Question Details

(solution) How was Facebook able to stay ahead of competitors like Twitter,

How was Facebook able to stay ahead of competitors like Twitter, Instagram and LinkedIn over the last 5 years? What strategies did they implement to give them that competitive advantage?

Describe the weaknesses of Facebook's privacy policies and features. What factors contributed to those weaknesses? Did Facebook overcome this issue? If so, how?

What steps should Facebook take to increase the confidence of users, analysts and investors in its innovation strategies?

As the social media industry continues to expand, what measures should Facebook take to fend off new and innovative companies from entering the market?

Page requirement is 6 to 7 pages

CASE: E-406


DATE: 05/12/11







The original Facebook website went live on February 4, 2004 as a digital directory of


undergraduate students enrolled at Harvard University. It was coded by then-sophomore Mark


Zuckerberg, who wanted to combine the school?s dorm-exclusive online directories into a


school-wide resource. Those who joined Facebook could create a profile with their first and last


name, photo, residence, contact information, relationship status, personal interests, and even


course schedule. A profile could be viewed by other users who had a confirmed digital ?friend?


relationship with the owner of that profile (Exhibit 1: Sample Profile).


Facebook spread quickly. By the end of February, there were 10,000 Harvard users registered on


the site. Students at Columbia, Stanford, and Yale were invited to join on February 25, 26, and


29, respectively.i Over half of the undergraduate student body at Stanford signed up in the first


week. By June, Facebook spanned some 30 colleges and had approximately 150,000 users.


Zuckerberg was surprised by the demand for Facebook?s services:


Early on, we weren?t intending this to be a company. We had no cash to run it.


We actually operated it for the first three months for $85 a month ? the cost of


renting one server. We had a network of banner ads, but it?s not like we were


making money.ii


He decided to spend the summer of 2004 in Silicon Valley growing Facebook and fleshing out


its business potential.


Arar Han (MBA ?09) wrote this case using publicly available sources under the supervision of Thomas M. Siebel


Professor of Business Leadership, Strategy, and Organizations William P. Barnett as the basis for class discussion


rather than to illustrate either effective or ineffective handling of an administrative situation. Historical details of


Facebook are largely drawn from Stanford GSB Case E-220, ?Facebook,? revised May 22, 2008.


Copyright © 2011 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order


copies or request permission to reproduce materials, e-mail the Case Writing Office at: or


write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University,


Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a


spreadsheet, or transmitted in any form or by any means ?? electronic, mechanical, photocopying, recording, or


otherwise ?? without the permission of the Stanford Graduate School of Business. Every effort has been made to


respect copyright and to contact copyright holders as appropriate. If you are a copyright holder and have concerns


about any material appearing in this case study, please contact the Case Writing Office at



Facebook in 2011 E-406



p. 2



Social Networking Sites


When Zuckerberg arrived at Facebook?s rented Palo Alto house in June 2004, there were at least


three other companies offering internet-based social networking services:







Friendster, which was founded in 2002, was a prominent dating site with 1.5 million unique


visitors in September 2003, up from just 110,000 in April.iii In October 2003, it rejected a


$30 million buyout offer from Google, instead raising $13 million in a venture round led by


Kleiner Perkins Caufield & Byers and Benchmark Capital.iv


MySpace was founded in July 2003 as a self-described ?online community that lets you meet


your friends? friends.? It offered a range of services such as invitations, events, classified


advertising, and forums, and raised $11 million in a round led by Redpoint Ventures.v


Orkut was started by a Google programmer in January 2004. Membership to Orkut was by


invitation only, so the network grew organically through an existing network of trusted


friends. By July 2004, it had over 1 million users, many of whom lived in Brazil.



Facebook was set apart from other social networking sites in that it grew from college to college,


using a dot-edu email address as verification of a new user?s identity and collegiate affiliation.


Other services did not have explicit divisions within the overall network, nor an expansion


strategy that targeted colleges. Facebook?s customer support page in 2004 explained that division


by school was for the sake of user privacy:


Facebook was intentionally designed to limit the availability of your profile to


only your friends and other students at your school. This simple but important


security measure promotes local networking and makes sure that your information


is seen by people you want to share it with, and not seen by folks you don?t.


