Case 12
Facebook
Matt Cook, Kathryn Hicks, Ricardo Rodriguez, Austin Rogers
Texas A&M University
Introduction
After going public in 2012, Facebook immediately expe-
rienced a fair amount of criticism and quite a bit of inves-
tor uncertainty. However, Mark Zuckerberg, Facebook’s
founder and CEO, was pleased to report that, as of one
year later, on January 30, 2013, the firm had surpassed
Wall Street’s expectations. Moreover, in only eight years,
Facebook’s growth resulted in it becoming the largest
social networking platform in the world.
Nevertheless, Zuckerberg and his top management
team knew that they needed to consider how to adjust
the firm’s strategies to compete as a public company,
partly in response to the belief among some users and
analysts that Facebook was losing its ability to satisfy
customers and shareholders simultaneously. In this
regard, what should the firm do strategically to ensure
its long-term and profitable growth? While Facebook’s
advertiser base is constantly looking to the firm for
additional innovative means to target users, its inves-
tors are questioning its ability to monetize its user base.
Relatedly, in a highly dynamic and competitive industry,
how will Facebook out-innovate its rivals and retain cus-
tomer “mind-share”? Along with his top management
team, Zuckerberg concluded that the firm should focus
on both worldwide and domestic market growth. With
many recent product innovations and strategic changes,
2013 and the few years beyond were expected to defining
ones for the young, public social networking firm.
© Vividfour / Shutterstock.com
Facebook’s Timeline
At the age of eleven, Facebook founder’s Mark
Zuckerberg’s orientation and actions hinted that he could
become a successful entrepreneur. Born in 1984 as the
CHE-HITT11E-13-0403-CaseStudy12.indd 133
only son to a psychiatrist and a dentist, he quickly gained
a sense of reasoning and adaptability that allowed for
complex, yet creative thinking. Growing up in New York,
middle school offered excess spare time that Zuckerberg
used to write software. After learning basic program-
ming from his father, a private tutor – who constantly
referred to Zuckerberg as a “prodigy” – was hired.1
During high school at Phillips Exeter Academy, he cre-
ated a music player as a product for sale by his newly
founded company, Intelligent Media Group. Zuckerberg
declined Microsoft and AOL’s offers to purchase this
firm.2 Winning several awards in math, astronomy, and
physics, Zuckerberg set his sights on Harvard University,
claiming on his college application that he was fluent
in French, Hebrew, Latin, and ancient Greek.3 It was at
Harvard that Zuckerberg’s truly invigorating path began.
Getting Started
Given his early interests, the fact that Zuckerberg
majored in computer science and psychology in college
is perhaps not too surprising. He began his journey by
writing a program called CourseMatch that allowed stu-
dents to coordinate and strategically select their classes.
Soon after this, he created Facemash. Facemash gave
students the opportunity to rate others based on looks
and then post these results online. Popularity for this site
increased to the extent that campus networks were over-
whelmed and malfunctioned, forcing Facemash to shut
down.4 Zuckerberg next embarked on creating a social
network that he dubbed “Thefacebook.” The young
entrepreneur dropped out of Harvard during his sopho-
more year to develop his soon-to-be multibillion-dollar
company.5
Working with his roommate Dustin Moskovitz, fel-
low investor, Peter Thiel, and former Napster employee,
133
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 134 Part 4: Cases

