sandberg and the Facebook team to come up with a strategy to justify Facebooks $100 billion valuation in the stock market. Sandberg needs to come up with a business model that will generate sufficient income to justify this valuation. She sees competitors like LinkedIn using a combina-tion of freemium and subscription business models. Googles revenue stream, in contrast, relies on advertising more than anything else; it generates $88 in advertising revenue per user. 102 For Facebook to follow such a path, it would need to increase its advertising revenue per user, which currently sits at $15, substantially.

Expanding Facebooks mobile advertising has been vital for Facebook to stay current, but mobile advertising generates less revenue compared to desktop advertising because fewer ads are shown. Facebook has enviable relevance and reach to offer its advertisers, and Sandberg has strong relationships with large advertisers from her Google days. Overall advertising revenues for Facebook are growing. Should she focus on convincing advertis-ers to pay higher ad rates for the precision and social benefits theyre getting from Facebook? Are there ways to expand mobile revenues?

Sandberg has seen how utilities like electric and gas companies use the pay-as-you-go business model. To many people, Facebook is almost as vital as electricityits a communication tool that users have come to rely on daily. Do users value Facebook enough to pay to use it, or would charging users open the door to a no-fee competi-tor? Facebook users would face high switching costs due to the network of connections theyve established, the photos theyve uploaded, and the timeline activities theyve shared on the site. Would they give it up if Facebook started to charge them?

Sandberg is also pushing to expand to other countries. These markets have vast numbers of potential users, but revenues per user are lower than in the U.S. Can the market size make up for the lower per-user revenues? What effect might local competitors have in foreign markets? And what about Instagram? Is there a way to monetize that acquisition to a larger degree? Are there other acquisitions that Facebook should make? Sandberg remem-bers how quickly MySpace lost its first-mover advantage after focusing too much on monetization. She wants to ensure that Facebook does not encounter a similar fate.

The clock is ticking. What business model and monetization strategy should she propose?



16


EXHIBIT 1 Facebooks Global Usage, 20092012 (in millions)

Panel 1: Monthly Active Users (MAUs)

Panel 2: Daily Active Users (DAUs)

(continued)

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

1,000%

1,100%

Jun-

09

Sep-

09

Dec-

09

Jun-

10

Sep-

10

Dec-

10

Mar-1

0

Mar-1

1

Jun-

11

Sep-

11

Dec-

11

Mar-1

2

Jun-

12

Sep-

12

Dec-

12

U.S. & CanadaEuropeAsiaRest of the World

0%

100%

200%

300%

400%

500%

600%

700%

Jun-

09

Sep-

09

Dec-

09

Jun-

10

Sep-

10

Dec-

10

Mar-1

0

Mar-1

1

Jun-

11

Sep-

11

Dec-

11

Mar-1

2

Jun-

12

Sep-

12

Dec-

12

U.S. & CanadaEuropeAsiaRest of the World




17

Source: Authors depiction of data in Facebooks SEC filing, http://1.usa.gov/14GKFGS .

EXHIBIT 1 (Continued)

Panel 3: MAUs on Mobile Devices

0%

Jun-

09

Sep-

09

Dec-

09

Mar-1

0

Jun-

10

Sep-

10

Dec-

10

Jun-

11

Sep-

11

Dec-

11

Mar-1

1

Mar-1

2

100%

200%

300%

400%

500%

600%

700%

Jun-

12

Sep-

12

Dec-

12

EXHIBIT 2 Facebook Revenues, 20102012 (in $ millions)


Rest of the World

Asia

Europe

U.S. & Canada

Rest of the World

Asia

Europe

U.S. & Canada

Dec-

10

Mar-1

1

Jun-

11

Sep-

11

Dec-

11

Mar-1

2

Jun-

12

Sep-

12

Dec-

12

Advertising

Payments & Other Fees

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400



18


EXHIBIT 3 Facebook Financial Data, 20102012 (in $ millions, except EPS data)

Fiscal Year 2010 2011 2012

Cash and short-term investments 1,785 3,908 9,626

Receivables total 373 547 1,170

Inventories total 0 0 0

Property, plant, and equipment total (net) 574 1,475 2,391

Depreciation, depletion, and amortization (accumulated) 246 450 882

Assets total 2,990 6,331 15,103

Accounts payable trade 29 63 65

Long-term debt 367 398 1,991

Liabilities total 828 1,432 3,348

Stockholders equity total 2,162 4,899 11,755

Sales (net) 1,974 3,711 5,089

Cost of goods sold 354 537 720

Selling, general, and administrative expense 449 1,095 3,187

Income taxes 402 695 441

Income before extraordinary items 606 1,000 53

Net income (loss) 606 1,000 53

Earnings per share (basic) excluding extraordinary items 0.28 0.47 0.02

Earnings per share (diluted) excluding extraordinary items 0.28 0.47 0.02

Source: Compustat.