As Zuckerberg commented:


We?re not asking anyone to put anything out there that they wouldn?t be


comfortable with. We?re not forcing anyone to publicize any information about


themselves. We give people pretty good control over their privacy.


Indeed, Facebook allowed users to restrict who could access their profiles: friends, friends of


friends, and certain networks of users. This was similar to other social networking sites, which


supported similar restrictions, though not by school as Facebook did.


Facebook Becomes a Business


By the end of the summer of 2004, Facebook had achieved the following milestones:







Redesigned and relaunched the Facebook site.


Upgraded and added to Facebook?s back-end infrastructure.


Appointed Sean Parker, co-founder of Napster and Plaxo, as president.


Received $500,000 in seed capital from prominent venture capitalist Peter Thiel.



Facebook in 2011 E-406



p. 3



More important, Zuckerberg became convinced of the site?s potential as a business: ?When we


came out to the Bay Area, we realized that no other site really had this kind of activity, that it


could be a big business, and it might be fun to do.? Zuckerberg dropped out of Harvard to pursue


Facebook full time, as its CEO.




Facebook hit 1 million users in December 2004. By May 2005, the site had 2.8 million users at


more than 800 colleges. Its growth reportedly sparked a bidding war among a dozen venture


capital firms eager to participate in Facebook?s success. The winner was Accel Partners, which


invested $12.7 million in a deal valuing Facebook at $100 million. Thrilled, Accel partner Jim


Breyer praised the Facebook management team as ?intellectually honest and breathtakingly


brilliant in understanding the college student experience.?


Facebook was on its way to capturing the 13.4 million U.S.-based college student audience,vi


with a penetration rate of over 80 percent at each of the colleges it served. But $100 million was


a surprising value for a company that had little revenue and served only college students. Breyer


himself said in an interview, ?Certainly relative to many other deals, especially deals at this same


stage, the price was significantly higher.? Some in the venture capital industry wondered whether


Accel?s investment was testament to the return of the internet investment bubble of the 1990s.vii


In September 2005, Facebook entered the 17.1 million student high school market. Existing, i.e.


collegiate, users could invite high school students they knew, and the first wave of high school


students to join could invite their peers. Facebook grew quickly among the high school set.


Although MySpace was already an established player, it took Facebook just seven months to


reach 1 million registered high school users.


In April 2006, Facebook started offering membership to those affiliated with a limited number of


corporations.viii These included Accenture, Amazon, Apple, EA, Gap, Intel, Intuit, Microsoft,


Pepsi, PWC, and Teach for America. New users could register using their dot-com work email


addresses. Later the same year, Facebook started expanding internationally by offering


memberships to schools like the Indian Institutes of Technology and select high schools in Israel.




By the end of 2006, Facebook was the second largest social networking site after MySpace. At


12 million active users, it was about a quarter of MySpace?s estimated 43 million.ix The average


Facebook user spent about one hour on the site per day, a figure that grew each month, while the


equivalent metric for MySpace, which was purchased by News Corp. in 2005 for $580 million,


was holding steady at about two hours.x According to web traffic monitor comScore, MySpace


was the fifth most popular website in the U.S. as measured by number of page views. It was said


to have become a music destination, with over 350,000 bands and artists using it as a platform


for publicity and communications with fans.xi With 36 million members worldwide, Friendster


also remained a prominent social networking site, though it was unclear how many of its


members were active users.xii Orkut was the dominant social networking site in Brazil and had


launched in India, to promising results.



Facebook in 2011 E-406



p. 4



In addition to the growth of the big four social networking sites, the social networking industry


saw aggressive investment into technology applications with a social focus:







Blogger was started in 1999 and bought by Google in 2003 for an undisclosed sum.


Flickr, a photo sharing site, was launched by a Canadian gaming company in 2004 and


purchased by Yahoo! in 2005 for $35 million.


Yelp, a social restaurant and business review site founded in 2004, had received a total of


$12 million in venture capital financing by 2006.