Sean Parker, “Thefacebook” was renamed “Facebook.” By Exhibit 1  Acquisitions

2007, Facebook Platform, which allowed programmers to Acquisition Date Company Business
create social applications within Facebook, was complete. 23 Aug 2005 Facebook.com AboutFace
The characteristic blue-colored website design stemmed 19 Jul 2007 Parakey Offline applications/
from Zuckerberg’s color-blindness, which limited him Web OS
from clearly seeing the colors red and green, but allowed 23 Jun 2008 ConnectU Social networking
visual clarity with the color blue.6 Later that year, Beacon 10 Aug 2009 FriendFeed Social networking
was created as a social advertising foundation. This led to a aggregator
massive increase in growth for Facebook as both students 19 Feb 2010 Octazen Contact importer
and companies could now derive value from the com- 2 Mar 2010 Divvyshot Photo management
pany. In August 2008, Facebook hired Sheryl Sandberg to 13 May 2010 Friendster Intellectual property
be its Chief Operating Officer and, in an effort to reach patents
new markets, in October 2008, in addition to its local 26 May 2010 ShareGrove Private conversations/
headquarters in Palo Alto, California, Facebook set up Forums
its international headquarters in Dublin, Ireland. By July 8 Jul 2010 Nextstop Travel recommendations
2010, the company had over 500 million users and by the 15 Aug 2010 Chai Labs Internet applications
end of 2012, the user base totaled 1 billion.7 20 Aug 2010 Hot Potato Check-ins/Status updates
29 Oct 2010 Drop.io File hosting/sharing
Earning Respect 15 Nov 2010 FB.com domain American Farm Bureau
In 2009, Vanity Fair magazine ranked Zuckerberg as the Federation
23rd most influential person of the Information Age; in 25 Jan 2011 Relation Mobile advertising
2010, the magazine chose him as the most influential 2 Mar 2011 Beluga Group messaging
­person.8 Fast Company selected Facebook as the most
20 Mar 2011 Snaptu Mobile app developer
innovative company of all in 2010 while Glassdoor indi-
24 Mar 2011 RecRec ComputerVision
cated that employees identified the firm as the best place
27 Apr 2011 DayTum Information graphics
to work in both 2011 and 2013. Zuckerberg currently has
an employee approval rating of 97 percent.9 Mentors such 9 Jun 2011 Sofa Software design
as Apple’s Steve Jobs and Netscape’s CFO Peter Currie 9 Jun 2011 MailRank Email prioritization
were serving as mentors for Zuckerberg regarding issues 2 Aug 2011 Push Pop Press Digital publishing
such as developing and using financing strategies and 10 Oct 2011 Friend.ly Social casual Q&A service
creating management teams.10 app
8 Nov 2011 Strobe HTML 5 mobile apps,
SproutCore
Expanding
Acquisitions have played a significant role in Facebook’s 2 Dec 2011 Gowalla Location based service
success. Beginning in 2008 with ConnectU, Facebook 9 Apr 2012 Instagram Photo sharing
has forged relationships with many influential compa- 13 Apr 2012 Tagtile Customer loyalty app
nies over the years. The firm uses acquisitions to add 5 May 2012 Glancee Social discovery platform
products and technologies; but most importantly, to gain 15 May 2012 Lightbox.com Photo sharing
access to valuable human capital. Zuckerberg once elab- 21 May 2012 Karma Social gifting
orated on Facebook’s acquisition strategy saying, “We 18 Jun 2012 Face.com Face recognition platform
have not once bought a company for the company. We 14 Jul 2012 Spool Mobile bookmarking and
buy companies to get excellent people.”11 sharing content
From 2008 to April 2013, Facebook acquired over 30 20 Jul 2012 Acrylic RSS app “Pulp” and secure
companies. The majority of these companies were never Software database app
intended to survive as independent businesses. Facebook 24 Aug 2012 Threadsy Social aggregator
uses the acquired employees to improve Facebook capa- 28 Feb 2013 Atlas Atlas advertiser suite
bilities and develop new businesses. It acquired companies 14 Mar 2013 Hot Studio Design agency
such as Rel8tion, Beluga, Snaptu, Chai Labs, and ConnectU,
as shown in Exhibit 1. Each acquired business brought Source: http://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_
knowledge to Facebook in a strategic area of weakness. Facebook

