Instruction: Read the case and carefully analyze the business model of Facebook.

Answer the following

Context: The Facebook business model This case is about the social network Facebook which
hardly needs an introduction, but when we first featured it in an earlier edition of E-Business and
E-Commerce Management it was a niche service mainly used in col leges and universities. It is still
a good case study in that it shows many of the success factors needed for launch of a new digital
business, but also the risks of alienating users when their privacy needs are not listened to. It’s
incredible that it now has more than a billion. Users active monthly worldwide, yet has fewer than
5,000 employees. (updates: 67, 317 employees in 2024)

Value proposition:

In 2013, the Facebook mission is simply to ‘make the world more open and connected’. Previously,
Facebook described itself as ‘a social utility that helps people communicate more efficiently with
their friends, family and coworkers. The company devel ops technologies that facilitate the sharing
of information through the social graph, the digital mapping of people’s real- world social
connections. Anyone can sign up for Facebook and interact with the people they know in a trusted
environment’.

Consumer value proposition:

You have probably seen the 2010 film ‘The Social Network’ which describes how Facebook was
founded while Mark Zuckerberg was a student at Harvard University. Initially membership was limited
to Harvard students. The initial viral effect of the software was indicated since more than half of the
undergraduate population at Harvard registered on the service within the first month! Zuckerberg
used open- source software PHP and the MySQL database to create the original ‘TheFacebook.com’
site and these technologies are still in use today. The film also describes the long- running dispute
over ownership of Facebook, in which another Harvard- originated social networking site,
‘HarvardConnection’, which later changed its name to ConnectU, alleged in September 2004 that
Zuckerberg had used its source code to develop Facebook when it originally contracted him to help
in building its site. When Facebook first launched in February 2004, there were just three things that
users could do on the site, which are still core to the functionality of the site. Users could create a
profile with their picture and information, view other people’s profiles and add people as friends.
Facebook (2013) explains these core consumer benefits defined by the company: Connect and
Share with your friends. Staying connected is the core feature as we would expect, but note the more
emotional underpinnings of the other elements of the value proposition. Discover and Learn.
Facebook references public figures and organizations that interest them – available through
Facebook company pages. Express yourself. A fundamental need. Facebook does this through its
key features which it describes as the Timeline, News Feed, Photos and Videos, and messaging
through Email, Chat and Text. Stay connected everywhere. Referencing the importance of mobile use
Instruction: Read the case and carefully analyze the business model of Facebook. Answer the following
questions below and send it over to [email protected]. Please indicate your full name on the subject
line and please make sure that it’s on PDF format.

and use on other sites to Facebook’s users and business model: People can access Facebook
through our website, mobile sites, smartphone apps, and feature phone products.

Value proposition for marketers and businesses:

Facebook works hard to monetize its audience, particularly since Facebook held its initial public
offering (IPO) on 18 May 2012. This was the biggest IPO for an Internet company, with a peak market
capitalization of over $104 billion. Facebook describes its offer to business as follows: Marketers can
engage with more than one billion monthly active users on Facebook or subsets of our users based
on information people have chosen to share with us such as their age, location, gender, or interests.
We offer marketers a unique combination of reach, relevance, social context, and engagement to
enhance the value of their ads. Commercial companies or not- for- profit organizations (e.g.
www.facebook.com/joinred) can also create their own Facebook Pages for their company (currently
free). Facebook users can then express their support by adding themselves as a fan, writing on the
company Wall, uploading photos, and joining other fans in discussion groups. When users become
fans, they can optionally agree to be kept up to date about developments, and updates then appear
in their newsfeeds. To encourage companies to advertise, Facebook uses an algorithm known as
EdgeRank which deter mines the percentage of company status updates that appear in a user’s
newsfeed. Marketers need to work hard to maintain the relevance of their posts using the techniques.

Revenue model Facebook has an ad-based revenue model:

Some of the features of Facebook Ads (www.facebook.com/ads) include:

● Targeting by age, gender, location, interests, and more.

● Alternative payment models: cost per click (CPC) or impression based (CPM).

● ‘Trusted Referrals’ or ‘Social Ads’ – ads can also be shown to users whose friends have recently
engaged with a company’s Facebook page or engaged with the company website.

