BLetson_FacebookCase
- 1. Letson 1 Facebook Case Analysis Social media in its most simple form is any virtual platform that allows individuals, groups of people, and businesses to connect with one another on a 24/7/365 basis. Social media can be used as a source of information, a platform for collaboration, or for business purposes. Before social media came into being, people kept in touch with one another via in- person and telephone conversations and postal mail. Businesses marketed primarily through television, radio, and newspaper advertisements, which were all very asynchronous processes that allowed for very little to no customer interaction. Over the last 15-20 years, the internet has taken society by storm. The growth of websites, email communications, and social media platforms has reshaped how people and organizations communicate and interact. In the early to late 2000’s, we saw the rise and eventual fall of various social media platforms such as SixDegrees, Friendster, and MySpace, all of which failed to articulate their value to potential shareholders. Amid this activity, Facebook came to being as nothing more than a Harvard University student directory. It worked very similar to other social networking sites in that it allowed users to create profiles and interact with one another; however, it initially restricted its users to only those with a “.edu” email address. The site grew like wild-fire. Within its first month, nearly three- quarters of Harvard students had registered, and just four months later, 30 college networks were represented with 150,000 registered users.1 Facebook eventually opened its virtual doors to all people, and as of December 2014, they had 890 million daily active users. 2 Why do people use Facebook? What do they do there? People use Facebook primarily to express themselves through sharing their opinions, ideas, photos/videos, and various activities (ie. "washing clothes"). This can be for many reasons: the need for acceptance or to feel a part of a larger group, to brag, to stir controversy, to elicit deep thought, or to inform. They visit when they are bored during their day, need to get their mind off of their work or a difficult situation, or simply to see what others are doing/saying at the time. People have the opportunity to interact with one another to build relationships, persuade others to give way to their ideas, and give/receive emotional support. Through Facebook’s Platform, users also have the ability to socialize through games or applications that have been developed by those in the Facebook community. Users can also take advantage of Facebook for Websites, which provides users the ability to log into third party websites using their Facebook credentials, which makes signing up for these websites (ie. TripAdvisor) a much easier task. I’ll discuss later how this creates value for the businesses as well. Finally, users have the ability to combine some or all of these tools together to promote a cause or organize an event through Facebook. All of these activities are enabled through Facebook’s free social networking site and mobile apps. For years, rumors have spread that Facebook would begin charging a fee to their users; however, time and time again, we see that this is false information, and articles such as the one from Investopedia tell us why. Facebook interaction doesn’t come without fault. Individuals run the risk of being bullied, developing a narcissistic attitude, having low self-esteem, and opening themselves up
- 2. Letson 2 to criminal activity. Bullying has become such a real and problematic issue that Facebook has a “Put a Stop to Bullying” page to help people of all ages stand up for themselves and each other. York University found that regular Facebook users ages 18-25 years old tended to express narcissistic or insecure personality characteristics. Additionally, researchers at the University of California found that those with low self-esteem feel safer sharing information on Facebook, which can actually work against them. Typically, this group of people frequently posts negative or criticizing comments to their friends, making them less likeable “friends.” 3 “Friends” are not always friendly, which is the case of many people who, over the years, have posted information on their Facebook page about their family vacation, honeymoon, etc. When these people return home, they find that their home has been robbed and personal items have been taken such as the case of Stacey Grant of Fontana, California. Upon returning from her Vegas vacation in 2014, she found that her family’s home had been robbed by a “friend” and two accomplices. 4 That is just one of the many instances where this has occurred. Lack of quality information, phishing, and time loss can also be unfortunate results of social networking. There’s an old game called Gossip (or Telephone) where one person whispers in another’s ear a bit of information. That person then whispers in the next person’s ear and so on through numerous iterations. Eventually, the last person in the line will tell what they heard. It is usually a very convoluted misinterpretation of the original message. This same principle holds true on social media. Information can be misinterpreted or simply wrong, and it can result in big problems with personal and professional relationships. Phishing is a form of identity theft, but at face value, it can appear innocent. Users can receive messages from “friends” asking for personal information, not knowing that the friend’s account has been spoofed. They hand over that information willingly, and by the time they ask their friend about it, it’s too late. Time loss is probably one of the largest negative outcomes of Facebook. People find themselves scrolling through timelines, replying to posts, and playing games, and before long, they have wasted hours of time! Many refer to this as being “addicted” to Facebook. Facebook Fan Pages Fan Pages, or Organizational Pages, are those that allow businesses, brands, products, artists, and public figures to create free custom Facebook pages and attract users to “like” them. Those users then see updates on their timelines when new posts are made to those Fan Pages. 