CHE-HITT11E-13-0403-CaseStudy12.indd 134 10/23/13 7:43 PM

 Case 12: Facebook
For example, in August 2009, Facebook acquired
a news feed company called FriendFeed. Before the
acquisition, Facebook’s news feed required users to
refresh the data manually and user posts that received
comments did not move up to the beginning of the
news feed. With the acquisition, Facebook leveraged
FriendFeed’s superior technology into the Facebook
platform. However, the key to this and to the major-
ity of Facebook’s acquisitions was the knowledge and
experience gained from the human capital that arrived
with the acquisition. In the case of FriendFeed,
Facebook gained four key employees that had previ-
ously played a major role in launching Google maps
and Gmail as Google employees before starting
FriendFeed.12 The talent and experience of these tal-
ented individuals was the foundation for enhancing
Facebook’s ability to provide this type of functionality
for its users.
In 2010, Facebook formed a strategic partnership
with Zynga, one of the largest and most successful pro-
viders of web-based social games.13 This partnership
allowed Facebook to enter into the promising online
gaming space while simultaneously attracting a younger
user base. In return for helping Facebook, Facebook
stated that it would help Zynga reach specific monthly
growth targets and would give Zynga a portion of the
revenues from ads placed on its game pages. In return,
Facebook required that Zynga not launch its games on
any other social platform.14
In March 2011, Facebook acquired Snaptu. Snaptu
provides application software for services such as
Facebook, Twitter, and LinkedIn that allows these ser-
vices to be featured on phones. Snaptu’s employees also
became a part of Facebook.15
In 2012, Facebook faced competition in a major
business unit: photo sharing. Instagram, a popular
photo sharing application on iPhones, was gaining
popularity and planning to launch an Android ver-
sion. With analysts speculating it could rival Facebook
in photo sharing,16 Facebook evaluated the competi-
tor and decided to complete a $1 billion dollar acqui-
sition of Instagram. This acquisition, completed in
September 2012, allowed Facebook and Instagram to
share activities and core competencies and created
additional value for users. It also helped strengthen
Facebook’s competitive advantage in photo sharing
by gaining market power and economies of scope.
The sharing of intangible and tangible resources
between the two business units also created value for
end users and helped strengthen Facebook’s presence
on mobile devices. Facebook’s VP of Engineering,
CHE-HITT11E-13-0403-CaseStudy12.indd 135
135
Mike Schroepfer, explained the reasoning behind this
acquisition:
So many of us at Facebook love using Instagram to share
moments with our friends…and for so many people, shar-
ing photos with friends is an important part of the Facebook
experience. That’s why we’re so excited to bring Instagram
to Facebook and see what we can create together.17
Facebook has since made Instagram available to all smart
phones. Unlike its other acquisitions, the Instagram
acquisition was the first major acquisition that involved
the purchase of a product with already engaged users.
This acquisition was also different in that Facebook
allowed Instagram to operate as a standalone service
and not incorporate into the Facebook mobile experi-
ence. Instagram benefited from the strong engineering
team and infrastructure at Facebook and brought recip-
rocal experience by utilizing the seamless benefit of the
Instagram mobile experience.18 As of February 2013,
Instagram had over 100  million Monthly Active Users
(MAUs).19
Following the Instagram acquisition, Facebook
acquired several additional companies including Spool,
Acrylic Software, and Threadsy. In the case of Spool, which
offered a mobile bookmarking service, Facebook decided
to discontinue the product offering. However, Facebook
will be utilizing Spool’s five programmers to enhance the
Facebook mobile experience.20
Facebook utilizes partnerships to help strengthen and
enhance product offerings to customers. These strategic
partnerships broaden and expand the Facebook experi-
ence and provide the firm’s users with an engaging and
complete product. In September 2011, Facebook chose
to form partnerships with media companies Netflix and
Spotify, thus allowing users to update their news feeds
with information about what they were currently doing.
Users could now seamlessly notify their connections
about what they were listening to or watching.21 In 2013,
Facebook enhanced its partnership with Trend Micro, a
global cloud security leader, and Rovi, an information
database of movies, TV shows, and celebrities that can be
tied to Facebook user profiles.22 Facebook’s partnership
with Rovi will allow advertisers to advertise to specific
customers groups that they want to target.23 These stra-
tegic partnerships add value to the Facebook experience,
which increases Daily Active Users (DAUs) and MAUs,
leading to increased revenue.
Going Public
Facebook filed for its initial public offering on February
1, 2012. As detailed in the filing, Zuckerberg would
10/23/13 7:43 PM
 136
retain a 22  percent ownership share and would own
57 percent of the voting shares. The shares were valued
at $38/share, valuing the company at $104  billion, the
largest valuation to date for a newly public company.
One day before the IPO, Facebook announced it would
sell 25  percent more shares than originally planned,
raising the IPO to $16 billion. Trading began on May 18,
2012 at a price of $42.05; but by the end of the week, the
stock had dropped 16.5  percent to $31.91. In less than
four months, the price had declined to $17.55 and as
of April 16, 2013, the share price was $26.92, represent-
ing one of the most disappointing IPOs in recent his-
tory.24 More recently, Facebook’s market cap exceeded
$64 billion and showed a monthly growth rate around
2 percent.25
Inside Facebook
“Give people the power to share and make the world more
open and connected.” Facebook Mission Statement.26
Mission
After evolving for over four years from its original
mission to “connect people through social networks at
colleges,” Facebook has transferred its focus from sim-
ply connecting college students to that of empowering
all users. Facebook impacts the world by expanding
the global user community, providing the most com-
pelling user experience to increase user engagement,
improving advertisement opportunities for businesses,
creating engaging and easy-to-access mobile products,
and developing a scalable infrastructure. 27 In a 2009
interview with Forbes, Mark Zuckerberg stated his
vision in regard to the impact Facebook could have
on the world:
Building a good economic engine is what allows all these
other platform companies and advertisers and other part-
ners to exist, and be a part of this ecosystem. Ultimately,
what being … a company means to me, is … not being just
that—building something that actually makes a really big
change in the world.28
Although Facebook’s scope has expanded, its pur-
pose remains the same: giving people a way to share
information in an easy and exciting way. Users are
invited to share their photos, hobbies, educational back-
grounds, friends, and just about every other piece of
information about themselves. With the encryption of a
powerful search engine, a continuously increasing num-
ber of companies, groups, and individuals establish con-
nections within seconds.
CHE-HITT11E-13-0403-CaseStudy12.indd 136
Part 4: Cases
Culture
Facebook itself operates under a developer-centered cul-
ture where the focus is less on the flashy features of a
new product and more on the logistics behind products.
Yee Lee provides a very important message in his article,
“How Facebook Ships Code.”29
Engineers [at Facebook] generally want to work on infra-
structure, scalability, and “hard problems” — that’s where
all the prestige is. It can be hard to get engineers excited
about working on front-end projects and user interfaces.
This is the opposite of what you find in some consumer
businesses where everyone wants to work on stuff that cus-
tomers touch so you can point to a particular user expe-
rience and say, “I built that.” At Facebook, the back-end
stuff like news feed algorithms, ad-targeting algorithms,
memcache optimizations, etc., are the juicy projects that
engineers want.
These developers are referred to as the “offensive line”
as they are the backbone of the Facebook team. One of
the key aspects that sets Facebook apart is its celebration
of its “offensive line.” It ensures that the difficult jobs,
those whose effects are less noticeable for the end user,
are the ones that people at Facebook are most excited
about doing. These jobs are the most highly respected
occupations at Facebook and because of this, Facebook
has managed to create a culture that would be challeng-
ing to duplicate or imitate.
Core Themes
An employee of Facebook for over three years, who
previously worked for Google, cited four core themes
at Facebook that countless others have echoed and
confirmed.30 The first is Autonomy and Responsibility,
which enables all employees to govern their own work,
resulting in a sense of ownership and pride. The sec-
ond theme is Focus on Impact, which entitles devel-
opers and engineers to create whatever they want in
their mission to have a positive effect on end users. As
Facebook accumulated a significant user base, it focused
on scaling horizontally, moving fast, and finding the
right people. Facebook placed its engineers on small,
independent teams and allowed them to make choices
that had major impacts on the direction of their respec-
tive product lines. For example, historically, only three
engineers have run Facebook’s photo sharing service –
the largest on the Internet. This type of control given
to employees makes coming to work exciting and has
created a culture at Facebook where changes designed
to meet customers’ needs can be quickly made.31 The
next theme is Facebook is Run by Hackers. What this
10/23/13 7:43 PM
 Case 12: Facebook
tongue-in-cheek theme implies is that employees enjoy
the ability to innovate and create new products based
on extensive research into every small detail. The final
theme is Growth and Coaching. A dominant culture that
has evolved is described as “no fear of failure.” This hon-
ors the concept that triumphs come out of failures, and
this atmosphere plays a huge part in Facebook’s success.
Additionally, coaching allows for a constant embedding
of continuous progression. With these motivations sug-
gested by the four core themes, the source of much of
Facebook’s enthusiasm is obvious.
Outside Facebook
Social Networking
One of the most innovative creations in the twenty-
first century is social networks. Connecting the world
through schools, families, businesses, photos, and just
about every other piece of information, social networks
thrive on people sharing their life stories. In the last ten
years, the most important networks have been Facebook,
MySpace, Twitter, and LinkedIn, with several additional
sites surfacing within the last few years. Facebook in
particular is considered a disruptive innovation that has
interfered with search engines such as Google and Yahoo!
Social networking sites serve three main purposes
in addition to connecting people: advertising, employee
and idea screening, and application development and
gaming.
In September 2012, Facebook generated over $1 bil-
lion per quarter from advertising revenue. Facebook’s
advertisers range from Ford Motor Company and
McDonald’s to Dell and Nike. Procter & Gamble esti-
mates that it generates $500  million in sales from
Facebook advertisements. Over 3,800 Wal-Mart stores
have their own Facebook page.32
These sites also provide a platform for employers to
monitor current employees as well as find and screen
possible new employees. With this screening, new infor-
mation may lead to new social capital for a firm. Access
to new ideas via social networking is critical to the inno-
vation process. This process allows for a type of integra-
tion among suppliers and buyers that is difficult to find
elsewhere.33
The last major source of innovative activity involves
application, software, and gaming developers. Creations
for Facebook apps and electronic platforms and oper-
ating systems have become especially popular. Zynga, a
game development firm, developed the highest grossing
online game on Facebook, FarmVille, and represented
12 percent of Facebook’s total revenues.34 Whether acting
CHE-HITT11E-13-0403-CaseStudy12.indd 137
137
as a hosting service, development platform, employment
locater, or an innovation hub, “social networks” is a fas-
cinating innovation with seemingly unlimited potential
to identify and serve customers’ needs.
The Industry
Facebook is influenced by several factors, most notably
its customers. Customers can be divided into two catego-
ries: users and advertisers.
Users have tremendous power over Facebook as
they constantly demand innovation and Facebook care-
fully listens to their needs, ever mindful that switching
costs to another social network are relatively nonexis-
tent. With every move Facebook makes, users send a
­signal—­sometimes positive and sometimes negative.
Small incremental innovations, such as tweaking the
position of a box, may be seen as a positive or incon-
sequential change to users. Larger radical innovations,
such as the creation of a personal “timeline” and refor-
matting an entire profile page, often cause the users to
divide into two categories: those who appreciate the
alteration and those who do not.
While user influence is high, the opposite is seen
with advertisers. At first glance, one might conclude that
advertiser power is high because Facebook depends on
its advertisers for profit. This, however, is quite the con-
trary. Because Facebook supplies a lucrative customer
base and despite speculation around the measurable
impact of advertising on Facebook, the power held by
advertisers is actually low. Placing advertisements on
Facebook is incredibly targeted and effective. The COO
of Facebook, Sheryl Sandberg, revealed that of the 60
studies conducted by Facebook in 2012 on how its adver-
tisements impacted offline and online sales, 70 percent
showed a ROI of better than three times, and 49 percent
showed a ROI of better than five times. This large ROI
for companies comes from Facebook’s ability to target a
narrow field of customers. For example, Facebook claims
it can reach an 18- to 28-year-old woman with 90  per-
cent accuracy. This compares to the industry average of
approximately 35 percent.35
In April 2013, Facebook was testing an advertising
feature that lets advertisers and agencies use Facebook
Exchange (FBX) to take into account the browsing
behaviors of Facebook users outside of Facebook.36 This
feature will provide advertisers the opportunity to display
advertisements to users that have already browsed their
sites or access information about the products or ser-
vices it offers.37 These advertisers will be able to describe
a typical customer to Facebook and then utilize FBX to
find those customers. This will significantly increase
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 138 Part 4: Cases

