Facebook, The Perfect Startup

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faberNovel 2012 ••• 1

LOGO

the Perfect Startup

.

Five keys to their unprecedented success

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We all know Facebook. We all know Mark Zuckerberg. These are the names. We all know the figures, they are mind-blowing: more than 900 million members for a current valuation of over 100 billion dollars. At first sight, we all knew Facebook would be the biggest start up "after Google", Mark Zuckerberg, the Social Network hero, a juvenile CEO signing autographs and striking the pose like one of the biggest rock stars of his generation.

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A quick word from Stéphane Distinguin ( CEO – faberNovel )

It is not about the IPO the entire world is commenting on: an IPO is certainly not an end, but a point on a startup trajectory. It’s all about perfection. Up to now, Facebook has been the perfect startup, not because it has succeeded in everything, but because its has built itself step by step, in a very pragmatic way. There is no miracle here: it is just a startup that has had an almost perfect stance towards every challenge it has faced to date, and has built the most fascinating innovation platform. Perfection is rarely encountered and even harder to analyze… At faberNovel, as we do every year, and after Google, Apple and Amazon, we wanted to highlight what could be the formula behind Facebook's roaring success. Is there a formula for perfection? We would like to share our discoveries, our dissection of this marvel just to make it more useful for all of you. I am not sure perfection will be achievable for all of us, but it certainly is our best source of inspiration.

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••• This work was made for you to share, reuse, remix, rework…

It is licensed under the Creative Commons BY-NC-SA license to allow for further contributions by experts and users in the coming months.

You may not use this work for commercial purposes. You may distribute a modified work under the same or similar license.

You are free to share and remix/adapt the work.

You must cite this document: faberNovel, Facebook: The Perfect Startup, May 2012.

Why do we release this kind of work for free? Our job is to help big organizations think and act like startups. And we believe that this cannot be achieved without causing people to want to innovate and explore new business models. Our ambition is to inspire you by giving you the keys to understand new markets like Russia or successful companies like Apple, Amazon… or Facebook.

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••• Facebook is quite a big 8 year old …

million user accounts

billion Likes & Comments per day

million Photos uploaded per day

12.8% global market share! Average Time spent by users in a month

Source: Facebook S-1, May 2012

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••• … with many characteristics of a giant .

$16 billion raised on the day of the IPO

Which ranks its CEO among the TOP10 World’s Billionaires

The largest tech IPO in history

Instagram $1 billion (2012)

Snaptu $65 million

(2011)

Friendfeed $47.5million

(2009)

Source: Based on information disclosed by Facebook, May 2012; Facebook’s IPO commented by Bloomberg

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••• Altough still a small company, relative to other tech giants

Facebook’s Page Views = 10x Youtube’s

26 years ld average Facebook employee age

Facebook’s Revenues = 10% Google’s

$3.7b

$37b

but…

Source: Facebook, Google, Adplanner June 2011

1 trillion

100 billion

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••• Its meteoric growth results in a remarkably high valuation per employee

$30 million valuation per employee 3500 employees

Obviously, they must be doing something right Estimates: Fabernovel, based on a $100b valuation; Number of employees: Facebook, May 2012

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Facebook is remarkable not so much in its product or usage, but in the way they built themselves as a company, from inception to maturity.

We believe that Facebook’s amazing performance was driven by excellency in business management.

What’s Facebook story?

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••• Facebook isn’t the first social network in history

•  Created as an embryonic social community.

•  Bought by Yahoo in 1999 for $3.57 billion.

•  Yahoo turned the service into free web hosting in attempts to monetize it.

•  Having lost the social element, the service closed in 2009.

These three social networks were short-lived leaders. Why would Facebook be different?