Twitter, a microblog site with RSS functionality, launched in 2006 and in 2007 received


between $1 million and $5 million in venture loans in a deal valuing it at $20 million.xiii



The boom in social networking businesses was a worldwide phenomenon. Beyond Orkut in


Brazil and India, Facebook lookalike Bebo was founded in San Francisco in 2005 and gaining a


dominant position in the United Kingdom, Ireland, and New Zealand.xiv ?Chinese Facebook?


RenRen1 also launched in 2005. Some, like South Korea?s Cyworld, predated Facebook, and had


already achieved a penetration rate of 25 percent of the entire South Korean market, population


50 million.xv




Limiting its user base to college-aged students with dot-edu email addresses had enabled


Facebook to verify that its users were who they said they were. While the site still required


members to use their real first and last names, opening up membership to others outside of the


dot-edu network in September 2005 suspended Facebook?s ability to confirm their identity and


affiliation. This led to a range of concerns about privacy in the network:






Press reports warned users against posting phone numbers and residential addresses.


College newspapers claimed that prospective employers were using Facebook and other


social networks to screen job candidates.


High school students feared that college admissions officers would do the same ? particularly


that they would reject applicants on the basis of any evidence of illegal drug use or underage


drinking found on student profiles.



Such concerns created a tension between Facebook?s interest in fostering ?a freer flow of


information,? as Zuckerberg put it, and a justifiable interest on the part of parents, school


administrators, and law enforcement officials to protect students from the potential risks of


disclosing private information in a semi-public realm. While Facebook took precautions to


protect its members from predatory users and encouraged them to report any suspicious


activities, it stopped short of censoring them or placing restrictions on anything it regarded as


their ability to express themselves.


Accel partner Breyer regarded the issue of privacy at Facebook as akin to the same at eBay in its


early stages:






RenRen was founded by Stanford GSB MBA Joe Chen (?99).



Facebook in 2011 E-406



p. 5



We certainly spend a lot of time thinking about what are the privacy issues?


Medium and long term, perhaps the closest model out there would be how eBay


had to make some fundamental decisions along the way relative to the


democratization, if you will, of their user base.


What constituted an appropriate level of privacy was not easy to define. Like the U.S.


government, Facebook was scrupulous to steer clear of intervening in ?citizen? self expression.


However, its policy was also to keep its college and high school networks discrete ? a move that


drew controversy when college users realized they could not view any high school profiles


without first being confirmed ?Friends.?xvi Facebook?s FAQ page at the time noted:


The high school and college networks are completely separate. This means that


features like search, messaging, poking, and inviting people to be friends are


restricted to the network you use. This is primarily for security reasons, but also


because many people prefer it this way.


User Revolt


In September 2006, Facebook inadvertently challenged user expectations of privacy with the


launch of ?News Feed? and ?Mini Feed.? Before the launch, users had to visit their friends?


individual profile pages to see a log of their activity on the site. Afterwards, the two features


harvested user activity on Facebook and added them to an RSS-like queue to the user?s friends.


News Feed was set as all users? homepage after login (Exhibit 2: Sample News Feed).


User response to the new feeds was strongly negative. For example:


You went a bit too far this time, Facebook. Very few of us want everyone


automatically knowing what we update. We want to feel just a LITTLE bit of


privacy, even if it is Facebook. News Feed is just too creepy, too stalker-esque,


and a feature that has to go.


Some Facebook users began to organize a boycott of the site on September 12, 2006.xvii


After several misdirected attempts to quell angry users, Facebook introduced modifications to


News Feed and Mini Feed that gave them more control over what would go into the feeds and


who would be allowed to see them. In addition, Facebook introduced new privacy controls.


These included the ability to block certain users from accessing one?s profile, the option of


restricting directory searches from returning one?s profile or picture, and a range of user controls


for who or which networks would be allowed to see various parts of one?s profile.


Then, on September 26, 2006, Facebook announced it was open to the public at large.