the ability of advertisers to interact directly with their Exhibit 2  Competitor* Comparisons (as of December 31, 2012)
most valuable customers. In 2012, Facebook brought in
Google LinkedIn Facebook
almost $5 billion in advertising revenue, accounting for
84 percent of total Facebook revenue.38 This reliance on Revenue 50.18B 972.31M 5.09B
advertising revenue requires Facebook to ensure that Quarterly Revenue 36.2% 81.0% 40.1%
advertisements are social, relevant, and well integrated Growth
with other Facebook content.39 Gross Profit 29.54B 846.79M 3.72B
There were over 6.8  billion mobile subscrip- EBITDA 16.28B 125.51M 1.19B
tions worldwide at the end of 2012 and that number is Net Income Available 10.79B 21.61M 32.0M
expected to continue to grow.40 Mobile platforms have to Common Share-
quickly become one of the fastest growing segments of holders
advertising. According to Gartner Research, spending Market Cap 257.98B 19.63B 63.42B
in this space would likely reach $11.4  billion in 2013.41 Profit Margin 21.4% 2.2% 1.0%
Recently, Facebook chose to allocate a large amount of its Operating Margin 26.7% 5.9% 10.6%
R&D to mobile products. Advertisers pay a premium to
Return on Assets 10.1% 3.2% 3.1%
advertise to mobile users, which makes up for the lower
volume of advertisements. Facebook’s new approach to Return on Equity 16.6% 2.8% 0.6%
offering services to mobile devices involves its recent Total Cash 48.09B 749.55M 9.63B
launch of Facebook Home. Facebook wants to interact Total Debt 7.21B 0 2.36B
with users continually throughout the day as they access Current Ratio 4 2 11
their mobile devices. Facebook believes it can earn a Operating Cash Flow 16.62B 267.07M 1.61B
significant amount of revenue by strategically placing
advertisements that target specific mobile users. Home *As a private company, financial data for Twitter is not publicly available.
takes the Facebook application that many mobile phone
Source: Yahoo! Finance. http://finance.yahoo.com/
users have installed and completely integrates it with
the user interface of the phone. It was initially released
on April 12, 2013 and will be preloaded on a new HTC With nearly 100 million users utilizing various accounts
smartphone.42 and products such as email, profiles, and gaming, Google
While some firms such as P&G claim results, others represents Facebook’s largest competitor and seem-
such as Coca-Cola are skeptical. With its 62 million fol- ingly has the capability to attract a substantial share of
lowers on Facebook, Coca-Cola has publicly questioned the social networking market. Google maintains a sig-
Facebook’s quantifiable effects on sales.43 nificant level of awareness among corporate users due
to its popular Gmail service. It has begun to capitalize
on this advantage by creating Google Plus for business.
Competitors This service not only allows companies to establish their
Facebook competes against direct competitors as well as own social networking presence on Google Plus, but also
others with the ability to attract its customers’ “mind- integrates with Google’s many features such as Google
share.”44 Twitter is an example of a direct Facebook com- Search and Google Ads.45 To expedite its growth and use,
petitor while Google examples one of Facebook’s indirect Google recently required all of its users to sign up for
competitors. The industry is growing rapidly, imitation Google Plus. Competitors within the dynamic social net-
costs are low, and it is difficult for firms to protect their working space are rushing to create ways to differentiate
competitive advantages for an extended period. In addi- themselves and increase their average revenue per user
tion to Facebook, there are four main players in the (ARPU). While Facebook accounted for 46  percent of
social media industry: Google Plus, MySpace, LinkedIn, logins for social media in recent times, the percentage of
and Twitter. Comparisons of Facebook relative to a few logins through Google is increasing.46
of its competitors appear in Exhibit 2.
Twitter
Google Plus This online “micro blogging” service was established in
Google Plus, aggressively pushed by chief executive 2006 by Jack Dorsey. With over 200  million users and
Larry Page, is a new social network leveraging the exist- 1.6  billion “tweets” per day, Twitter has become one of
ing Google infrastructure to compete with Facebook. the most iconic and visited websites on the Internet.47