5 This platform provides businesses the ability to interact with their customers and potential customers using individualized pull tactics. This allows customers the ability to post positive or negative reviews and share their experiences or ideas with the company; likewise, the company has the opportunity to respond to customer reviews. The businesses can also use institutionalized push tactics by performing broadcast advertisements and product updates, improvements, and recalls. As was the case of Finnair, the peer-to-peer interaction provided a sense of community and caused customers to collectively identify with the company. 6 Customers can also interact with one another on these pages to share their experiences with the product or service that the company offers. Fan Pages have turned what used to be a very asynchronous marketing process into a now synchronous one by opening an
- 3. Letson 3 avenue of communication between the customers and the businesses. To attract more “likes” or revenue, Fan Page administrators have the opportunity to market their product or service via Facebook Exchange and Facebook Ads, which are paid advertising services within Facebook. Page administrators can select what they want to advertise, the demographic and location of their audience, and the interests of those audience members. That gives the business the best opportunity to reach the customers they are looking for rather than doing a blanket (and more costly) campaign. These advertisements can be served in two ways: on the users’ timeline, which gets the most interaction, or on the right-side column. Additionally, businesses can perform even more specialized targeted marketing by uploading their own customer contact list to Facebook. This information gets matched to Facebook’s data, and only those people will be solicited. 7 According to MITSloan Management Review, 63% of businesses surveyed reported that social business has positively affected business outcomes, and 59% of those respondents in multinational companies stated that social business helps them to leverage a global presence. 8 Although these statistics are not directly related to Facebook Fan Pages, they do provide significant proof that these types of social media platforms are providing value to the businesses utilizing them. Facebook Platform and Facebook for Websites Facebook Platform is a set of tools that enable third party developers to develop applications on top of Facebook. Just three months after its launch in 2007, Platform had over 3,000 applications that had been released, and by January 2008, that number had grown to 13,000. Unfortunately, only a small number of these applications were responsible for the majority of the usage because many were criticized as being childish, silly, and a waste of time. Additionally, some developers failed to follow Facebook’s rules, and users were seeing their personal photos on in-app advertisements, which was a clear violation of Facebook’s privacy policy. 9 The most popular use of Facebook Platform was in the social gaming industry, which was led early on by Zynga, with the release of Texas Hold’em, FarmVille, and CityVille. These social media platforms provided users with the ability to socialize with other players within the games. By the summer of 2011, Zynga’s games attracted over 250 million monthly users. One user described the appeal of FarmVille saying, “When I have five minutes between meetings and want to relax, I would browse YouTube or read a blog or something, but now I hop on FarmVille. Those five minutes that I used to spend on something of little value, I’m now spending interacting with friends, which has real value to me.” 10 Not only did Facebook Platform provide community interaction for users, but it also gave Zynga a very healthy revenue. Through the sale of virtual goods to users, such as decorative objects for their farms or cities or items that helped them gain an advantage in the game, Zynga landed $90 million in profit on $850 million in revenue by the summer of 2011. Facebook caught on quickly and seized an opportunity to monetize. In July 2011, Facebook began requiring Platform developers to use Facebook Credits exclusively to process payments for these virtual goods. Of these payments, Facebook began taking 30% on each transaction. This yielded approximately $1.26 billion in revenue for Facebook. 10
- 4. Letson 4 Facebook for Websites, or Facebook Connect as it was originally named, allows third- party websites to utilize Facebook users’ credentials and provides Facebook users a way to register with these websites without having to set up additional accounts. Simply the Facebook brand gives users a quality expectation about the company’s website, and it makes the registration process quick and painless. By providing this as a free service, Facebook saves these third-party organizations a significant amount of money by providing identity credential management and market research analysis that would otherwise cost these companies large amounts of overhead and R&D funding. The money saved can then be used for other areas of business. Facebook for Websites’ identity credential management provides companies with the ability to aggregate user data, track user activity, and make intelligent marketing decisions by understanding who their customers are and what their likes and dislikes are. Rather than spending inordinate amounts of time trying to gain an understanding of their customers, companies like TripAdvisor, Hulu, and Spotify who use this service were able to bypass this entire process and grow exponentially faster. By October 2008, only 100 websites had integrated with Facebook for Websites, but the early results showed that two out of three new registrants of these sites were a direct result of this integration. In addition, sites who used this service saw a 30%-200% increase in registration on their sites and a 15%- 100% increase in user engagement. By 2012, 24.3% of the top 10,000 websites were integrated with Facebook for Websites. 