Investments and Purchase Offers


In April 2006, Facebook had raised $27.5 million in a round of financing led by Greylock


Partners and Meritech Capital Partners. The deal valued Facebook at $550 million. Shortly



Facebook in 2011 E-406



p. 6



thereafter, Yahoo! offered to buy a majority stake in Facebook for $1 billion cash, based on a $2


billion valuation. Facebook rejected this offer and announced in December that Facebook was


not for sale. As Zuckerberg explained in an interview:


We are not necessarily focused on what the exit is going to be ? whether it?s


selling the company or an IPO or when that?s going to be. But we obviously think


that there?s a lot of potential to keep growing.xviii




Resolved to grow the business organically, Facebook hired new employees ? especially


programmers (?developers?) ? at a brisk pace. At 300 employees in November 2007, it was said


to be targeting roughly 700 by the end of 2008. xix Google was a frequent target of Facebook?s


recruiting efforts. As reported in TechCrunch:


Facebook has already claimed YouTube CFO Gideon Yu, e-commerce product


lead Benjamin Ling and GDrive developer Justin Rosenstein. But ex-Googlers


inside Facebook are saying that the problem goes further than a few high profile


exits caused by vesting stock. Facebook just seems a hell of a lot ?sexier? than


Google. A steady stream of Google employees is making the switch to Facebook,


and competition for top college grads is fierce as well.


Senior VPs at Google have dubbed it ?the Facebook problem? according to a


number of sources. At least ten ?top performers? have made the switch over the


last two months. Ex-Googlers expect to continue seeing at least two to four more


leave for Facebook each month. That doesn?t sound like much, but Facebook is


targeting the cream of the crop. The best Googlers are being actively recruited,


and many are leaving.


Powered by its growing team of talented developers, Facebook launched a number of new


features during 2006 and 2007. These included:









Social Bookmarking (October 2006): allowed users to share items of interest from within


Facebook or across the Internet with friends or post them to their profiles. (January 2007): Facebook optimized for mobile phones. Users could upload


photos and notes to Facebook and receive message from Facebook using SMS.


Virtual Gifts (February 2007): a small icon constituting a gift could be given and received


among Facebook users and posted to user profiles. The first gift was free; subsequent gifts


cost $1 each. Proceeds were donated to charity.


Flyers Pro (September 2007): an advertising market allowing advertisers to stipulate the


maximum price they would pay for each time a user clicked on their ad. Using Facebook?s


knowledge of users? gender, age, location, political views, relationship status, education


status, workplace, and key words, the ads could be finely targeted to relevant users.


Social Ads (November 2007): an advertising platform. Brands and businesses could create


profile pages akin to user profile pages. Called ?Pages,? these profiles contained information


like the company location, website, hours of operation, members, and the like.



Facebook in 2011 E-406










p. 7



Facebook Chat (April 2008): instant messenger for Facebook friends.


Mini Feed extension (April 2008): users could import updates from other web services like


Flickr,, Digg, Picasa, and Yelp into their profiles.


People You May Know (April 2008): allowed users to connect with additional users that


Facebook?s algorithm suggested.


Facebook Connect (May 2008): enabled users to login to third-party websites using their


Facebook credentials and allow them to access their profile information. When users


activated feature with a third-party site, the third-party could access as much user data as


Facebook could access.xx


Facebook Beta (July 2008): a new graphic user interface for Facebook. Users were initially


invited to opt in to the new look, which integrated Mini Feed with the user?s profile Wall,


among other attempts to create a less cluttered look and feel.



F8 and the Social Graph


In addition to building new features, Facebook launched a platform2 called F8 in May 2007 for


developers to build applications that could run within the site. F8 allowed third-party developers


to create applications that users could then add to the six standard Facebook applications: photos,


events, groups, gifts, birthdays, and marketplace (also launched in May). Facebook Query


Language and Facebook Markup Language were concurrently released to support developers in


their efforts. F8 launched with 85 applications from 65 partners including Microsoft and


Amazon. By June, 40,000 developers had launched more than 1,500 new Facebook applications.


At the unveiling of F8, Zuckerberg spoke of a concept called the ?social graph? as foundational


to the Facebook user experience and to the site?s growth potential. The term ?social graph? and a


broader school of thought on ?social networks? had been popularized in the mid-fifties by social


scientists who used nodes and lines to graphically illustrate linkages among people.xxi3


Zuckerberg described Facebook as the largest social graph in the world.


