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
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
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
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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
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Facebook in 2011 E-406
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
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.
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
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
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
RenRen was founded by Stanford GSB MBA Joe Chen (?99).
Facebook in 2011 E-406
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.
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
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
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
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
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
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
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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