978-1259913747 Case Facebook

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Structure of the Case

The case opens with Sheryl Sandberg reviewing the company’s 1Q2015 earning data in preparation

for the ensuing earnings call. Notably, the company continued a strong run in the mobile ad space and

subsequent revenue data that Facebook had generated. But as chief operating officer (COO), she is

looking to take the company to the next level: not only to continued growth in mobile ads, but to domi-

nance in the digital ad space. For this to occur, Facebook would somehow have to top Google in both

display and search ads, despite only having nominal presence and expertise in display ads.

The case looks back at the history of Facebook, detailing its growth from Harvard’s campus to Silicon

Valley. Facebook went from a Harvard online student directory to a social network that included 800

colleges and universities and a $12.7 million investment by 2005. Monthly active users (MAUs) con-

tinued to grow and a few more investors joined subsequent rounds of funding. In 2012, Facebook

surpassed one billion MAUs, giving the company an enviable amount of reach as well as a massive

collection of user information. Revenues reached $12.46 billion in 2014, with the majority of sales gen-

erated from ad revenues, and everything else coming from its gaming platform and platform develop-

ers. Still, Facebook was making an average revenue per user (ARPU) of $9 in North America, whereas

Google was generating ARPU of $45.

Facebook’s founder/CEO, Mark Zuckerberg, continues to drive strategy around product develop-

ment, although he no longer directly develops for the website. Zuckerberg received much criticism

over his casual appearance and inexperience. In 2008, he recruited Sheryl Sandberg as his COO. He

thought she would be comfortable as his number two. Sandberg’s recruitment has softened the criti-

cism against the young CEO while bringing a sense of urgency to monetizing Facebook’s billion-user

base of subscribers. Zuckerberg brings in the users while Sandberg brings in the money. Sandberg’s

impressive background has brought greater credibility to Facebook’s future.

News Feed, Timeline, and Graph Search make up the three “pillars” of Facebook’s product offering.

News Feed tells users what is going on in their part of the social graph that they’re a part of. Timeline

provides a quick way to answer the question “who is this person?” because it provides a chronologi-

cal ordering of a person’s life posts to the website. Graph Search is the latest pillar that allows users to

query their connections for information unique to them. Zuckerberg also sees this search feature as a

way for users to make new connections. In addition to the pillars, Facebook has various features that

Facebook, Inc.

TEACHING NOTE

MHE-FTR-037

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Teaching Note — Facebook, Inc.

users find useful: a messaging service, photo sharing and storage, calendar and event management,

notifications, personalized pages, and a gifting service.

The Facebook IPO, which took place on May 18, 2012, was lackluster and proved to be a catalyst

for a company-wide refocusing. For starters, Zuckerberg was forced to grow up as a business leader

and dedicate attention to the company bottom line, whereas before it was less of a focus for the young

CEO. Second, it highlighted how woefully unprepared the company was for the rise of mobile and the

implications the shift in consumer habits had on its core products. As a result, the company evolved

on its ad capabilities, focusing on a mobile-centric platform and placing ads in user News Feeds, sell-

ing ad space not tied to user “likes,” and sacrificing the traditionally sacred user experience in favor of

higher ad revenue.

Facebook creates value for marketers and advertisers as well as for application developers. For

marketers, Facebook touts four value propositions: reach, relevance, social context, and engage-

ment. Online advertising continues to grow and so does the value of Facebook’s advertising business.

Advertisements are not the only revenue source for Facebook; 8 percent of revenues come from its

developer platform. Developers can use a variety of application programming interfaces (API) that

allow them to connect their products to a user’s social network. Some examples include posting to a

user’s news feed, logging in using Facebook credentials, and integrating like and Subscribe buttons.

The company continues to develop new products that help nurture the meteoric growth in mobile

and ad revenues. Key to new products is the company’s ability to leverage the “holy grail” of the user

Facebook ID, which allows users to login across a number of devices and, in turn, enables marketers to

better track consumer interactions and behavior.

Facebook competes in the advertising ecosystem with social networks like Twitter, and the photo-

sharing service Instagram. Although Facebook acquired Instagram on April 19, 2012, for one billion

dollars, Twitter remains an active competitor. As of December 2014, Twitter had 288 million MAUs.

However, Facebook users spend more time on the website than Twitter users. Facebook ad revenues in

2014 were $11.4 billion compared to Twitter’s $830 million.