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 Case 12: Facebook
The estimate of the firm’s advertising revenues for 2013
was $583 million with the projection for 2014 being that
this figure would double, surpassing $1 billion. The larg-
est reason for growth is mobile ad revenues. Robert Hof
from Forbes comments, “Unlike some leading online
advertising companies such as Google and Facebook,
which have been struggling to contend with lower mobile
ad prices that have depressed their growth, Twitter has
found mobile has been its key moneymaker.”48 Its quick
and simple posts make mobile ads an ideal location and
advertisers are flocking to exploit this channel.
MySpace
MySpace, engineered by Chris DeWolfe, implemented a
strategy very similar to Facebook in its origination. This
firm initially targeted the same audience as Facebook,
had enormous capabilities, and was purchased by News
Corporation, a large media corporation with profes-
sional management to lead its unique resources. Started
in 2003, the site pioneered social networking and
once boasted more users than any other social media
site. However, its rise to popularity in the teenage and
young adult category from 2005-2008 plummeted in
2009. Once a music-centered social platform, with the
advent of Facebook, MySpace chose to reposition itself
as a “social entertainment destination” and ultimately,
alienated many of its followers.49 While Facebook and
other competitors focused on introducing a platform
where developers could co-design, MySpace chose to
build everything in-house. Although it designed many
features, MySpace neglected to deepen its differentiating
factors and in the end, other networks capitalized on this
opportunity.50
LinkedIn
LinkedIn has differentiated itself by targeting working
and employment seeking professionals. Used as a site to
connect with future employers and employees, LinkedIn
reports more than 200 million users in over 200 coun-
tries.51 Founded by Reid Hoffman and managed by CEO
Jeff Weiner, a previous Yahoo! executive, the firm has
successfully managed to segment customers and com-
pete alongside Facebook. LinkedIn’s success stems from
its creation of “connections” that allow people to main-
tain and discover relationships between many people
and companies. The company went public in 2011, priced
at $45/share. The value of a share of the firm’s stock
increased to just under $180 by mid-2013. It acquired
several companies such as Rapportive and SlideShare,
alongside several patents from additional companies.52
With a focus on trust building and creation, LinkedIn
CHE-HITT11E-13-0403-CaseStudy12.indd 139
139
appears to have positioned itself to compete successfully
with Facebook.
Out-Innovating the Competition
In comparison to its more profitable competitors who
charge for their services such as LinkedIn, Facebook
essentially gives away its social networking features
at no cost. Creating a strategic subscription model is
becoming the norm within the Internet services indus-
try. While maintaining basic access and services with no
fee, LinkedIn grants extra features to those who value its
networking and job-search functionalities enough to pay
a monthly fee. Other online services have begun offer-
ing the basics of their services for free and charging fees
for premium features. The ability of subscription-based
firms such as Netflix, Amazon Prime, and Dropbox Pro
to attract lucrative users has started to attract investors.
A recent study aimed at understanding the extent to
which consumers value free online services calculated
the amount customers would be willing to pay for dif-
ferent services. The results indicated that respondents
between the ages of 23-33 maintain a significant level of
willingness to pay for what have customarily been free
services (see Exhibit 3).53 With Google Search, Gmail,
Wikipedia, and then Facebook topping the charts, this
study revealed that subscription-based models have a
promising future.
Strategic Leaders
Facebook’s leaders have played a major role in making the
company what it is today – the largest social network in
the world.54 Each leader has added essential values in cre-
ating a unique company. Facebook’s team is not a result
of luck; it is the result of Mark Zuckerberg’s efforts to hire
the best and most knowledgeable people in the industry.55
For Facebook, a major priority is to bring people
on board who fit the culture and values of the company
and who have the right attitude and skills to make stra-
tegic decisions. Individuals with visionary qualities help
Facebook form and implement strategies for achieving
strategic competitiveness and above average returns.
Since 2008, Zuckerberg has hired a team capable of tak-
ing Facebook’s growth to the next level. A list of key per-
sonnel at Facebook appears in Exhibit 4.
Mark Zuckerberg, Chairman of
the Board and CEO
Mark Zuckerberg is the Chairman of the Board and CEO of
Facebook Inc. He has been CEO since 2004 and Chairman
of the Board since the company went public in 2012.56
10/23/13 7:43 PM
 140 Part 4: Cases

