Case Study:
Facebook was launched in February 2004 by Harvard undergrad students as an alternative to the traditional student directory. Its popularity quickly spread to other colleges in the US by word of mouth, and the site now registers close more than 500 million active users,
- 50% of our active users log on to Facebook in any given day, Average user has 130 friends, People spend over 700 billion minutes per month on Facebook. There are over 900 million objects that people interact with (pages, groups, events and community pages)
- Average user is connected to 80 community pages, groups and events
- Average user creates 90 pieces of content each month
- More than 30 billion pieces of content (web links, news stories, blog posts, notes, photo albums, etc.) shared each month.
- More than 70 translations available on the site
- About 70% of Facebook users are outside the United States
- Over 300,000 users helped translate the site through the translations application
Facebook has completed two rounds of venture financing at very high valuations, the first at a valuation of ~$100M and the second at ~$550M (valuations are unconfirmed). These valuations were driven by the multiple acquisition offers that Facebook has reportedly turned down (the latest was a rumored $750M offer). Facebook is already generating significant revenue, so despite all the valuation and web traffic metric hype, it has also established a very real business.
Facebook had its initial success with college students by providing an information service that was not available offline – an interactive student directory containing each student’s class schedule and social network. Before Facebook added the feature sets it has today, it was simply a more complete student directory. Facebook did not create a community where one never existed before; rather they provided an important information and communication service to a pre-existing offline community.
While students already had a loose affiliation with all fellow students at a college, they didn’t have an easy way to learn more about their fellow students outside their direct social network. Given the large class sizes at most universities today, students don’t have the opportunity to interact with very many of their fellow classmates during class. I remember the days I spent at Berkeley in 200+ student lecture halls scanning the crowd for attractive girls or previous acquaintances. Facebook organized students by class schedule for the first time, making it possible to learn more about that classmate you might have a crush on. Although I am highlighting one particular use case, initial Facebook usage was indeed driven by dating type activity – checking people out, learning more about crushes, light stalking type of activity, etc.
The larger picture here is that Facebook created a high utility online service for enabling pre-existing social behaviors within an offline community. This makes for an interesting lesson learned: it’s easier to piggyback off a pre-existing community with offline behaviors that drive online service usage.
Facebook made important product decisions that ensured harmony and trust between the offline community and the online service created. Facebook originally limited membership to those users who could verify they had a “.edu” e-mail address for the college they attend. Facebook also placed limits on the ability to search or browse users to the college that the user attends. These measures aim to make users feel that the site is exclusive and limited to members in their offline community (colleges and universities). In the early days of Facebook, something like 30% of users actually posted their cell phone number on their profile. I’m not sure whether this statistic is still valid, but it supports the notion that users trust who is viewing their profile.
Facebook has recently opened its doors to users outside the .edu networks. To accomplish this, they have created “networks”. High schools, employers and geographic areas are, essentially, what colleges were to the original Facebook. When you join one of these “networks,” you can only view others in the self-designated network. Additionally, Facebook has implemented a number of privacy controls that allow users to control exactly who gets to see the information they provide.
Facebook is a more compelling advertising opportunity than other social networking sites because of deep penetration within a series of micro communities (college campuses). If a local advertiser wants to target a particular college campus, Facebook is the best way to get the advertiser’s message to that audience. CPM rates for local advertising command a significant premium from advertisers because of their more targeted nature. With 65% of users logging in daily and 85% weekly, advertisers can run time-oriented campaigns very effectively. The large, branded advertisers, who value reach, can advertise to nearly every student in the 18-22 demographic in the US with one campaign.
Facebook will have ample opportunity to diversify its revenue streams beyond traditional banner advertising due to its deep penetration in these micro communities. Having the attention of 90% of students attending a university lends itself to online classifieds, event listings, e-commerce, and lead generation. Facebook should be well-positioned to be a major player in online classifieds given the usage patterns of its user base.
The key to an online advertising business targeting branded advertisers (advertisers looking for branding, not just clicks) is having a strong brand that advertisers want to be associated with. A perceived hot brand is what drives premium CPM rates. Two sites having similar demographics and user usage patterns may have drastically different CPM rates based solely on the perceived brand recognition and image factor. While some people I spoke with disagreed, I believe that Facebook did a masterful PR job - highlighting the impact that Facebook has made on the lives of college students and their online media consumption in nearly every story written. How often do you hear that 90% of Facebook users login to the site once per week? Clearly the PR coverage came as a result of the tremendous viral growth, but capitalizing on that PR to help build brand was a key success factor.
The “face” of Facebook is Mark Zuckerberg. Back in February 2004, when Facebook was founded, he was a student at Harvard. Two other students, Dustin Moskovitz and Chris Hughes were the second and third employees of the company. This added a level of credibility to the site in the minds of the student users. It was something one of them had created, not something fed to them by a “company” in the traditional sense. It was a place that they could trust because one of their own had made it.
Adding to the underground feel of Facebook was the viral spread of the site. It fanned out throughout Boston, and then the Ivy League. Students at other schools had to wait in line until Mark and friends could find time to add their school. This created even more buzz around the product.
would be curious to know is how Facebook’s $500K seed round of financing was structured. That investment was done at the end of 2004 by ex-PayPal exec Peter Thiel (when Facebook was available on ~30 campuses). I’m guessing that $500K bought 5-10% if it was structured as equity, but would have bought considerably less if it was structured as convertible debt. If anyone can shed some light on the seed round, please leave a comment below.
The Facebook success story is most interesting to me because of how daily offline social behavior drove usage of the site. There are plenty of activities in our daily life that could benefit from a complementary online product. However, if that offline behavior only occurs once every few months, you have the challenge of user recall. Namely, will users remember your service and know how to find it to fill their need. Facebook demonstrates you have a great Internet service if offline behaviors can drive nearly daily usage online. In the life of a college student, you are meeting or interacting with new people nearly every day. It is human nature to be curious to learn more about that person, hence you jump on Facebook. Facebook fills a high value need for college users on a nearly daily or weekly basis, consistently reinforcing the utility of the service, and building goodwill with users. The issue of user recall is an import one for a web entrepreneur to understand, particularly if the need they are addressing occurs infrequently in the lives of their target users.
Another lesson that Facebook reinforces is the importance of brand and PR buzz to advertising rates. The amount branded advertisers are willing to pay for online advertising is hugely subjective – it’s still more art than science. To get premium CPM rates, entrepreneurs must establish a brand – not only with users, but also with advertisers. Many social services do not have high click thru rates on ads because people are not in the mind frame of looking for information when they are using a social service. All social networking sites suffer from this “lack of click thru” problem. While immersive advertising opportunities will eventually displace banner advertising on most social services over time, for the time being, traditional banner advertising is still a critical revenue stream.
Finally, we can learn a lot from Facebook by how they built initial trust between users and their service. While these days it is easy to build a consumer Internet product, establishing trust with users is not. As an entrepreneur, how quickly you can establish trust with your users can be a critical success factor. Facebook built immediate trust via the home page by showing only a select few colleges as being open to registration. Coupled with the registration process, users immediately understood that the site was exclusively for use by college students. This made them feel comfortable disclosing information that people normally wouldn’t post on the Internet. Simple, but very powerful. Facebook does give users control over the information displayed on their profile and to whom it is displayed, but only a small percentage of users actually change the default settings. Thus, the key part of the trust equation is not features, but branding and messaging about the service and who uses it.
Question
1. Identify the key success factors for Facebook.
2. What are the measures taken to protect privacy on facebook?
3. Identify the major companies using facebook for marketing and outline their strategies.
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