$10

$8

$6

$4

$2

$0 0%

20%

40%

60%

80%

100%

2011 2012 2013 2014

Facebook ad revenues% change

$3.15

68.2%60.6%

$5.06

$6.72$7.64

32.8%

13.7%

EXHIBIT 4 Facebook Ad Revenues, 20112014 (in billions with % change)

Source: Authors depiction of data from Google edges closer to Facebook as US display advertising becomes two-horse race, eMarketer, February 22, 2012, http://bit.ly/WnbzfA .




19

EXHIBIT 5 Facebook Average Revenue per User (ARPU), 20102012


$0

$1

$2

$3

$4

$5

Rest of theWorld

Europe

U.S. & Canada

Asia

Worldwide

Dec-

10

Mar-1

1

Jun-

11

Sep-

11

Dec-

11

Mar-1

2

Jun-

12

Sep-

12

Dec-

12$0.33 $0.38$0.31 $0.40 $0.41 $0.37 $0.44

$0.47 $0.56

$0.44$1.14

$1.38

$0.43 $0.50 $0.54$0.56 $0.53 $0.58

$1.54

$0.55$1.25 $1.26 $1.24 $1.21 $1.28 $1.29 $0.69

$1.26 $1.19$1.33 $1.34

$1.60$1.40 $1.43 $1.37

$1.71

$2.77 $2.84

$2.49

$2.80

$3.20$2.90

$3.20$3.40

$4.08

EXHIBIT 6 Twitter Ad Revenues, 20102014 (in millions with % change)

Source: Authors depiction of data from Twitter, LinkedIn to see solid ad revenue growth, eMarketer, January 31, 2012.

2010 2011 2012 2013 2014

Twitter ad revenues

% change

$0

$100

$200

$300

$400

$500

$600 $540.0

$399.5

$259.9

$139.5

$45.035%

54%86%

210%



20


EXHIBIT 7 Social Media Site Visits in October 2012

Source: Authors depiction of data from Most popular social media websites in the United States in October 2012, Statista Industry Statistics, November 25, 2012.

Twitt

er

Face

book

YouT

ube

Goog

le1

Pinter

est

Yaho

o! An

swers

Linke

dIn

Tagg

ed

Instag

ram

Class

mates

0

10

20

30

40

60

70

50

Perc

ent S

hare

of V

isits

EXHIBIT 8 Various IPOs and Market Cap, 19942012 (in billions)

Source: Authors depiction of data drawn from Bloomberg.

$300

$250

$200

$150

$100

$50

$0

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

LinkedIn (LNKD)

Facebook (FB)

Google (GOOG)

Groupon (GRPN)

Yahoo (YHOO)

Amazon (AMZN)

eBay (EBAY)

Netix (NFLX)

Mar

ket C

ap, i

n bi

llion

s




21

EXHIBIT 9 Facebook, LinkedIn, and Google Post-IPO Stock Performance

Panel 1: Google

1-Au

g-04

1-Se

p-04

1-Oc

t-04

1-No

v-04

1-De

c-04

1-Ja

n-05

1-Fe

b-05

1-Ma

r-05

1-Ap

r-05

220%0%

20%40%60%80%

100%120%140%

NYSE: GOOGLE NASDAQ: 100

Panel 2: LinkedIn

40%30%20%10%

0%210%220%230%240%

1-Ma

y-11

1-Ju

n-11

1-Ju

l-11

1-Au

g-11

1-Se

p-11

1-Oc

t-11

1-No

v-11

1-De

c-11

1-Ja

n-12

NYSE: LINKEDIN NASDAQ: 100

(continued)



22


EXHIBIT 10 Percent Net U.S. Online Ad Revenue, 20112014

2011 2012 2013* 2014*

Google 41.0% 44.9% 46.6% 47.4%

Yahoo! 9.5% 7.4% 6.2% 5.6%

Facebook 5.4% 6.5% 7.1% 7.1%

Microsoft 5.7% 5.7% 6.0% 6.5%

AOL 2.8% 2.4% 2.2% 2.1%

Total Top 5 64.4% 66.9% 68.1% 68.7%

Total Internet (billions) $32.0 $39.5 $46.5 $52.8

*Projected.

