MT5007 Management of Technological Innovation

LIM CHING WU LESLIE g0603039@nus.edu.sg HT0063039Y

Division of Engineering & Technology Management MT5007 Management of Technological Innovation

Introduction
In 2004, college sophomore Mark Zuckerberg wanted to build an online version of student directory with basic information, commonly known to schools as face book [1]. Harvard did not offer such a directory and the administration insisted that they were unable to aggregate the information required. Thus, one night, Zuckerberg hacked into Harvard’s student records and created a basic site called Facemash, which randomly paired photos of undergraduates and invited visitors to determine who was “hotter”. After four hours, 450 visitors, and 22,000 photo views, Harvard administration disconnected Zuckerberg’s internet connection and took down the site. However, Zuckerberg continued with this new project as he believed that information should be available to all students. He added applications and expanded the networks to other schools, and to work networks such as employees from the Central Intelligence Agency, McDonald’s, and the U.S. Marine Corps. Eventually in September 2006, Zuckerberg’s social networking website, Facebook.com, was opened to the public.

Presently, the site has more than 68 million active users worldwide [2]. Exhibit 1 in Appendix A shows the population of users worldwide. Based on report by Alexa [3], the site’s traffic ranking rose from 60th in September 2006 to 6th in February 2008. Exhibit 2 in Appendix A, from Wall Street Journal, depicts the monthly growth in number of active users from June 2004 to June 2007. In comparison with the rival social networking sites, as seen in Exhibit 3 of Appendix A, Facebook is ranked 2nd in the “Top 10 U.S. Social Networking Site for November 2007” report released by Nielsen Online. In January 2008, Zuckerberg reported Facebook’s revenue at US$150 million in 2007 and projected revenue at US$350 million for 2008 [4].

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Division of Engineering & Technology Management MT5007 Management of Technological Innovation

This paper examines Facebook’s revenue model and investigates on the factors that led to the current success of Facebook, to understand and illustrate the different technological management concepts behind this success. While the emphasis in this case study is on the lessons learnt for a successful innovation, it also briefly discusses the other issues Facebook is currently facing and recommends some future strategies to maintain its competitive advantages.

Revenue Model
There were several funding from venture capitalists since the launch of Facebook. Notably US$500,000 from Peter Thiel (co-founder of PayPal) in 2004, US$13 million from Accel Partners in 2005, and US$25 million from Greylock Partners, Accel Partners, Meritech Capital Partners and Peter Thiel.

The revenue model of Facebook is based on the following: • Display advertisements – Example of revenue from this is through outsourcing advertising deal. Besides the common banner advertisements, Facebook allows users to make their own advertisements known as Facebook Flyers at low prices based on number of clicks. These advertisements are filtered according to targets’ gender, age, education status, and regional networks. Direct advertisements accounts for majority of Facebook’s revenue. • Sponsorship – This is in the form of homepage sponsored stories and sponsored groups. In the former sponsorships, advertisements are displayed in the News Feed section of Facebook users’ pages which most users pay attention to. The click-through rates of such advertisements are higher than normal banner advertisements by ten to twenty times. Levels of filtering (such as by gender or location) for targeted users are applied with a premium. Sponsored groups are groups in Facebook created for

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Division of Engineering & Technology Management MT5007 Management of Technological Innovation

particular brand of goods. These groups (such as Apple Students, PINK Victoria Secret, NBA Finals Trivia Challenge) are personal environments for users to gather and interact, transforming the brand into a participant of Facebook. The cost of each sponsored group is US$300,000 for three months. There were 186 sponsored groups in September 2007. • Gifts – Users can purchase limited edition virtual gifts for other Facebook users at US$1 per item.

Path to Success
From an innovation based on the believe of a sophomore, to one with 66 million active users and annual revenue of US$150 million, it is not difficult to see that Facebook has been a great success. This is also evident from the significant investment made to the company since its launch. In October 2007, Microsoft invested US$240 million for 1.6 percent stake in Facebook [5]. This values the Facebook at US$15 billion. Following that in December 2007, Hong Kong tycoon Li Ka-shing US$60 million for 0.4 percent stake in Facebook [6]. And in January 2008, German internet entrepreneurs the Samwer brothers also invested a significant amount in Facebook [7]. This section will examine the factors which contributed to this success. The Untapped Market Unlike other social networking sites which had been targeting the older demographics or teenagers (in the case of MySpace), Facebook was designed by college students for college students. It targeted specifically the students within each university. Students needed such directory services and Facebook provided a better site than that of schools. With endorsement from university students from reputable schools such as Harvard, Stanford and Yale, students

