Facebook - A Case Study - Part 1







Facebook - Part 1: Software Business Categorisation

Ever since I switched from Friendster to Facebook many years back, I have always been engaged in this social networking platform. I liked it because it is a great way to connect with family and friends. Over time, the way I connect with my friends progressed from poking them to sharing photos and video feeds. As time passes, I start to wonder. What makes Facebook so successful? How does Facebook become a unicorn company with a hockey stick growth? Why is it that we can spend so much time on this platform and yet not be bored?

As part of my school assignment, I have done some research on this company, and have split my findings into three parts. Firstly, on the Business Categorisation of Facebook. Next, on the Financial Analysis, and third, on the Business Strategy and Roadmap of the company. 

This post contains my first paper on the business characterisation of Facebook. Enjoy! -- 


Executive Summary
When researching on a software company’s business model, we could use a framework (Rajala, Rossi, & Tuunainen, 2003), or a business model canvas (Osterwalder & Pigneur, Business Model Generation, 2010). The diagram below shows an overview of Facebook’s business model (Sinha, 2015). In this paper, I will elaborate more on the Product Strategy, Revenue Logic, Distribution Model, and Services and Implementation model of Facebook.




Product Strategy
Facebook was founded in Feb 2004 and its key product strategy was to become a popular social networking site for anyone who has access to the internet. The foundation of Facebook’s product strategy is to provide a platform that allows users to share messages, photos, and more for free. This is aligned to its vision of enabling the world to connect and to share. 

Consumers do not go to Facebook for the platform, but for regular content updates from their trusted connections. The advantage Facebook has is that instead of spending money to hire content writers to write content, the content is willingly generated by its 1.7 billion monthly active users (Statista, 2016), and does not cost Facebook a single dollar. (Osterwalder, Strategyzer, 2015) Content generators on the other hand are attracted to continuously maintain their account to provide more content as it is a free and simple way to connect to their friends.

This product strategy is also built to extend to the developing countries. In Africa for example, “Facebook Zero” took over the entire continent in 18 months by providing a simplified, text-only version of Facebook that can be accessed by WAP-enabled “feature phone”, non-smartphones that compromises the majority of the phones on the planet.  (Mims, 2012)

Also, Facebook is continuously innovating to attract its consumers. For example, Mark Zukerberg, CEO of Facebook, recently showcased Facebooks’ latest idea for social interaction in virtual reality at Oculus Connect, the annual developer conference for the VR company (Popper, 2016).

Revenue Logic


Facebook gets roughly 85% of its revenue from advertising sales. This revenue is about 14 Billion USD in December 2015. The remaining 15% comes from revenue share or commission from virtual goods sales like that of paid credits for games like FarmVille. Facebook takes up to 30% cut from the total sale achieved for such transactions (Economy, 2016).

The Skyscanner image is an example of the advertisement Facebook uses. Assuming that advertisers sponsor pages for as low as $1USD per active user, multiply that by the current 1.7billion active users monthly, that could be the revenue Facebook earns per month.

However, along with this revenue logic, Facebook needs to figure how to balance revenue with customer satisfaction. This is because irrelevant advertisements at a user’s newsfeed could annoy them. Facebook overcome that by using a social graph for marketers to target ads to users not only on the basis of geography, but also based on those users' behavioral histories and profiles on Facebook: page likes, age, gender, interests, etc.  (Eric, 2014). Better reaction to the advertisements would benefit both the customer and advertisers, and ultimately, Facebook’s revenue stream.

Distribution Models
Facebook is free for anyone with an internet access. As such, anyone can be a customer of Facebook as long as they use a computer or mobile device to link up to the Internet to create an account in the platform.