On pace to hit 50 million users by the end of 2007, Facebook was adding 100,000 new users a


day. The company had a record of all the links among its members, as well as the members? links


to sites and places outside of the network. This data constituted Facebook?s social graph, a


highly leverageable asset for Facebook and a tremendous advantage it had vis-à-vis other


companies seeking to reach anyone who was in the Facebook network. Simply put, Facebook


had more information about people?s relationships and preferences than any other business did.


Moreover, it was voluntarily given and highly reliable.


At the F8 conference, Facebook invited application developers to tap into its social graph. As


Zuckerberg described:





A technology platform prescribes a programming language and environment for an operating system or user


community. Developers create applications, or other additions or improvements to the platform, building out the


system?s functionality or buttressing the community?s offerings. Facebook was based on the Internet. Over time, it


was accessible through the company?s website, through cell phones, so-called ?smart? phones, and even cars


preinstalled with advanced telecommunications tools.




This school of thought included the work of sociologist Duncan J. Watts, who researched and wrote about


structure and randomness in social networks in his 1999 book Small Worlds (Princeton University Press).



Facebook in 2011 E-406



p. 8



The Facebook platform is optimized for building applications in Facebook, and


with more value for people to develop on our base than we could do on our own.


People are already building social apps, but they have to reconstruct the social


graph all by themselves. We are going to allow developers worldwide to do


complete new things. Today social networks are completely closed nets?today


we are going to end that. With this [framework] any developer worldwide can


build full applications on top of the social graph inside the Facebook Platform.xxii


More Investments, Competitive Responses, and a Privacy Problem


It was hard to overestimate the potential value of Facebook?s platform. A few months after the


launch of F8, Facebook announced a $10 million fund for Facebook application developers.


Called the fbFund and administered by the Founders Fund and Accel Partners, the fund would


provide $25,000 to $250,000 in grants to aspiring application developers.4


Successful investors to Facebook in 2007 and 2008 were Microsoft; Hong Kong billionaire Li


Ka-Shing; German brothers Marc, Oliver, and Alexander Samwer; and TriplePoint Capital.


Together, they invested a total of $475 million in five transactions all valuing Facebook at $15


billion (Exhibit 3: Facebook Valuation September 2004 to January 2011).


Google, which had competed with Microsoft to invest in Facebook, responded by launching


OpenSocial in November 2007. While not a direct competitor to F8, given their discrete


operating environments, OpenSocial was also an application platform. Instead of prescribing its


own language, as F8 did, developers could use common programming languages like Javascript


and HTML to build social applications on the Internet. Social network companies like Orkut,


Salesforce, LinkedIn, Plaxo, and Friendster all joined the OpenSocial platform. In March 2008,


MySpace and Yahoo! joined Google to jointly foster the development of OpenSocial.


Microsoft pointed to Facebook?s enormous advertising potential to justify its $240 million


investment. Indeed, at no other time had so many people gathered in one place to willingly


divulge valuable marketing information about themselves, and at no other time was this


information so accessible, harvestable, and actionable. In June 2008, Facebook surpassed


MySpace to become the largest social network.xxiii


The engine driving the growth of Facebook?s social graph was Beacon, a feature in Facebook?s


Social Ads platform that took Social Bookmarking to a new level. Beacon enabled users to


connect their profiles to 44 external partner sites. Beacon not only collected data on user


activities on those sites, it also published user activity on external sites to News Feeds ? all


without notifying users or obtaining their permission.


Zuckerberg publicly apologized to Facebook?s angry users:


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





In its second year, fbFund offered investments instead of grants. It was quietly discontinued in 2010.



Facebook in 2011 E-406



p. 9



apologize for it? 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. But we missed the right balance? People


need to be able to explicitly choose what they share, and they need to be able to


turn Beacon off completely if they don?t want to use it.xxiv


But the damage was done. Facebook eventually shut down Beacon in September 2009 as part of


the settlement for a successful class action lawsuit.5 Then, in December 2009, it announced a


new set of privacy standards that defaulted its users to sharing more profile information publicly.


Again, users were aghast:


These new ?privacy? changes are clear...


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