11 Where does Facebook go from here? In 2011, Facebook reported $1 billion profit on $3.7 billion in revenue. Of that revenue, 85% came from advertising and the remaining 15% came from the sale of virtual goods in Facebook Platform.12 By 2014, the amount of revenue from advertising had grown to 92%. 13 Considering these numbers, it’s easy to see the impact advertising is having on Facebook, but there is certainly room for improvement and recognizing an even larger annual return. The worst thing Facebook could do is to begin charging its users for membership because they would lose a significant amount of members, resulting in lower incomes for all of Facebook’s advertisers, which is the primary source of revenue for the company. Additionally, a loss of Facebook users would cause a decreased number of gamers (and purchasers of virtual goods) in the social gaming industry and a loss of registrants for those third party companies utilizing Facebook for Websites. Facebook Pages is a platform that Facebook excels with that allows companies to promote their products/services; it should be maintained going forward to continue realizing such large advertising profits. Platform should be maintained going forward to capture the revenue from virtual goods sales and gaming advertising. The area least monetized at this time with the most potential to create revenue is Facebook for Websites. As a free service since 2008, Facebook for Websites has seen consistently increasing numbers of third-party websites utilizing this service. As stated earlier, 24.3% of all global sites were integrated with Facebook in 2012, and I can only imagine now four years later where that statistic has grown to. The service is incredibly valuable and powerful and helps companies to get information about their users that may otherwise take years to collect. Facebook can and should be charging for this service either through monthly or annual
- 5. Letson 5 subscriptions based upon the company’s size. It should be broken down into small, medium, and large for-profit organizations. The service should remain free for non-profit organizations as a way to help continue their work in their respective communities and should be a charitable tax deduction for Facebook. The cost of the service should depend on the company size, and a discount should be given for annual or multi-annual subscriptions. If we use the 2012 statistic and say that there are 2,430 of the global leading sites who are currently utilizing Facebook for Websites and we charge $500-$10,000 annually for the service (based on company size), that is a potential revenue of up to $24 million on a rolling annual basis. These numbers are likely higher because the number of integrated sites has likely risen in the last four years. To conclude, Facebook has the most state-of-the-art platform in the world with the most in-depth market research on the largest audience. Facebook for Websites is the most under-monetized tool, and it is extraordinarily powerful to those companies using it. Without a doubt, Facebook should be chasing this opportunity for additional returns and increased shareholder value.
- 6. Letson 6 Resources 1 Piskorski, Eisenmann, et al, “Facebook,” HBS No. 9-808-128 (Boston: Harvard Business School Publishing, March 2014), p. 2. 2 Facebook, 2014 Annual Report, http://investor.fb.com/annuals.cfm, p. 5, accessed March 2016. 3 Ray Williams, “Do Facebook and Other Social Media Encourage Narcissism?” Psychology Today, June 2013, https://www.psychologytoday.com/blog/wired-success/201306/do- facebook-and-other-social-media-encourage-narcissism, accessed March 2016. 4 Giuseppe Macri, “Facebook ‘friend’ robs family after posting vacation plans online,” The Daily Caller, March 2014, http://dailycaller.com/2014/03/31/facebook-friend-robs-family- after-posting-vacation-plans-online/, accessed March 2016. 5 Piskorski, Eisenmann, et al, “Facebook,” HBS No. 9-808-128 (Boston: Harvard Business School Publishing, March 2014), p. 5. 6 Jarvenpaa & Tuunainen, “How Finnair Socialized Customers for Service Co-Creation with Social Media,” MIS Quarterly Executive, September 2013, p.129. 7 Piskorski, Eisenmann, et al, “Facebook,” HBS No. 9-808-128 (Boston: Harvard Business School Publishing, March 2014), p. 6. 8 Kane, et al., “Finding the Value in Social Business,” MITSloan Management Review, Spring 2014, p. 82. 9 Piskorski, Eisenmann, et al, “Facebook,” HBS No. 9-808-128 (Boston: Harvard Business School Publishing, March 2014), p. 7. 10 Piskorski, Eisenmann, et al, “Facebook,” HBS No. 9-808-128 (Boston: Harvard Business School Publishing, March 2014), p. 8. 11 Piskorski, Eisenmann, et al, “Facebook,” HBS No. 9-808-128 (Boston: Harvard Business School Publishing, March 2014), p. 10. 12 Piskorski, Eisenmann, et al, “Facebook,” HBS No. 9-808-128 (Boston: Harvard Business School Publishing, March 2014), p. 1. 13 Facebook, 2014 Annual Report, http://investor.fb.com/annuals.cfm, p.10, accessed March 2016.