Exhibit 3  Willingness to Pay for Services

Groupon

Tumblr

eBay

Yelp

Skype

Wikipedia

Google Search
$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00

Source: Galston, E. (10 Mar 2013). Are we in a subscription bubble? Tech Crunch. http://techcrunch.com/2013/03/10/are-we-in-a-subscription-bubble/

Exhibit 4  Key Personnel

FOUNDERS Mark Zuckerberg Dustin Moskovitz Eduardo Saverin Chris Hughes Andrew McCollum
BOARD Mark Zuckerberg Jim Breyer Peter Thiel Sheryl Sandberg Mark Andreessen
Erskine Bowles Susan Desmond Don Graham Reed Hastings
EXECUTIVE Mark Zuckerberg Sheryl Sandberg David Ebersman Mike Schroepfer
OFFICERS Chairman & CEO COO CFO CTO

Wikipedia. Facebook. Accessed 20 May 2013. http://en.wikipedia.org/wiki/Facebook

As noted earlier, Zuckerberg’s ability to innovate began at a
young age and culminated with the inception of Facebook.
Parts of the media sometimes paint an unattractive picture
of Zuckerberg with respect to some of his actions over the
years; however, his actions do not appear to support the
media’s occasional assertions related to behavior.57 Indeed,
Zuckerberg has been involved in various acts of charity
and joined a new political organization that promotes ven-
ture and immigration reforms.58
David Ebersman, Chief Financial Officer
David Ebersman has been with Facebook since 2009.
He started his career at Oppenheimer & Co., Inc. in
1991 where he worked as a research analyst. He later
joined Genentech, a biomedical firm, from 1994 to
2009 where he had a brilliant career that ultimately
contributed to his position as CFO of Facebook.
Across Wall Street, investors consider him a truthful
professional who works for the best interests of inves-
tors. Proof of this fact is the way he administered the
takeover of Genentech by Roche, working tirelessly
to generate the most value for Genentech’s sharehold-
ers during the transaction. The value that Ebersman
brings to Facebook is his expertise regarding public
companies and his strong operational background. His
presence has resulted in a greater level of confidence for
Facebook’s team and its shareholders.59
Sheryl Sandberg, Chief Operating Officer
Sheryl Sandberg has been a very influential leader
at Facebook since 2008. After graduating summa
cum laude from Harvard University with an A.B. in
Economics, Sandberg joined the World Bank to work
on health projects in India.60 After earning her MBA
(also from Harvard), she held positions at McKinsey &
Company, the U.S. Department of Treasury, and, most
recently, Google. At Google, Sandberg is the VP of
Global Online sales and Operations and was involved
in the launch of Google’s philanthropic arm, Google
.org. As part of Facebook’s top management team, her
knowledge of international markets and finance is valu-
able as Facebook forms and implements its international
strategy.
Theodore Ullyot, VP and General Counsel
Theodore Ullyot also started with Facebook in
2008. His academic background includes an A.B. in
History from Harvard University and a J.D. from the
University of Chicago. 61 Before Facebook, he was a
partner at Kirkland & Ellis LLP where he focused on

