HBS Case study on Facebook from March 2013.
In October 2012, Facebook registered its billionth user, cementing its position as the largest online social network in the world (see Exhibits 1 and 2 for user statistics). Founded by Mark Zuckerberg in 2004, Facebook helped users share information with friends. Users took advantage of these functionalities, uploading, for example, over 219 billion photos, making Facebook the largest photo-sharing site in the world. The site attracted a broad range of age groups and cultures, with approximately 81% of its users hailing from outside the U.S and Canada. Facebook also offered free profile page to companies to post information about their products and invite fans to respond with comments. Facebook also developed Facebook Platform, which enabled third-party developers to build applications, including games, which by 2011 had attracted over 40% of Facebook users.
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In 2011, Facebook reported $1 billion profit on $3.7 billion in revenue. Almost 85% of the revenue came from advertising, which was primarily displayed alongside user-provided content. The remaining 15% came from sales of virtual goods by third-party developers on Facebook Platform.5 In February 2012, the company filed for initial public offering (IPO) at a valuation of $104 billion, the third largest IPO in U.S. history. Since the IPO the stock price declined steadily, placing pressure on the company’s management team to increase revenue (see Exhibit 3 for current management biographies). This was a difficult task as the company already accounted for approximately 28% of U.S. online display ads.7 Advertisers were also cautious to increase their Facebook advertising budgets when on average users clicked on only five ads for every 10,000 displayed. Furthermore, despite the fact that nearly half of Facebook’s users were accessing the site via smart phones and tablets, Facebook had no effective mobile ad strategy.
Two broad options were on the table. First, Facebook could invest more to develop new advertising products. Past efforts in this vein had proven successful, e.g. in late 2010, Facebook released “social advertising,” which allowed companies to display advertising exclusively to friends of people who “liked” that company’s page on Facebook, with a short blurb indicating which friend liked the page. Such advertising generated up to 10 times as many clicks as regular advertising, but it was not clear whether this rate could be sustained, or whether future advertising products would meet with equivalent success, especially as more users shifted to mobile devices.
The second option was to invest further in the Platform and help companies develop their own applications. Thus far, most Platform revenues came from casual game developers like Zynga, which paid 30% of its sales on virtual goods and subscriptions to Facebook. However, other Facebook-integrated apps, like Spotify, Netflix, and Hulu, did not have to pay, even though Facebook created immense exposure for them. In that regard, the Platform could help companies in travel, media, news, and even financial services to reduce customer acquisition costs or to develop new features that the companies could charge for.