At the time of the launch of ads, the Facebook blog made these comments, which indicate the
delicate balance between advertising revenue and user experience. They said, first of all, ‘what’s not
changing’

● Facebook will always stay clutter- free and clean.

● Facebook will never sell any of your information.

● You will always have control over your information and your Facebook experience.

● You will not see any more ads than you did before this.’

And what is changing:

● ‘You now have a way to connect with products, businesses, bands, celebrities and more on
Facebook.
Instruction: Read the case and carefully analyze the business model of Facebook. Answer the following
questions below and send it over to [email protected]. Please indicate your full name on the subject
line and please make sure that it’s on PDF format.

● Ads should be getting more relevant and more meaningful to you.

Facebook’s strategy Facebook describes the key elements of its strategy in its SEC filing as:

1. Expand global community. Facebook names specific ‘relatively less- penetrated, large
markets’ such as Brazil, India, Mexico and Japan.
2. Develop social products to provide the most compelling user experience. As with many SEC
filings of successful Internet businesses, there is a clear commitment to user experience.
Facebook’s approach is based on Insight: ‘To provide the most compelling user experience,
we continue to develop products and technologies focused on optimizing our social
distribution channels to deliver the most useful content to each user by analyzing and
organizing vast amounts of information in real time.’ Smart Insights (2012) quotes Andrew
(Boz) Bosworth, who is the Director of Engineering at Facebook, as saying: Every day, we run
hundreds of tests on Facebook, most of which are rolled out to a random sample of people
to test their impact. For example, you may have seen a small test for saving newsfeed stories
last week. Other products might require network effects to be properly tested, so in those
cases we launch to everyone in a specific market, like a whole country.
3. Mobile Products. Facebook is seeking to make these more engaging and more easily
available. By the end of 2012 Facebook had more than 680 million average monthly users of
mobile services. The acquisition of photo sharing app Instagram in August 2012 was part of
this strategy.
4. Facebook Platform. Facebook notes the importance of developing an open system through
apps and web sites built by developers using the Facebook Platform, including Application
Programming Interfaces (API) and Social Plugins (for example, Like and Share but tons) to
help integration with other services such as websites. The Facebook Platform was introduced
in 2007 and by January 2008, over 18,000 applications had been built on it, with 140 new
applications added per day. More than 95% of Facebook members have used at least one
application built on Facebook Platform. Facebook Platform for mobile applications was
launched in October 2007, although many Facebook users already interacted with their
friends through mobile phones
5. Improve ad products. With the IPO this is a vital aim for Facebook, but it has to be balanced
against the other elements of the strategy, particularly number 2 above. Facebook states:
‘Our advertising strategy centers on the belief that ad products that are social, relevant, and
well- integrated with other content on Facebook can enhance the user experience while
providing an attractive return.’
6. Build a scalable infrastructure. Facebook describes its investment in software and hardware
infrastructure that enables their aim to provide a ‘unique, personalized experience to each of
our users around the world’. To do this, Facebook explains its technology investments as
focusing on analytics and development in areas including content optimization and delivery,
Instruction: Read the case and carefully analyze the business model of Facebook. Answer the following
questions below and send it over to [email protected]. Please indicate your full name on the subject
line and please make sure that it’s on PDF format.

graph query, media storage and serving, large- scale data management, and software
performance.

Facebook’s competitors

Although it seems curious to think of a company as large as Facebook having competitors, it has new
global rivals and local rivals. It mentions: Google+, which Google has integrated with certain of its
products, including search and Android, as well as other, largely regional, social networks that have
strong positions in particular countries, such as Mixi in Japan and vKontakte and Odnoklassniki in
Russia.

It also describes companies that offer microblogging (Twitter), developers of platforms such as Apple
iOS and Google Android, and games developers as key competitors. It has taken the decision not to
create a competing mobile platform, instead in 2013 launching Facebook Home on Android to
increase usage of Facebook on these devices.