•  Probably the first genuine social network

•  Faced technical difficulties from 2004 to 2006

•  Lacked activity & content for the users

•  Chose a restrictive policy (e.g. no pseudonym)

•  Refused a $30 million buyout offer from Google

•  Acquired in 2009 for $26 million after its reboot

•  A reaction to Friendster •  Chose an absolute freedom

policy •  Huge success among artists

and celebrities •  Too much freedom

deteriorated the quality of the website

•  Lacked activity for the users •  Acquired by News Corp. for

$580 million in 2005 •  Sold for $35 million in 2011

to Specific Media

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••• Facebook managed to survive 3 classical challenges

Technology Facebook only experienced 3 severe outages: •  The most severe outage

Facebook faced was in 2010 for 2.5 hours

•  They experienced a few difficulties later in 2010, unveiling new pages

•  In early 2012, some Facebook’s European users could not connect to the platform for a few hours

Policy Facebook has learned from the mistakes of its predecessors, keeping a balance between freedom and control: •  Allowing users to modify the

content •  Preventing users from

modifying the interface •  Allowing brands and artists

to create special pages

Focus Facebook always kept the social feature at the center of the user-experience: “Facebook’s mission is to make the world more open and connected.” Facebook stayed focused on the “big idea”.

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••• It has done so with a perfect scaling strategy

2004-2006 2007-2010 Nowadays

Test Growth Consolidation College Networks •  Low-scale •  High-density •  High need to connect

Build the platform

Gradual opening to the world •  Word-of-mouth extension (through

invitations) •  New features that drive engagement Scale the platform

Self-sustaining community •  Improvement of existing features •  New features to maintain engagement

Maintain the platform

Source: Quora, “What are some decisions taken by the Growth team at Facebook […]?”, answered by Andy Johns

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••• 2006 breakthrough: The News Feed – Your friends ticker tape

The News Feed aggregates the user’s friends activity: status updates, photos uploads, comments… The more friends, the more content to explore. As every webmarketer knows: fresh content is key to generate stickiness. Facebook’s News Feed concept goes even further: providing user-centric content from his network, hence tastes and interests. News Feed gave a considerable competitive advantage to Facebook in its battle against MySpace, because it provides permanent user-centric content renewal.

With the News Feed launched in 2006, Facebook managed to automate relevant content creation… from friends’ activity.

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••• Facebook motto : “Product First”, but with business sense

"Facebook was not originally created to be a company. It was built to accomplish a social mission - to make the world more open and connected"

Mark Zuckerberg

But Zuckerberg quickly understood that business perspective benefits the overall management: •  Straightforward and quantifiable objectives •  Money can assemble the best team of developers

In order to enforce these objectives, he hired Sheryl Sandberg as COO in 2008. Zuckerberg met Sandberg in 2007, at a Christmas party, while she was still Vice President of Online Sales and Operations at Google.

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••• With 56.6% of voting rights, M. Zuckerberg can keep the shareholders at bay

“Our CEO has control over key decision making as a result of his control of a majority of our voting stock. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares,[…], in his own interests, which may not always be in the interests of our stockholders generally. “

Here’s an enlightening extract from Facebook S-1:

Source: Facebook S-1

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••• Zuckerberg even refused several opportunities to sell out

“I admire Mark Zuckerberg for not selling out, for wanting to make a company. I admire that a lot.”

Revenue $382,000

Revenue $3.7 billion

Revenue $777 million

$10 million acquisition offer by Friendster

$1.6 billion acquisition offer by Yahoo

$300 million invested by DST Global to postpone IPO

Steve Jobs (1955-2011)

$15 billion acquisition offer by Microsoft

Source: Steve Jobs quoted in Walter Isaacson biography; acquisitions offers reported by TechCrunch

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To sum up, Facebook managed to tackle one of the most common tensions in any startup: Product vs. Business

Product Business

Many startups struggle or fail when they find themselves prioritizing one over the second. Facebook seems to have passed this test quite brilliantly.

What is fascinating with Facebook ? The way it deals with most startup challenges.

vs.