CHE-HITT11E-13-0403-CaseStudy12.indd 140 10/23/13 7:43 PM

 Case 12: Facebook 141

telecommunications and appellate law. Ullyot joined Financial Results

America Online and remained through its merger
with Time Warner, ultimately becoming the Senior VP
and general counsel for AOL Time Warner Europe.
In January 2003, Ullyot began a two-year stint in the
White House as associate counsel and deputy assistant
to President George W. Bush and chief of staff to U.S.
Attorney General Alberto R. Gonzales.62 Ullyot’s expe-
rience in government as well as public and private com-
panies coupled with his telecommunications expertise
and high-level connections make him a perfect fit
for Facebook. Ullyot’s current responsibilities include
examining and addressing the rising concerns about
data privacy among Facebook users.
In 2012, Facebook generated over $5  billion, mostly
from advertising (Exhibit 5). Facebook relies heavily
on advertising to generate positive cash flows. From
2010 to 2011, and 2011 to 2012, revenue increased
74  percent and 59  percent, respectively. This slow-
ing of revenue growth is a concern for Facebook
that must be accounted for and improved in order to
continue to be a market leader in connecting adver-
tisers to consumers. Net income from 2010 to 2011
increased 65 percent. However, from 2011 to 2012, net
income decreased by a staggering 95 percent to only
$53  million. This substantial reduction in income

Exhibit 5  Income Statement (summarized)

In Millions, except Per Share data, unless 12 Months Ended % Change % Change
otherwise specified from 2010 from 2011
Dec. 31, 2012 Dec. 31, 2011 Dec. 31, 2010
Revenue $5,089 $3,711 $1,974 88% 37%
Costs and expenses:
  Cost of revenue 1,364 860 493 74% 59%
  Research and development 1,399 388 144 169% 261%
  Marketing and sales 896 393 167 135% 128%
  General and administrative 892 314 138 128% 184%
Total costs and expenses 4,551 1,955 942 108% 133%
Income from operations 538 1,756 1,032 70% −69%
Interest and other income (expense), net:
  Interest expense −51 −42 −22 91% 21%
  Other income (expense), net 7 −19 −2
Income before provision for income taxes 494 1,695 1,008 68% −71%
Provision for income taxes 441 695 402 73% −37%
Net income 53 1,000 606 65% −95%
Less: Net income attributable to participat- 21 332 234 42% −94%
ing securities
Net income attributable to common stock- 32 668 372 80% −95%
holders
Earnings per share attributable to Class A & B
common stockholders:
  Basic $0.02 $0.52 $0.34
  Diluted $0.01 $0.46 $0.28
Weighted avg. shares used to compute earn-
ings per share attributable to Class A & B
common stockholders:
  Basic 2,006 1,294 1,107
  Diluted 2,166 1,508 1,414

Source: U.S. Securities and Exchange Commission. Facebook Inc. http://www.sec.gov/cgi-bin/viewer?action=view&cik=1326801&accession_number=0001326801-13-

000003&xbrl_type=v#

CHE-HITT11E-13-0403-CaseStudy12.indd 141 10/23/13 7:43 PM

 142 Part 4: Cases

was due to a 133  percent increase in total costs and Exhibit 6  Consolidated Statements of Cash Flow (summarized)
expenses. Cash flows from operations and financing (USD $) 12 Months Ended
have been increasing each year to support cash out- In Millions, unless Dec. 31, Dec. 31, Dec. 31,
flows used to purchase PPE and marketable securities otherwise specified 2012 2011 2010
(Exhibit  6). Facebook continues to emphasize R&D Cash flows from
operating activities
and, in 2012, the percentage spent on R&D increased
Net income $53 $1,000 $606
by 261  percent, nearly $1.4  billion. Facebook hopes
significant expenditures in 2012 will result in addi- Adjustments to reconcile
net income to net cash
tional revenue opportunities in the future. Another
provided by operating
financial move occurred in preparation for its IPO activities:
when Facebook tried to eliminate short- and long-
Depreciation and
  649 323 139
term debt (Exhibit 7). amortization
Loss on write-off of
  15 4 3
equipment
Strategic Challenges Share-based
  1,572 217 20
On January 30, 2013, Facebook announced that it had compensation
surpassed several milestones. Not only did the firm   Deferred income taxes −186 −30 23
exceed 1.06 billion MAUs, it also tallied over 680 million Tax benefit from share-
  1,033 433 115
monthly active mobile users63 (Exhibit 8). However, the based award activity
firm faces several unique challenges. Excess tax benefit from
  −1,033 −433 −115
share-based award
activity
Monetizing Facebook’s User Base Changes in assets and
Facebook boasts an enormous user base, but finding liabilities:
a way to monetize its users is a significant challenge.   Accounts receivable −170 −174 −209
User growth will likely not continue at the impressive
  Income tax refundable −451 0 0
rates it has seen in the past, which is why the firm
needs to focus on long-term revenue growth. Social Prepaid expenses and
  −14 −24 −38
other current assets
media monitors, such as SocialBakers, have reported
concerns that Facebook’s domestic growth has peaked.   Other assets 2 −5 −6
As a result, Facebook’s ability to tie more revenue-   Accounts payable 1 6 12
generating ideas into the long-term strategy will be Platform partners
  −2 96 75
essential. payable
Facebook currently generates most of its revenue Accrued expenses and
  160 37 20
through two different methods: advertisements and roy- other current liabilities
alties from third-party software developers.64 As previ- Deferred revenue and
  −60 49 37
ously discussed, advertising is the firm’s primary source deposits
of revenue. Because of this, the advertisements on the   Other liabilities 43 50 16
site need to be effective enough to ensure advertiser Net cash provided by
  1,612 1,549 698
satisfaction. Facebook posted a 37  percent increase in operating activities
revenue from 2011 to 2012, but analysts are still worried. Cash flows from investing
A closer look at the increase reveals that the primary activities
driver behind the increase was a three percent advertise- Purchases of property
  −1,235 −606 −293
ment price increase coupled with a 32 percent increase in and equipment
the number of advertisements.65 Put simply, Facebook’s Purchases of
  −10,307 −3,025 0
increase in revenue is merely a reflection of its increas- marketable securities
ing user base and does not appear to be a result of the Sales of marketable
  2,100 113 0
firm’s efforts to innovate. In a post-IPO world, investors securities
want to see evidence that Facebook is working hard to Maturities of
  3,333 516 0
create new avenues for revenue creation and bottom-line marketable securities
growth. (Continued)

