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

 


 

FACEBOOK IN 2011

 

FACEBOOK IN 2004

 

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: cwo@gsb.stanford.edu 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 cwo@gsb.stanford.edu.

 


 

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.

 

2005-2006: GROWTH AND CHALLENGES

 

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.

 

Competition

 

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

 

Privacy

 

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:

 


 

1

 


 

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

 

2007-2008: A STREAM OF NEW FEATURES

 

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.

 

m.facebook.com (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, Deli.cio.us, 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:

 

2

 


 

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.

 

3

 

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

 

4

 


 

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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