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Facebook’s excellency lies in managing classical startup challenges

Technology & User Experience Business model exploration Business & Ecosystem

Disruption Long term vision

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1.  Technology & User Experience •••

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••• Facebook’s platform is both a best practice in user-centric design…

Customizable appearance thanks to new Cover Picture

Engaging content thanks to smart display

Timeline featuring the user’s story, with milestones and events.

Facebook New Timeline, released in 2011, replaced “The Wall”

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••• … and technical wizardry

Visual aggregation of numerous sources of content

Action links to out-of-platform apps and software

Third-party apps integration

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••• The result let people and brands tell their story in a way that is engaging and new …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

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More than 1,000 developers deliver code to be released each week, most of the time small iterations… sometimes completely new features. Facebook manages to do this with a few simple rules:

A new version of Facebook is released every Tuesday

“Move Fast and Break Things”

Developers are individually responsible for the code they write.

“Mark is always right”

Facebook accomplishes all of this at a breakneck, startup pace

to million users!

#1 #2 #3

= 12,000 modifications per month

Source: Arstechnica.com, A behind-the-scenes look at Facebook release engineering, April 2012; Facebook Developer Garage, Paris, April 2012

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••• The key to Facebook’s agility: its testing process

Facebook teams’ tools prove there’s no need to be sophisticated to be efficient. They work with hacker tools, such as: IRC chat (a geek instant messaging system) and P2P file-sharing technology (basically content piracy tools) to release Facebook each week!

Source: Arstechnica.com, A behind-the-scenes look at Facebook release engineering, April 2012; Facebook Developer Garage, Paris, April 2012

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••• Acting like a startup is not just a question of process: it’s a question of culture

Mark Zuckerberg, CEO The Genius who hacked into Harvard’s security network to create the first version of Facebook at only 20.

Sheryl Sandberg, COO Named in the top 100 most influential people in the world, and still leaving work at 5:30 everyday to pick-up her children at school.

Two atypical leaders….

… managing an army of highly-talented youngsters

Avada Kedavra, Expecto Patronum, Alohomora Names of Facebook’ HQ meeting rooms, inspired by Harry Potter magic spells

Facebook average employee is 26 years-old By comparison, IBM’s average employee is 44 year old…

Source: Mashable

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••• When it comes to new features, Facebook takes a pragmatic approach

In 2011, Facebook introduced a new News Feed which presented “Top Stories” first. Despite the business opportunity offered by this new feature, Zuckerberg decided to remove it and set up the “latest updates first” as demanded by the vast majority of users.

With Facebook Deals, the engineering team faced a lack of traction: the product wasn’t used enough to justify it to continue. They simply shut the service down.

Through analytics, Facebook discovered that Groups were cannibalizing a large portion of their new Pages. They decided to improve their Groups to meet the genuine objective of the feature, differentiating it from User Pages.

Customer feedback

Groups Deals New News Feed

At Facebook, modifications or removals are not seen as failures: everything is constantly tested and modified. It is a never ending beta, with high-quality user-experience.

Fail fast, fail often Constant improvement

Source: Facebook Blog

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••• Facebook’s main asset is the map generated by users data : the Social Graph

The Social Graph is in fact the digital map of real-life connections and interactions between users. Facebook stores more than 100 Petabytes of user data. That’s 2x the size of the entire written works of mankind (from the beginning of recorded history, in all languages). In order to enrich this database, Facebook opened its Social Graph to third-party developers and app editors.

Women

Men

Source: Facebook S-1

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Facebook opened its data to third-party developers with an API: Open Graph

Open Graph Open Graph is an API provided by Facebook. With users’ authorization, third-party developers can access users’ data or publish new data on user profiles.

Publish Include links into status updates

Access Access user’s data with Facebook Connect

2008

Publish Publish likes in users’ timelines with Open Graph 1.0

2010

Publish & Access Publish rich actions and objects in users’ timelines with Open Graph 2.0

2012

Now, users can like but also: listen, watch, read, cook…

What’s an API? It is an Application Programming Interface, basically it is an interface through which software components communicate with each other.