Technology giants Microsoft and Google are also competing with Facebook. Microsoft has a 10 per-

cent stake in Facebook and a partnership that uses Skype for Facebook’s video chat service. There is

tension in the online advertising space between Facebook and both Microsoft and Google. Google’s

online advertising services are exhaustive and dominant compared to Facebook. Immense value for

both online marketers stems from their extensive, intimate knowledge about users of their services. As

of yet, Google’s social network, Google+, has not figured out how to acquire as large an installed base

as Facebook.

Facebook’s network of over one billion monthly active users is an enviable number to other advertis-

ing agencies. Perhaps even more enviable was the company’s current ability to offer users connectivity

across multiple mobile devices, something that was highly attractive to advertisers. Yet, mobile was

where the company’s dominance ended. How could Sandberg and her team begin to challenge Google

beyond the realm of mobile?

Teaching Note —Facebook, Inc.

Suggested Answers

AnAlysis: Focus on ExtErnAl And/or intErnAl EnvironmEnts

1. What are the vision, mission, and values of Facebook? Critically evaluate their usefulness to the

company’s leaders in formulating strategic intent.

Facebook’s official mission, as stated on its own page, is “to give people the power to share and

make the world more open and connected.”2 This mission has manifested itself throughout Facebook’s

Teaching Note — Facebook, Inc.

of McGraw-Hill Education.

must overcome a few roadblocks including: Germany, where users are fiercely concerned about pri-

vacy issues; Brazil, where Google’s social network has deep roots; Russia, where VKontakte has social

media dominance; and China, where Facebook is blocked and the Chinese social network RenRen

operates free of competition from Facebook.

Facebook’s values are consistent with upholding an innovative software development culture by

empowering and encouraging employees to take on difficult problems. As taken directly from its web-

site, Facebook’s values are:

• FocusonImpact

• MoveFast

• Wehaveasaying:“Movefastandbreakthings.”Theideaisthatifyouneverbreakanything,

you’re probably not moving fast enough. At Facebook, we’re less afraid of making mistakes

than we are of losing opportunities.

For pre-IPO Facebook, these values and the mission statement seemed to be very effective at devel-

oping products that grew the user base. The Facebook website has reached over a billion people and is

a globally recognized brand.

However, post-IPO, Facebook initially struggled to reach the valuation expected by the public.

Zuckerberg was quoted as saying that at Facebook, “We don’t build services to make money; we make

money because we build services.” Since the beginning of Facebook, his focus has been on develop-

Teaching Note —Facebook, Inc.

This shift in attitude is largely a result of COO Sheryl Sandberg and her track record as a hard-

nosed manager who made Google highly profitable as the vice president of Global Online Sales and

Operations. As a Harvard MBA, she focuses on the “show me the money” attitude in Facebook’s daily

operations.

At one point on the Facebook campus in May 2012, posters were put up saying “Advertisers are

users too.*” and below it, “*no srsly,” to indicate in Internet speech, “no seriously.”4 These posters

2. What “industry” is Facebook competing in, and how is this industry changing? Who are

Facebook’s most important competitors? Why?

Facebook, like other social media companies, is difficult to place into a specific industry. As far as

industry standard classifications, Facebook is classified with:

The social media sector has been moving toward the mobile Internet. To be successful in this space,

a company’s product must be everywhere a user goes. Thus, it has become mandatory to keep up with

the rapid pace of mobile-device technologies for the three major mobile platforms while keeping an eye

In these categories, Facebook is competing with other social media networks such as Twitter and

linkedIn. These companies have served many of the same users, are promoted by many of the same

webpages and companies, and also link their services for the convenience of users. The reality is that

3. What are Facebook’s resources and capabilities? What is Facebook’s core competency? Can its

resources and capabilities form the basis of a competitive advantage? Why or why not?

Several resources and capabilities work together to form a competitive advantage for Facebook. (See

Exhibit TN-2.)

Teaching Note — Facebook, Inc.