Along with this line, it makes sense for Facebook to want to bring Internet access to everyone. Mark Zukerberg compared basic access to the Internet to basic healthcare, education and library books. Though he mentioned that this is not for commercial interests, there is no denying that bringing the Internet to developing countries like India is a potentially lucrative market because though it is the second most populous country in the world, only 375 million of its 1.25 billion people use the Internet. (Beres, 2015)

Also, though another huge market, China, bans Facebook due to Internet censorship, we can see that Mark has interests in that area. It may or may not be for commercial reasons, but he is known to be learning Mandarin Chinese, he recently gave his baby daughter a Chinese name along with his Chinese-American wife, and he have also met up with prominent China figures like Community Party propaganda chief Liu Yunshan, and Chinese Internet chief Lu Wei (Kosoff, 2016).

Services and Implementation


Facebook has a support inbox that is an easily accessible for its customers to report issues about the platform. Also, to prevent customers from being annoyed by advertisements, they have a feature to hide advertisements or to ask for an explanation on why they are seeing a particular advertisement. Users also have the options to configure their Facebook Ads settings.


Finally, Facebook also builds a community for developers. By having easily accessible Facebook APIs to login webpages or develop applications, more places will be integrated with Facebook to increase their market reach.

Conclusion
Facebook has a strong business model for its successes. This includes attracting consumers to willingly work on generating content by giving them free access to the platform to connect to each another. Next, having brands onboard at the platform through Facebook Pages or Facebook advertisements to send traffic and inject revenue. Finally, staying agile and ahead of competitions (Owyang, 2012) by continuously increasing its market segments to increase more people with internet access to access their platform, and staying ahead of the technology curve while keeping a feedback loop to service its customers that are in need.


References
Mims, C. (2012, September 24). Facebook’s plan to find its next billion users: convince them the internet and Facebook are the same. Retrieved from Quartz: http://qz.com/5180/facebooks-plan-to-find-its-next-billion-users-convince-them-the-internet-and-facebook-are-the-same/ 
Sinha, B. (2015, Dec 28). LinkedIn Slide Share. Retrieved from White boarding techniques used in Lean product innovation: http://www.slideshare.net/tatan_sinha/white-boarding-techniques-used-in-lean-product-innovation
Rajala, R., Rossi, M., & Tuunainen, V. K. (2003). A framework for analyzing software business models. Helsinki, Finland: DBLP.
Osterwalder, A., & Pigneur, Y. (2010). Business Model Generation. Canada: John Wiley & Sons, Inc. Hoboken, New Jersey.
Statista. (2016). Retrieved from Statista: https://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/
Osterwalder, A. (2015, April 9). Strategyzer. Retrieved from Strategyzer: http://blog.strategyzer.com/posts/2015/4/9/facebook-whatsapp-uber-business-model
Economy, U. (2016, Feb 22). Unicornomy. Retrieved from Unicornomy: http://unicornomy.com/how-does-facebook-make-money/
Eric. (2014, Jan 27). Mobile Dev Memo. Retrieved from Mobile Dev Memo: http://mobiledevmemo.com/facebook-becoming-backbone-mobile-app-distribution/
Beres, D. (2015, Dec 12). The Huffington Post. Retrieved from The Huffington Post: http://www.huffingtonpost.com/entry/mark-zuckerberg-india_us_568149f2e4b06fa68880910e
Kosoff, M. (2016, Mar 21). Vanity Fair. Retrieved from Vanity Fair: http://www.vanityfair.com/news/2016/03/mark-zuckerberg-met-with-chinas-propaganda-chief
Fortune. (2016). Fortune 500. Retrieved from Fortune 500: http://beta.fortune.com/fortune500/facebook-157
Owyang, J. (2012, May 19). Web Strategist. Retrieved from Web Strategist: http://www.web-strategist.com/blog/2012/05/19/facebook-a-brilliant-business-model/
Popper, B. (2016, Oct 6). The Verge. Retrieved from The Verge: http://www.theverge.com/2016/10/6/13176906/oculus-connect-3-facebook-social-vr-avatars
Cover Image Source: https://tctechcrunch2011.files.wordpress.com/2016/07/facebook-search.png?w=738



No comments

Powered by Blogger.