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from universities in other countries were also keen to join after Facebook added their schools in. Design and Core Features The design of Facebook is centralized around the profile of the users and other core features of Facebook which can be added on (such as Photo-Sharing, which ranked number one on the Web with more than 2.7 billion photos on site and more than 14 million uploaded daily, Video and Event applications). These features appealed to students. They provided interactivity of Web 2.0 which college students like. The design is simple. It uses common graphical user interfaces, and text links for feature navigation. The site is largely unobtrusive and easy for students to use. Organization by classes and groups allows students to adequately represent and express themselves. As users invest great amount of effort in building up their profiles, and use of the core features (such as uploading high volume of photos) actively, it creates a high switching cost for the users to other social networking sites. Thus, the success of these core features resulted in the lock-in of users to the Facebook platform. The Network Effect Network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service [8]. In other words, the number of prior adopters is a term in the value available to the next adopter. For social networking sites, it is important to have a critical mass of users. The value of such networking sites to the users is in the form of being connected to more users. Hence the participation of large number of users will encourage more users to join the site. Prior to the public launch of Facebook, it had already established a critical mass of users in schools and organizations. Hence, by opening the social network to the greater online community, Facebook continued to ride on the network effect to attract more users. The

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Division of Engineering & Technology Management MT5007 Management of Technological Innovation

youthful demographic that Facebook attracts is highly prized amongst advertisers, the source of revenue for Facebook. Strategic Partnership In August 2006, MySpace (top ranked social networking site) and Google signed a deal for Google to provide search and contextual ads to MySpace, in return for giving US$900 million in guaranteed payments through 2010 [9]. On the other hand, after losing out to rival Google on the deal, Microsoft signed a deal to be the exclusive seller and provider of banner advertising and sponsored links for Facebook [10]. By working on the dynamic relationship among competitors and complementary service providers, Facebook was able to benefit to the strategic partnership. This will be further elaborated in later section on recommended future strategies. Modular and Open Architecture Besides the thirteen basic Facebook applications, the site has over 15,000 third party applications built on the Facebook Platform, and increasing at 140 new applications per day. As these third party applications are hosted on their own servers, it means that there is a continuously growing pool of applications available for Facebook users, and other than its core services, the expansion and maintenance of Facebook applications is almost autonomous. This presents advantages for the users as well as Facebook.

Technically, it is possible for third party developers to build new applications as Facebook is based on a modular architecture design and operates on LAMP (Linux, Apache, MySQL, PHP), a free and open source software stack. It defines its own interfacing language, the Facebook Markup Language (FBML), and opened up the Facebook API to anyone interested in developing Facebook applications, harnessing the efforts of the community. Furthermore, these specifications are clearly documented. Exhibit 4 in Appendix A shows the class diagram

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Division of Engineering & Technology Management MT5007 Management of Technological Innovation

that illustrates the basic Facebook modular design. The resultant third party applications developed allow users to interact (adding and removing of modules) with them in very similar manner. Facebook’s open architecture also allows existing Web businesses to plug directly into their social infrastructure with their own Facebook applications.

Colleges such as Stanford University and National University of Singapore started to offer modules on Facebook programming [11]. This highlighted the academics’ perspective on the importance of the Facebook API for social networking platforms. As such, this will also further popularize the development of third party Facebook applications among students.

Current Issues
Privacy is one of the current major issues for Facebook. The Facebook platform collects large sets of personal information. Although Facebook provides one of the best privacy management tools amongst social networking sites, new users may not understand how their information is used and how to control their privacy settings. In November 2007, Facebook launched an advertising system known as Facebook Beacon, to connect businesses with users and targeting advertising to the audiences they want. It allowed users to share information from other websites for distribution to their friends on Facebook. Beacon proved to be controversial as security researcher from Computer Associates found out that it tracked users' off-Facebook activities even if those users are logged off from the social-networking site [12].

The other issue is threat from Google’s ambition in the area of social networking. Google’s social networking site, Orkut, is the most popular in Latin America, with 12.4 million unique visitors in October 2007 [13]. It implements the OpenSocial API which is Google’s equivalent of the Facebook API for third party developers to build applications. Google

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OpenSocial is a more open cross-platform alternative when compared with Facebook API as it supports other social networking sites such as Bebo, Friendster, Hi5, mySpace, LinkedIn, etc. OpenSocial is Google’s solution for open and modular architecture. It allows Google to strategize for higher market share through Orkut or assist mySpace to compete more competitively against Facebook.

