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 Harvards 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 Zuckerbergs 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, McDonalds, and the U.S. Marine Corps. Eventually in September 2006,
Zuckerbergs 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 sites 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
Facebooks revenue at US$150 million in 2007 and projected revenue at US$350 million for
2008 [4].

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This paper examines Facebooks 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 Facebooks 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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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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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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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. Facebooks 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 Googles ambition in the area of social networking. Googles
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 Googles
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 Googles 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 users web browsing experience tremendously. It has
enabled users with relatively average computer know-how to publish more content to the

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MT5007 Management of Technological Innovation

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 todays 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
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[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
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[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]

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

2007.
http://www.pcworld.com/article/id,140225-c,webservices/article.html
Retrieved on 2 Mar 2008.

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[13]

O. Kharif, Googles 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.
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BlackBerrys
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[15]

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

20 Sep 2007.
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[16]

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

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[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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Exhibit 4: Facebook Platform Class Diagram.

A-3