Source: Authors depiction of data from Google edges closer to Facebook as US display advertising becomes two-horse race, eMarketer, February 22, 2012, http://bit.ly/y2FYgi .

Source: Authors depiction of data from Yahoo .

EXHIBIT 9 (Continued)

Panel 3: Facebook

20%10%

0%210%220%230%240%250%260%270%

1-Ma

y-12

1-Ju

n-12

1-Ju

l-12

1-Au

g-12

1-Se

p-12

1-Oc

t-12

1-No

v-12

1-De

c-12

1-Ja

n-13

NYSE: FACEBOOK NASDAQ: 100




23

EXHIBIT 11 Net U.S. Online Display Ad Revenue, 20112014 (in $ billions)

2011 2012 2013* 2014*

Facebook $1.73 14.0% $2.58 16.8% $3.29 17.7% $3.75 17.1%

Google $1.71 13.8% $2.54 16.5% $3.68 19.8% $4.76 21.7%

Yahoo! $1.35 10.8% $1.40 9.1% $1.50 8.1% $1.64 7.5%

Microsoft $0.56 4.5% $0.67 4.4% $0.80 4.3% $0.96 4.4%

AOL $0.53 4.3% $0.62 4.0% $0.71 3.8% $0.81 3.7%

Total Top 5 $5.88 47.4% $7.81 50.8% $9.98 53.7% $11.92 54.4%

Total Online Display $12.40 $15.39 $18.57 $21.91

*Projected.

Source: Authors depiction of data from Google edges closer to Facebook as US display advertising becomes two-horse race, eMarketer, February 22, 2012, http://bit.ly/y2FYgi .

EXHIBIT 12 LinkedIn Ad Revenues (millions and % change)

Source: Authors depiction of data from Twitter, LinkedIn to see solid ad revenue growth, eMarketer, January 31, 2012, http://bit.ly/A3mdNS .

$0 0%

20%10%

30%40%50%60%

80%90%100%

$50

$100

$200

$300

$150

$250

$400

$350

$450

2011 2012 2013 2014

LinkedIn ad revenues

% change

70%$310.7

$405.6

$226.0

$154.637%

46%

95%

31%



24


EXHIBIT 14 Analyst Ratings of Facebook Stock, June 27, 2012

Bank Analyst Rating Price Target

Morgan Stanley Scott Devitt Overweight $38.00

J. P. Morgan Doug Anmuth Overweight $45.00

Goldman Sachs Heather Bellini Buy $42.00

BofA-Merrill Justin Post Neutral $38.00

Barclays Anthony DiClemente Equal-weight $35.00

Citigroup Mark Mahaney Neutral $35.00

Credit Suisse Spencer Wang Neutral $34.00

RBC Capital Markets Andre Sequin Outperform $40.00

Wells Fargo Jason Maynard* Outperform $37.00

BMO Capital Markets Daniel Salmon Underperform $25.00

Lazard Capital Markets William Bird Neutral N/A

Piper Jaffray Gene Munster Overweight $41.00

Raymond James Aaron Kessler Market Perform N/A

Stifel Nicolaus Jordan Rohan Hold N/A

William Blair Ralph Schackart Outperform N/A

Cowen & Co. Kevin Kopelman Neutral N/A

Pacific Crest Evan Wilson Sector Perform N/A

Oppenheimer & Co. Jason Helfstein Ouperform $41.00

Source: Authors depiction of data from Analysts hit the tepid button on Facebook, The Wall Street Journal, June 27, 2012, http://on.wsj.com/VE9P23 .

EXHIBIT 13 Valuation History (in billions)

Source: Authors depiction of data from Facebook investors cash out, The Wall Street Journal, August 17, 2012, http://on.wsj.com/ZX1r4W .