Before Facebook, the dominant social network was MySpace (now spelled “Myspace”). MySpace,

started in 2003, was acquired by NewsCorp in 2005. After the acquisition, the company shifted focus

Facebook’s core competency is designing web and mobile tools for mapping the social graph by

engaging users to share information privately and, more important, publicly. The “public” posts are

Of the resources that Facebook has acquired over time, without its strong user base, Facebook would

not have as compelling an argument for advertisers and marketers. As the shift to mobile proceeds,

Facebook has formed a clear competitive advantage with its resources. In order to maintain this

advantage, it must be flexible and sensitive to the wave of changes in how its users are engaging the

FormulAtion: Focus on BusinEss,

corporAtE, And GloBAl strAtEGiEs

4. What is Facebook’s business model? How is it currently making money?

Facebook operates a two-sided platform with a large base of users that act as content generators on

one side of the market, with marketers, advertisers, and developers on the other side trying to reach

them. The marketers act as content generators when they create free business fan pages, which are

similar to users’ timelines. Developers are co-creators with Facebook in delivering products that keep

users engaged.

Teaching Note —Facebook, Inc.

Each customer has at least one channel for generating revenue for Facebook. Users can buy gifts for

each other through Facebook, and a small percentage of those transactions become revenue. Advertisers

Facebook has invested in products and tools for each participant in their ecosystem. Users have

the many features of the website to access for free. Most user products entice users to volunteer more

games for the Facebook platform. (See the business model depicted in Exhibit TN-4.)

5. Given Facebook’s competitive advantage, core competency, and business model, is it possible

for the company to compete with Google’s dominance across all digital advertising? If so, how

might it overcome the advantage Google has in the area of search advertising?

The answers to this question could be many and varied; however, the key is that Facebook’s busi-

ness model as of March 2015 (while a significant improvement on monetization from January 2013) is

not likely to yield a company capable of competing with Google for dominance in the digital ad space.

Indeed, Google’s ARPU in North America is $45, as opposed to Facebook’s $15.

With that said, there are a number of factors that play to Facebook’s advantage as alluded to in the

case:

• Facebookhasanincrediblylargeandvaluableuserbaseofalmost1.4billionMAUsandalmost900

million DAUs.

By contrast:

• GooglehasnotbeenabletocreatetheinstalleduserbasethewaythatFacebookhas,andGoogle+is

yet to truly gain traction in the realm of social media.

Teaching Note — Facebook, Inc.

Nonetheless, Google has a significant advantage to any company seeking to challenge its dominance

in digital advertising: search ads. Google’s search engine interacts with millions of users everyday.

Despite ads being largely limited to the top of a search page, the prime real estate and sheer volume

In sum, Facebook would need to innovate in order for it to be able to compete effectively with Google

and circumvent the grip that Google has on the search ad space. Mobile is an obvious area to leverage:

Possible business models may include:

• Buildoutadditionaladfeaturesformobileusersthatcapitalizeontheuniqueabilitiesofthemobile

platform.

• Findnewwaystoincreaseadvertisersspending:

• Chargeaccessfeesforcompanypages.Atthetimeofthecase,Facebookallowedcompaniesto

create business fan pages for free. By either charging companies a fee to maintain these pages

All of this perhaps overlooks the question as to whether it is a good idea to attempt to compete head-

on with Google, and the notion that Facebook may wish to leverage its experience, capabilities, and

1. more users continue go mobile as the mobile evolution accelerates,

Teaching Note —Facebook, Inc.

implEmEntAtion: Focus on rEcommEndAtions

And How to implEmEnt tHEm

6. Given the increasingly important role that mobile will play in the Facebook machine, what

should Sheryl Sandberg prioritize as she seeks to organize to maintain and grow Facebook’s

competitive advantage in the mobile space? How does this help Facebook in competing with

Google?

Since Facebook’s IPO and the ensuing sub-par performance the firm exhibited, the culture at

Facebook has undergone a change to its organizational design and organizational structure. Partly due

to the added pressure of being a publicly traded company, as well as the focus on mobile, managers

and engineers at Facebook have shifted their focus from (purely) growing the user base to growing

revenue by giving them responsibility for revenue targets. The result has been tremendous growth in

The fact that many within Facebook were able to change and create new positions indicates that

Facebook is, at least in part, an organic organization. Other changes that empowered change within the

As Facebook seeks to build on its mobile dominance, aspects of the organic organization stand to

become critical to the ability to react to changing technology, to any strategic plays Google and other

Another potentially critical piece will be what acquisitions (if any) Facebook makes in the near

future, and how these may be integrated into the organization. In the world of mobile where technol-

ogy evolves at a rapid pace and startups can potentially disrupt companies like Facebook, it is reason-

able to anticipate that Facebook will be keeping watch on which companies are potential partners or

Teaching Note — Facebook, Inc.