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Analyzing this graph with algorithms creates the Edge Rank

It is an major improvement of the News Feed, increasing content relevancy for each user.

The Edge Rank is a score given to a piece of content for every user, depending on its interests. Whether a particular content will be displayed or not in the News Feed of a user will depend on its Edge Rank.

User A posts something about on his Timeline

Friend 1 doesn’t like

Friend 2 likes

The Edge Rank of the post is low for Friend 1

The Edge Rank of the post is high for Friend 2

It doesn’t appear on his News Feed

It appears on his News Feed

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••• Before going further, let’s review some key Facebook concepts

News Feed It’s the user’s Facebook h o m e p a g e w h i c h d isp lays the user ’s network activity: status u p d a t e s , p h o t o s uploaded, links shared…

Timeline It’s the profile page of every user. It displays a timeline o n w h i c h a r e chronologically placed the main events of his social life.

Open Graph It’s Facebook’s API that enables any third-party developer to connect to Facebook’s database and access the Social Graph (with Authorization) to read it and/or write new data.

Social Graph I t ’s the users’ data a c c u m u l a t e d b y F a c e b o o k o n i t s p la t form. I t can be visualized as a social map if each element is put into its context.

Edge Rank It’s the relevancy coefficient calculated on content shared on Facebook’s platform. This relevancy is calculated for each p iece o f content relatively to every user.

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2.  Business Model exploration •••

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••• Facebook’s key figures

in revenues in 2011

In 2009, Facebook was profitable for the first time. In 2011 it generated $1b profit !

million users users connecting every day

million apps million

Pages

[Over $4 per user per year]

[$1 per user per year] Source: Facebook S-1, May 2012

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••• Facebook’s actual business model is mainly advertising

million Sale of Facebook Credits +89% of average growth per quarter.

Advertising +17% of average growth per quarter.

billion

In 2011 it generated

billion in revenue, for $1b profit!

Source: Facebook S-1, May 2012

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••• An advertising-based business model inspired by Google’s

Google implements CPC

CPM advertising era Inherited from Print, TV & Radio advertising

2002

Google revenues increase x7 from 2002 to 2004

Performance based advertising business models are born

CPM: Cost-per-Mille CPC: Cost-per-Click The Advertiser buys space to the Media Sales Agency for a thousand prints of the ad. This is usually display advertising.

The Advertiser negotiates the price of one click-through on its ad with the Media Sales service of the platform. This is performance advertising.

Performance based advertising market gets larger than CPM advertising

2008

Source: Google

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••• How Facebook tried to replicate Google’s formula… to find out it wasn’t working for them …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

Facebook offered two types of advertising: CPM and CPC. Both were placed on the same spot on the right bank of the page.

The average click-through rate in 2010 proved Facebook’s advertising weakness :

Facebook tried to replicate Google’s high-value proposition: large traffic, targeting and performance driven by search context, and tools for advertisers.

Performance: Facebook enhances action by introducing rich ads, with a Title, Picture, and Text.

Traffic: Facebook is the most time-consuming website with 8h18 per user per month, and 1 trillion PV.

Tools: Facebook sets up its own advertising platform with all the targeting options.

Targeting: Facebook uses the data provided by users. It supposedly provides a 90% accuracy.

Google Traditional banner advertising Facebook Source: WordStream, 2010

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•••

Revenue from advertising:

And yet, Facebook has generated a lot of money out of its advertising

With the average user spending 8 hours and 18 minutes a month on Facebook, there is potential for much, much more.

Revenue per minute of user activity (Q4 2011)

million $

Q4 2011

increase YoY

Source: Facebook S-1, May 2012; Estimates Fabernovel

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••• So Facebook decided to do what it is best at

It is neither an epiphany nor a direct strategy: it has been implemented

Facebook-style, through small iterations.

Let’s see how.

And extends its platform philosophy to its monetization strategy.

Facebook invents

SOCIAL advertising

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•••

The network is how each person is related to another.