CHE-HITT11E-13-0403-CaseStudy12.indd 142 10/23/13 7:43 PM

 Case 12: Facebook 143

Exhibit 6 Continued  Consolidated Statements of Cash Flow Exhibit 7  Consolidated Balance Sheets
(summarized) (USD $) Dec. 31, 2012 Dec. 31, 2011
(USD $) 12 Months Ended In Millions, unless
In Millions, unless Dec. 31, Dec. 31, Dec. 31, otherwise specified
otherwise specified 2012 2011 2010 Current assets:
Cash flows from  Cash and cash $2,384 $1,512
operating activities equivalents
Investments in non-
  −2 −3 0   Marketable securities 7,242 2,396
marketable equity
 Accounts receivable, 719 547
securities
net of allowances for
Acquisitions of business-
  −911 −24 −22 doubtful accounts
es, net of cash acquired, of $22 and $17 as of
and purchases of intan- December 31, 2012 and
gible and other assets 2011, respectively
Change in restricted
  −2 6 −9   Income tax refundable 451 0
cash and deposits  Prepaid expenses and 471 149
Net cash used in
  −7,024 −3,023 −324 other current assets
investing activities Total current assets 11,267 4,604
Cash flows from financing Property and equipment, 2,391 1,475
activities net
Net proceeds from issu-
  6,760 998 500 Goodwill and intangible 1,388 162
ance of common stock assets, net
Taxes paid related to
  −2,862 0 0 Other assets 57 90
net share settlement of Total assets 15,103 6,331
equity awards Current liabilities:
Proceeds from exercise
  17 28 6   Accounts payable 65 63
of stock options  Platform partners payable 169 171
Proceeds from long-
  1,496 0 250  Accrued expenses and 423 296
term debt, net of other current liabilities
issuance cost
 Deferred revenue and 30 90
Repayments of long-
  0 −250 0 deposits
term debt  Current portion of 365 279
Proceeds from sale and
  205 170 0 capital lease obligations
lease-back transactions Total current liabilities 1,052 899
Principal payments
  −366 −181 −90 Capital lease obligations, 491 398
on capital lease less current portion
obligations Long-term debt 1,500 0
Excess tax benefit from
  1,033 433 115 Other liabilities 305 135
share-based award
Total liabilities 3,348 1,432
activity
Commitments and
Net cash provided by
  6,283 1,198 781 contingencies
financing activities
Stockholders’ equity:
Effect of exchange rate
  1 3 −3
Convertible preferred stock 0 615
changes on cash and
cash equivalents Common stock value 0 0
Additional paid-in capital 10,094 2,684
Net increase (decrease)
  872 −273 1,152
in cash and cash Accumulated other com- 2 −6
equivalents prehensive income (loss)
Cash and cash
  1,512 1,785 633 Retained earnings 1,659 1,606
equivalents at Total stockholders’ equity 11,755 4,899
beginning of period Total liabilities and $15,103 $6,331
Cash and cash equiva-
  2,384 1,512 1,785 stockholders’ equity
lents at end of period
Source: U.S. Securities and Exchange Commission. Facebook Inc. http://www.sec.
gov/cgi-bin/viewer?action=view&cik=1326801&accession_number=0001326801-
Source: U.S. Securities and Exchange Commission. Facebook Inc. http://www.sec.
13-000003&xbrl_type=v#
gov/cgi-bin/viewer?action=view&cik=1326801&accession_number=0001326801-
13-000003&xbrl_type=v#

CHE-HITT11E-13-0403-CaseStudy12.indd 143 10/23/13 7:43 PM

 144 Part 4: Cases

Exhibit 8  Mobile Monthly Active Users (in millions)

Future of Facebook
680
Although Facebook had a successful fiscal year in 2012,
604 many analysts believe the company’s level of meaning-
543 ful growth is beginning to plateau. Further, Facebook’s
488
users, advertisers, and investors are anxious for the firm
432
to develop more sustainable competitive advantages.
376
325 With the introduction of Facebook Home, FBX, and
288 Instagram, the firm has started to prove that it is capable
245
of becoming much more than a basic social network-
ing platform. Mark Zuckerberg and his team of strate-
gic leaders have decided to invest a significant amount
of R&D dollars to create additional value for custom-
ers. What financial results will Facebook generate in
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 the years to come? Can Facebook find ways to generate
2010 2011 2011 2011 2011 2012 2012 2012 2012
value for demanding customers across time? How does
Source: MarketingCharts staff. (31 Jan 2013). Facebook’s Mobile User Base. the firm need to position itself relative to competitors
Marketing Charts. http://www.marketingcharts.com/wp/direct/facebooks- to enhance its potential to earn above-average returns?
mobile-user-base-and-share-of-ad-revenues-keeps-growing-26610/
Dealing with questions such as these and perhaps a host
of others will affect Facebook’s future.

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