2005

2006

2007

2008

2009

2010

2011

$1.0$15.0 $10.0

$35.0$50.0

$80.0

$104.8 Opening price for IPO($38.00 per share)

before IPO

2012

18-M

ay-2

012

18-J

un-2

012

18-J

ul-2

012

18-A

ug-2

012

18-S

ep-2

012

18-O

ct-2

012

18-N

ov-2

012

18-D

ec-2

012

after IPO




25

EXHIBIT 15 History of Facebook Public Shares Available (in millions)

Source: Authors depiction of data from Facebook investors cash out, The Wall Street Journal, August 17, 2012, http://on.wsj.com/ZX1r4W .

1,197

149 47

May 2013

2,0931,944

Dec 2012Nov 2012

747692421

271

421

55

May 2012 OctNov 2012Aug 2012

New public sharesShares

500

0

1,000

1,500

2,500

2,000



26


Endnotes

1 . The Social Network [Film], 2010.

2 . Facebook IPO filing puts high value on social network, USA Today, February 2, 2012, http://usat.ly/y5z8UK .

3 . A brief history of Facebook, The Guardian, July 24, 2007, http://bit.ly/AHNfU .

4 . Facebook IPO filing puts high value on social network.

5 . Facebook Form S-1 registration statement, SEC, May 16, 2012, http://1.usa.gov/LJb1NN .

6 . Ibid.

7 . Ibid.

8 . Ibid.

9 . Google edges closer to Facebook as US display advertising becomes two-horse race, eMarketer, February 22, 2012, http://bit.ly/y2FYgi .

10 . Facebook: One billion and counting, The Wall Street Journal, October 5, 2012, http://on.wsj.com/134nYvE .

11 . Facebook Form S-1 registration statement.

12 . Floating Facebook: The value of friendship, The Economist, February 4, 2012, http://econ.st/yq7kQa .

13 . Facebook CEO seeks help as site grows upGoogle veteran to be Zuckerbergs no. 2, The Wall Street Journal, March5, 2008, http://on.wsj.com/TBMcIs .

14 . Ibid.

15 . Helft, M. (2010), Mark Zuckerbergs most valuable friend, The New York Times, October 2, http://nyti.ms/1aiOvsN .

16 . Ibid.

17 . Person of the Year: Mark Zuckerberg, Time magazine, December 15, 2010.

18 . http://www.ted.com/talks/sheryl_sandberg_why_we_have_too_few_women_leaders.html .

19 . Sandberg, S. (2010), Why we have too few women leaders, TEDWomen, December.

20 . The acceptable face of Facebook, The Economist, July 21, 2011, http://econ.st/VDqBi8 .

21 . Sandberg, S. (2013), Lean In (New York: Knopf).

22 . Facebook CEO seeks help as site grows up.

23 . Facebook seeks a new finance chief as Yu leaves, The Wall Street Journal, April 1, 2009, http://on.wsj.com/1jska .

24 . Facebook hires finance chief, The Wall Street Journal, June 30, 2009, http://on.wsj.com/4vQ9Fa .

25 . Inside fumbled Facebook offering, The Wall Street Journal, May 23, 2012, http://on.wsj.com/JEVdyb .

26 . Facebook overview, Facebook, http://bit.ly/GMr0Lq .

27 . Graph search event video, Facebook Newsroom, January 15, 2013, http://bit.ly/14mMqrL .

28 . Facebook overview.

29 . Graph search event video.

30 . Ibid.




27

31 . Facebook on collision course with Google on web searches, The Wall Street Journal, January 16, 2013, http://on.wsj.com/14mMZBT .

32 . Ibid.


34 . Ibid.

35 . Facebook to organize friends into lists, The Wall Street Journal, September 13, 2011, http://bit.ly/Vltapl .



38 . Ibid.

39 . Ibid.

40 . Introducing Graph Search: Help people discover your business, Facebook-Studio, January 15, 2013, http://bit.ly/WcKyPl .


42 . Ibid.

43 . Ibid.

44 . Ibid.

45 . Ibid.

46 . Ibid.

47 . Ibid.

48 . Facebook annual report, Facebook, 2012.

49 . Ibid.; Facebook IPO filing.

50 . f8 conference, Facebook, September 11, 2012, https://www.facebook.com/f8 .

51 . Facebook annual report, Facebook, 2012


53 . Ibid.

54 . Ibid.

55 . Ibid.

56 . Insta-Rich: $1 billion for Instagram, The Wall Street Journal, April 10, 2012, http://on.wsj.com/IfvnR7 .

57 . Ibid.

58 . Twitter may have 500M1 users but only 170M are active, TechCrunch, July 31, 2012, http://tcrn.ch/Xst7NM .