Recent Updates

• Zuckerberg says search remains a priority: Facebook is testing a search engine inside its mobile app, in

a hint at a potential strategic direction for the social network.6

• Facebook to directly host news articles: Facebook has announced an initiative, dubbed Instant Articles,

in which nine media organizations will publish content directly on Facebook’s iPhone app, rather

than just links, in an attempt to appeal to impatient mobile consumers.7

• Facebook 1Q2015 Earning call recap: Facebook purportedly has 4 billion video streams daily; revenues

up 42 percent but spending hits profits.8 See Exhibit TN-5 for update to financial data.

• Facebook yet to truly steal youtube’s thunder: Major ad buyers say that Facebook’s video view numbers

are undoubtedly impressive, but in terms of actual ad inventory, Facebook still pales in comparison

to YouTube.9

• despite ban, Facebook pursuing advertisers in china: Online ad growth in China mainland substantial

enough to warrant company’s attention even though social media site is banned.10

• Google-Facebook rivalry: Google takes a couple of digs at Facebook in the company’s 1Q2015 earnings

call, conceivably indicating the pressure Google is feeling from Facebook’s growth in digital ads.11

Additional Resources

vidEos

1. Building Graph search.

https://www.facebook.com/about/graphsearch (3:19). Facebook.

2. Why We Have too Few Women leaders.

http://bit.ly/hcnwRz (14.58). TED Talk, Sheryl Sandberg.

Book

Sandberg, S. (2013). lean in: women, work, and the will to lead (New York: Knopf).

Teaching Note —Facebook, Inc.

ExHIbIt tN-1 Industry Convergence

Industry Facebook Google Amazon Microsoft

Social Network Facebook.com

(Primary service)

Google+ Goodreads Skype

Online Search Graph Search Google.com

(Primary service)

Bing

Teaching Note — Facebook, Inc.

Subscriber Base Website Big Data IP Developer Platform

Tangible

Resources

Server facilities

Cash on-hand

ExHIbIt tN-2 Table of Resources and Capabilities That Work Together to

Form a Competitive Advantage for Facebook

ExHIbIt tN-3 Resource-Based View—VRIO Framework

Teaching Note —Facebook, Inc.

Social Subscribers Developers Advertisers/Marketers

Role/Level of Engagement Content generators Co-creators Content generators

in-game purchases

Free access to company pages

Products Newsfeed

Photos/Video

SDK

Graph API

Banner ads

Premium Video Ads

ExHIbIt tN-4 Business Model—Two-Sided Platform Participants

Teaching Note — Facebook, Inc.

2014 2015

Fiscal Year/Quarter 2012 2013 1Q 2Q 3Q 4Q 1Q

Cash and short-term investments 9,626 11,449 12,629 13,956 14,250 11,199 12,413

Receivables (total) 1,170 1,160 1,006 1,190 1,363 1,678 1,508

Inventories (total) – – – – – – –

ExHIbIt tN-5 Update to Financial Statements through 1Q2015

Source: Compustat, Morningstar.

Teaching Note —Facebook, Inc.

Endnotes

1 “Facebook’s profile,” Facebook, http://www.facebook.com/facebook.

2 “Careers,” Facebook, http://on.fb.me/1jcQ50X.

3 Rusli, E. M. (2013), “After IPO, Facebook gets serious about making money,” the wall street Journal, May 16.

http://on.wsj.com/1ijwjTB.

4 Ibid.

5 Seetharaman, D. (2015), “In Hint of Ambition, Facebook Tests Search Engine to Share links,” the wall street

Journal, May 11.

6 Seetharaman, D. (2015), “Facebook Pushes Speedier News Publishing,” the wall street Journal, May 13.

7 Fitzgerald, B. (2015), “Facebook: We Have 4 Billion Video Streams Daily—Earnings Call Recap,” the wall

street Journal, April 22.

8 Shields, M. (2015), “Facebook Video Surging, But YouTube Still Offers Advertisers More Options,” the wall

street Journal, April 23.

9 Abkowitz, A. (2015), “Facebook Woos Chinese Advertisers,” the wall street Journal, March 29.

10 Barr, A. (2015), “Sign of Facebook’s Ad Growth? Two Digs From a Google Exec,” the wall street Journal, April

24.