Risk factors

Today Facebook states that: ‘Trust is a cornerstone of our business’ and they now dedicate significant
resources to the goal of building user trust through developing and implementing programs designed
to protect user privacy, promote a safe environment, and assure the security of user data. Facebook
has to some extent learnt this lesson from early mistakes, with incidents including: Initial concerns
about privacy of member data – 14 December 2005. Two MIT students downloaded over 70,000
Facebook profiles from four schools (MIT, NYU, the University of Oklahoma, and Harvard) using an
automated script, as part of a research project on Facebook privacy.

New feed functionality launched – September 2006. New information feeds were launched in
mid- 2006 which show the challenges of balancing the benefit of new functionality against disrupting
existing user habits. Writing in the Facebook blog in September 2006 Mark Zuckerberg said: ‘We’ve
been getting a lot of feedback about Mini- Feed and News Feed. We think they are great products, but
we know that many of you are not immediate fans, and have found them overwhelming and cluttered.
Other people are concerned that non- friends can see too much about them. We are listening to all
your suggestions about how to improve the product; it’s brand new and still evolving.’

Later, in an open letter on the blog dated 8 September 2006, Zuckerberg said: ‘We really messed this
one up. When we launched News Feed and Mini- Feed we were trying to provide you with a stream of
information about your social world. Instead, we did a bad job of explaining what the new features
were and an even worse job of giving you control of them. I’d like to try to correct those errors now.’
Privacy concerns sparked by ‘Beacon technology’ – November 2007. Facebook received a lot of
negative publicity on its new advertising format related to the ‘Beacon’ tracking system. Mark
Zuckerberg was forced to respond on the Facebook blog (5 December 2007).

He said:
Instruction: Read the case and carefully analyze the business model of Facebook. Answer the following
questions below and send it over to [email protected]. Please indicate your full name on the subject
line and please make sure that it’s on PDF format.

About a month ago, we released a new feature called Beacon to try to help people share information
with their friends about things they do on the web. We’ve made a lot of mistakes building this feature,
but we’ve made even more with how we’ve handled them. We simply did a bad job with this re lease,
and I apologize for it. While I am disappointed with our mistakes, we appreciate all the feedback we
have received from our users. I’d like to discuss what we have learned and how we have improved
Beacon. When we first thought of Beacon, our goal was to build a simple product to let people share
information across sites with their friends. It had to be lightweight so it wouldn’t get in people’s way
as they browsed the web, but also clear enough so people would be able to easily control what they
shared. We were excited about Beacon because we believe a lot of information people want to share
isn’t on Facebook, and if we found the right balance, Beacon would give people an easy and
controlled way to share more of that in formation with their friends. But we missed the right balance.
At first we tried to make it very lightweight so people wouldn’t have to touch it for it to work. The
problem with our initial approach of making it an opt- out system instead of opt-in was that if someone
forgot to decline to share something, Beacon still went ahead and shared it with their friends. It took
us too long after people started contacting us to change the product so that users had to explicitly
approve what they wanted to share. Instead of acting quickly, we took too long to decide on the right
solution. I’m not proud of the way we’ve handled this situation and I know we can do better.

Privacy setting concerns – Autumn to 2009 to Spring 2010. In December 2009, Facebook
implemented new privacy settings. This meant that some information, including ‘lists of friends’, was
‘publicly available’, when it was previously possible to restrict access to this information. Photos and
some per sonal information were also public unless users were sufficiently knowledgeable and
active to limit access. Privacy campaigners, including the Electronic Fron tier Foundation and
American Civil Liberties Union, criticized the changes. In May 2010 further changes were made to
give users greater control and simplify the settings.

Facebook lists some of its other key risk factors as:

● ‘users increasingly engage with other products or activities;

● we fail to introduce new and improved products or if we introduce new products or services that
are not favorably received;

● users feel that their Facebook experience is diminished as a result of the decisions we make with
respect to the frequency, prominence, and size of ads that we display;

● we are unable to continue to develop products for mobile devices that users find engaging, that
work with a variety of mobile operating systems and networks, and that achieve a high level of market
acceptance;
Instruction: Read the case and carefully analyze the business model of Facebook. Answer the following
questions below and send it over to [email protected]. Please indicate your full name on the subject
line and please make sure that it’s on PDF format.

● we are unable to manage and prioritize information to ensure users are presented with content
that is interesting, useful, and relevant to them;

● users adopt new technologies where Facebook may not be featured or otherwise available.