59 . Twitter shares active user numbers, The Wall Street Journal, September 8, 2011, http://on.wsj.com/q27dF1 .

60 . Twitter VP Jason Goldman steps down, The Los Angeles Times, December 8, 2010, http://lat.ms/fSWZnI .

61 . Twitter, LinkedIn to see solid ad revenue growth, eMarketer, January 31, 2012, http://bit.ly/A3mdNS .



28


62 . Ibid.; Facebook Form S-1 registration statement.

63 . The mounting minuses at Google1, The Wall Street Journal, February 28, 2012, http://on.wsj.com/zjRr06 .

64 . What keeps Facebook up at night, Fox Business, February 2, 2012, http://fxn.ws/yRkBrc .

65 . Google edges closer to Facebook as US display advertising becomes two-horse race, eMarketer, February 22, 2012, http://bit.ly/y2FYgi .

66 . Ibid.

67 . Ibid.

68 . Form 10-K, Google Inc., 2012, http://1.usa.gov/HeZUPW .

69 . Theres no avoiding Google1, The Wall Street Journal, January 3, 2012, http://bit.ly/WiALDF .

70 . The mounting minuses at Google1, The Wall Street Journal, February 28, 2012, http://on.wsj.com/zjRr06 .

71 . Theres no avoiding Google1.

72 . Why it doesnt matter that Google1 users only spend three minutes a month on the site, Forbes, February 28, 2012, http://onforb.es/yoxUre .

73 . Microsoft to acquire Skype, Microsoft, May 10, 2011, http://bit.ly/kRB0Gt .

74 . Why the Facebook-Microsoft alliance should worry Google, The Wall Street Journal, July 7, 2011, http://bit.ly/noRRYd .

75 . Parkhurst, E. (2012), Microsoft, Facebook get cozy as competitors hover, Puget Sound Business Journal, May 4, http://bit.ly/17N5yzp .

76 . About LinkedIn, LinkedIn, http://press.linkedin.com/about .

77 . Ibid.

78 . Ibid.

79 . LinkedIn IPO soars, feeding web boom, The Wall Street Journal, May 20, 2011, http://on.wsj.com/mbbJlr .

80 . About LinkedIn.

81 . Twitter, LinkedIn to see solid ad revenue growth.


83 . The mounting minuses at Google1.

84 . Why Wall Street likes LinkedIn more than Facebook, Forbes, August 4, 2012, http://onforb.es/PSdwxh .

85 . Facebook sets historic IPO, The Wall Street Journal, February 2, 2012, http://on.wsj.com/xcZO7h .

86 . Facebook prices IPO at record value, The Wall Street Journal, May 17, 2012, http://on.wsj.com/J0D5tn .

87 . SEC could seek Nasdaq upgrading, The Wall Street Journal, June 29, 2012, http://on.wsj.com/NHWO36 .

88 . Facebook IPO hasnt hit Nasdaq volumes, The Wall Street Journal, June 29, 2012, http://bit.ly/ViCGcx .

89 . Analysts hit the tepid button on Facebook, The Wall Street Journal, June 28, 2012, http://on.wsj.com/LB2NcX .

90 . Ibid.

91 . Ibid.

92 . Google edges closer to Facebook as US display advertising becomes two-horse race.




29

93 . Analysts hit the tepid button on Facebook.

94 . SEC could seek Nasdaq upgrading, The Wall Street Journal, June 29, 2012, http://on.wsj.com/NHWO36 .

95 . Stock traders to Mark Zuckerberg: Do you hear us now? Forbes, July 31, 2012, http://onforb.es/PkPafk .

96 . Facebook Q2 2012 earnings call, Facebook, July 26, 2012, http://bit.ly/1bknWSy .

97 . Ibid.

98 . Facebook plays defense, The Wall Street Journal, September 5, 2012, http://on.wsj.com/PZnD7U .

99 . Zuckerberg admits to missteps, The Wall Street Journal, September 11, 2012, http://on.wsj.com/OEFfmx .

100. Facebook: One billion and counting, The Wall Street Journal, October 5, 2012, http://on.wsj.com/134nYvE .

101. Twitters mobile ads begin to click, The Wall Street Journal, June 28, 2012, http://on.wsj.com/MapjuQ .

102. Facebook: One billion and counting.




FACEBOOK Case Study (1)

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