Future Strategies
Although Facebook is enjoying tremendous growth in market share, there are threats from Google and myriad of smaller social networking sites (such as Ning) which target at niche markets. With innovative features and rapid changing market trend, these small social networking sites have the potential of disrupting the market leaders. There is a need for Facebook to reinvent itself, and rethink what is its main business. This paper recommends the strategies which Facebook may adopt. Expansion to Mobile Platforms In 2007, Facebook tied up with T-Mobile to add its platform to Research in Motion (RIM) BlackBerry devices [14]. Mobile platforms present opportunities for Facebook to meet users’ needs away from the desks. In a study released by Comscore in June 2007, in Japan, the number of users using mobile phones to access the Internet (estimated 53.6 million) was almost equal to the number users doing so using personal computers (estimated 53.7 million) [15]. This illustrated the potential size of the market and suggested that regions which with higher adopting rate of mobile Facebook, may be the areas with high personal computer penetration. Beyond the Facebook Platform Web 2.0 has changed the average user’s web browsing experience tremendously. It has enabled users with relatively average computer know-how to publish more content to the

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World Wide Web. Facebook is one of these many interactive applications (such as eBay, Blogger, Wikipedia, etc.) using Web 2.0 technology. Facebook will become the de facto service provided of users’ web content (such as photos, videos, profile, etc.), if it can expand beyond its core website, and enable users to easily integrate the full array of Web 2.0 applications. The Facebook portal will serve as the main shop-front for users’ activities and content authoring, which widgets integrated at other sites will serve out the content to more people. This is another way of exploiting Network Effect as reaching out to more people will attract them to join and improving on the content. Corporation with More Brands Brands can make use of Facebook as a tool to get closer to the consumers (offering latest products and news) and gathering feedback (for improvement or observing trends) on their products. By relating brand preference more prominently to the users’ profiles, it is likely that users in the same community will try these brands as well. Through customizing and marketing such opportunities to more brands, Facebook will be able to secure more sponsorship and provide value-add to users at the same time. Connecting to Trends The Facebook users’ profiles are source of information on users’ preferences and background. Facebook applications such as “Books iRead” capture the users’ interests. Besides pushing the advertisements to users through contextual-aware advertising, Facebook can link these entities of interest (such as book titles or movie titles) directly to the internet shopping web sites (such as eBay or Amazon) of these items. Users browsing these profiles are more motivated to click-through these links than those in advertisements. There is a trend of increasing online sales. In a 2007 Forrester report, it predicted a rise of 18 percent of online sales to US$259.1 billion [16]. Thus, by connecting to trends and integrating with services,

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Facebook can produce a business model that them to mutually benefit (such as sharing profit of directed sales for internet shopping). Looking Outside Social Networking The modular architecture of Facebook can be applied to fields outside social networking. One such example is using it as a teaching tool. As college students are very familiar with the Facebook interface, schools can make use of the Facebook Platform to be interactive tools for instructional purposes. Facebook Brand Culture As seen in many successful brands, developing a brand culture is the key to sustaining success. With the success of one single product, users will be able to identify with products of same family (such as in the case of Apple with the “i” products, eg. iPod, iPhone, etc.). Similarly, Facebook can continue to target other markets by developing a brand culture and products from its initial success. Through customization based on profiles of other targeted market, Facebook can launch hybrid versions of its current social networking site and other products using its brand culture (such as sites for the older demographic). Creative Organizational Culture Creativity and innovation are absolutely critical in today’s economy for firms to stay competitive. Facebook will also need to constantly innovate in its infrastructure and technology, to meet the users’ needs and improve in its performance. There different ways to build innovation as part of their organizational culture. It is necessary for Facebook to recognize the importance of innovation in the organizational culture, and adapt the success formulas from innovative companies to suit individual firms [17].

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Conclusion
The key strength of Facebook is its modular and open architecture, which enabled it to exploit the network effect. As a first mover in this aspect, it had rapidly gained market share over incumbent such as mySpace and Friendster. Strategic partnership ensured long term funding. However, the competitors, such as Google Orkut and mySpace, have also adopted open architecture. Thus, first mover advantage will slowly be eroded. Therefore, it is important for Facebook to look beyond its success factors and expand on them when strategizing for the future. This paper also briefly highlighted the current issues and recommended strategies to sustain the growth, such as connecting directly to trends and moving beyond the Facebook platform. While these recommendations are merely possible way forward, it is important to recognize that strategies should change according to the dynamics of the competitors, complements, trends and technology.

