The development of Facebook's strategy including business and revenue model
You use Facebook, but have you ever wondered about its business model and how it has evolved? In my E-business and E-commerce Management book we have reviewed the development of Facebook for over six years now. I think it's still a great case study for both students and professionals to learn from, since it shows many of the success factors needed for a new start-up, including the risks of alienating users when their privacy needs are not listened to.
It’s incredible that Facebook now has more than a billion monthly active users worldwide, yet has fewer than 5,000 employees.
In this case study which we aim to keep up-to-date between the new editions of my books, I have structured the review of Facebook strategy using some of the customer-related aspects of the Business Model Canvas.
Facebook's value proposition
In 2013, the Facebook mission is simply to 'make the world more open and connected'.
Previously, it described itself as:
'a social utility that helps people communicate more efficiently with their friends, family and coworkers. The company develops 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'.
You almost certainly know the story behind how the Facebook value proposition developed from watching the 2010 film The Social Network? It describes how Facebook was founded while Mark Zuckerberg was a student at Harvard University - initially for limited Harvard student membership. 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 on the ownership of Facebook since another Harvard-originated social networking site ‘HarvardConnection’, which later changed its name to ConnectU, alleged in September 2004 that Zuckerberg had used their source code to develop Facebook when they originally contracted him to help in building their 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.
- 1. Users could create a profile with their picture and information.
- 2. View other people’s profiles.
- 3. Add people as friends.
Core Consumer Benefits
The latest Facebook SEC update 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 organisations that interest them – available through Facebook company pages.
- Express yourself. A fundamental need and Facebook does this through it’s 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 and use on other sites to Facebook’s users and business model. People can access Facebook through the website, mobile sites, smartphone apps, and featured phone products.
Value proposition for marketers and businesses
Facebook works hard to monetise its audience particularly since it held its initial public offering (IPO) on May 18, 2012. This was the biggest IPO for an Internet company, with a peak market capitalization of over $104 billion. Facebook describes its offer to businesses as...
'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 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 which then appear in their news feeds.
To encourage companies to advertise, Facebook uses an algorithm known as EdgeRank which determines the percentage of company status updates appear in a user’s newsfeed.
Marketers need to work hard to maintain relevance of their posts using the techniques described by Marie Page in her explanation of EdgeRank.
Facebook's revenue model
Facebook has an ad-based revenue model. Some of the features of Facebook 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.
Promises from Facebook at launch
At the time of the launch of ads, the Facebook blog made these comments, which indicates 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.
- Ads should be getting more relevant and more meaningful to you'.
Facebook’s Strategy - framework of key elements of SEC filing
- 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? 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 news feed 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 ad 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 websites built by Developers using the Facebook Platform, including API (Application Programming Interfaces) and Social Plugins (for example, Like and Share buttons) 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 Facebook Platform 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 2.
Facebook states: 'Our advertising strategy centres 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 believes it’s investment in software and hardware infrastructure has enabled them to provide a 'unique, personalised experience' to each of their users around the world.
Facebook explains its technology investments as focusing on analytics and development in areas including content optimization and delivery, graph query, media storage and serving, large-scale data management, and software performance.
6. Facebook’s competitors
Curious to think of a company as large as Facebook having competitors, it has new global rivals and local rivals!. Facebook mentions Google+, which Google has integrated with some 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 platforms, instead in 2013 launching 'Facebook Home on Android' to increase usage of Facebook on these devices.
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 learned 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 it's new advertising format related to the ‘Beacon’ tracking system.
How did Mark Zuckerberg respond in his blog?(5 December 2007)
'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 release, 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'.
'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 information with their friends'.
What did they admit to missing? - the right balance. It was supposed to be lightweight - touch it to work. The problem was following an opt-out system instead of opt-in - as someone would forget to decline to share something; Beacon still went ahead and shared it with their friends. It took them too long after people started contacting them to change the product so that users had to explicitly approve what they wanted to share.
Instead of acting quickly, Facebook took too long to decide on the right solution!.
Privacy setting concerns – Autumn to 2009 to Spring 2010
In December 2009, Facebook implemented new privacy settings. This mean't some information, including ‘lists of friends’, was ‘publicly available’, when it was previously possible to restricted.
Photos and some personal information were also public unless users were sufficiently knowledgeable and active to limit access. Privacy campaigners including the Electronic Frontier Foundation and American Civil Liberties Union criticized the changes. In May 201, further changes were made to give users greater control and simplify the settings.
Facebook lists some of it's other key risk factors as:
- users increasingly engage with other products or activities; failure to introduce new and improved products.
- introduce new products or services not liked; users feel that their Facebook experience is diminished as a result of the decisions made with respect to the frequency, prominence, and size of ads that are displayed.
- unable to continue to develop engaging products for mobile devices, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance.
- unable to manage and prioritise 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.
Key sources for the latest information on Facebook
Do let us know of any other resources useful for studying Facebook's strategy and business model.