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References
[1] E. McGirt, Hacker. Dropout. CEO, Fast Company, 19 Dec 2007.

http://www.fastcompany.com/magazine/115/open_features-hacker-dropout-ceo.html Retrieved on 27 Feb 2008.

[2]

Facebook Statistics, Facebook, 2008.

http://www.facebook.com/press/info.php?statistics Retrieved on 27 Feb 2008.

[3]

Facebook Traffic Details, Alexa, Feb 2008.

http://www.alexa.com/data/details/traffic_details/facebook.com?q=facebook Retrieved on 27 Feb 2008.

[4]

K. Swisher, Chatty Zuckerberg Tells All About Facebook Finances, All Things

Digital, 31 Jan 2008. http://kara.allthingsd.com/20080131/chatty-zuckerberg-tells-all-about-facebook-finances/ Retrieved on 27 Feb 2008.

[5]

B. Stone, Microsoft Buys Stake In Facebook, The New York Times, 25 Oct 2007.

http://www.nytimes.com/2007/10/25/technology/25facebook.html?_r=3&ref=media&oref=lo gin&oref=slogin&oref=slogin Retrieved on 28 Feb 2008.

[6]

E. Auchard, Li Ka-Shing Foundation Buys Facebook Stake, Reuters, 3 Dec 2007.

http://www.reuters.com/article/technologyNews/idUSN0344520920071204 Retrieved on 28 Feb 2008.

[7]

J. Bowker, Samwer Brothers Buy Stake In Facebook, Reuters, 15 Jan 2008.

http://www.reuters.com/article/rbssTechMediaTelecomNews/idUSL1562367720080115 Retrieved on 28 Feb 2008.

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[8]

Network Effect, Wikipedia, 2008.

http://en.wikipedia.org/wiki/Network_effect Retrieved on 1 Mar 2008.

[9]

Google Signs $900m News Corp Deal, BBC News, 7 Aug 2006.

http://news.bbc.co.uk/2/hi/business/5254642.stm Retrieved on 1 Mar 2008.

[10]

K. Q. Seelye, Microsoft to Provide and Sell Ads on Facebook, the Web Site, The New

York Times, 26 Aug 2006. http://www.nytimes.com/2006/08/23/technology/23soft.html?ex=1313985600&en=21cbf30b 709596b9&ei=5088&partner=rssnyt&emc=rss Retrieved on 1 Mar 2008.

[11]

S. P. Aune, Stanford University Offers Facebook Development Class, Mashable

Social Networking News, 10 Sep 2007. http://mashable.com/2007/09/10/stanford-facebook/ Retrieved on 2 Mar 2008.

[12] 2007.

J. C. Perez, Facebook Admits Ad Service Tracks Logged-Off Users, PC World, 3 Dec

http://www.pcworld.com/article/id,140225-c,webservices/article.html Retrieved on 2 Mar 2008.

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[13]

O. Kharif, Google’s Orkut: A World of Ambition, Business Week, 8 Oct 2007.

http://www.businessweek.com/technology/content/oct2007/tc2007107_530965.htm Retrieved 3 Mar 2008.

[14]

S. Lawson, Facebook, RIM Team to Bring Social Networking to BlackBerrys, CIO,

25 Oct 2007. http://www.cio.com/article/148550/Facebook_RIM_Team_to_Bring_Social_Networking_to_ BlackBerrys Retrieved on 5 Mar 2008.

[15]

Mobile Phone Web Users Nearly Equal PC Based Internet Users In Japan, ComScore,

20 Sep 2007. http://www.comscore.com/press/release.asp?press=1742 Retrieved on 5 Mar 2008.

[16]

Online Sales To Soar Again This Year, Forrester.com, 2007.

http://www.forrester.com/ER/Press/Release/0,1769,1145,00.html Retrieved on 10 Mar 2008.

[17]

C. W. Lim, Building An Innovative Organizational Culture, National University of

Singapore, 2007.

Cover Picture taken from Google Scholar Blog, University of British Columbia. http://weblogs.elearning.ubc.ca/googlescholar/archives/043221.html

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Appendix A: Tables and Charts
Exhibit 1: Population of Facebook Users.

Exhibit 2: Monthly Facebook Users Growth from June 2004 to June 2007.

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Exhibit 3: Nielsen Online Report October 2007.

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Division of Engineering & Technology Management MT5007 Management of Technological Innovation
Exhibit 4: Facebook Platform Class Diagram.

A-3

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