A critical notion to understand: Facebook is not a social network… …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

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••• … it is a social media

Facebook is also a digital content exchange platform of our social network.

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••• A simple feature led to a whole new social thinking strategy

In 2009, Facebook introduced the “Like” action The “Like” feature generated so much traction that Facebook was eager to implement it everywhere.

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••• Applied to brands, the like button developed the social graph even further …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

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••• Applied to third-party content, it improved social discovery

In one-click on any type of content, users could recommend the content they stumbled upon to their friends. With this feature, Facebook deeply evolved:

News about user’s social network

Content sharing (articles, videos,…)

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••• Facebook’s Like had become a real economy

On NHL.com Facebook visitors are

reading 92% more articles

On Gawker.com Facebook integration

increased traffic by 200%

A few examples:

On NBA.com Facebook was #2 referral source.

In 2011…

“likes” a day

There were

million had integrated the Like button

million websites

More than

average amount of friends

Average Like User

years old

more clicks on external links

Source: Facebook, 2011

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••• Focus on: the Viral Loop

*139 is the average size of Facebook users’ networks, Source: Facebook S-1

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••• Facebook decided to look for new interactions that could strengthen and qualify this relationship with brands …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

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••• With its new version of Open Graph, Facebook is able to qualify the actions of its users more precisely

Spotify was one of the first to set the example, at f8 conference* in 2011.

How did it use the new Open Graph features? User’s activity on Spotify is recorded and published on Facebook. The action is defined as “listening” and both the song and the artist are identified.

2012

Facebook now has a granular view of how its users are related to brands, products, services…

Case Study: Spotify

Example:

* The f8 conference is the annual meeting of Facebook developers, similar to Apple’s WWDC

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••• How powerful is this relationship exactly? We asked Dailymotion

After f8, technical teams at Dailymotion were granted a direct access to Facebook Tech Support in order to integrate Open Graph publications on their service.

Dailymotion is YouTube’s main competitor. They saw the potential of Open Graph at the f8 Conference in September 2011.

Though beneficial for Dailymotion, they didn’t really enjoy it at first: many users complained that it was too invasive and spammed their News Feed.

+10% in 4 months with Open Graph

video views per day million

video views per day million

Source: Dailymotion

Dailymotion worked with Facebook to improve the user experience: implementing Privacy buttons (turn off Open Graph publications) on their video, and aggregating the publications on Facebook’s walls to avoid spam.

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••• Facebook now monetizes this Viral Loop effect with Sponsored Stories

With Sponsored Stories, Facebook introduces digital word of mouth marketing. Brands can now amplify the Viral Loop effect by purchasing impressions of Branded Activities on targeted users.

Sponsored stories – January 2012

Different types of branded activities:

Check-ins (Mark is at Starbucks)

Likes (Mark likes Starbucks)

OpenGraph publications (Mark drank a Cappuccino at Starbucks)

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••• Sponsored Stories: how does it work exactly? Case study, Starbucks

Everyday, Starbucks gets tagged in Branded Activities (without having to pay for it)

With Sponsored Stories, Starbucks can make sure the story will appear on Sheryl friends’ News feed. Starbucks pays to boost its Edge Rank towards targeted profiles.

Here, Sheryl just checked-in with one of her friends.

Sponsored

The story appears on Sheryl friends’ News feed whose profiles match Starbucks’s targeting.

Depending on this update’s Edge Rank, the publication will appear in friends’ News Feeds.

Around $0.36 CPM in the US (source SocialBakers.com)

Reach among Starbucks fans without Sponsored Stories:

16%

Reach among Starbucks fans with Sponsored Stories:

75%

Source: Facebook

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Depending on this update’s Edge Rank, the publication will appear in friends’ News Feeds.

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••• It all sums up to two well-known webmarketing concepts

Integrating with Facebook platform will make your content visible by Facebook users. e.g. through Like, Facebook Connect, or Open Graph. Providing engaging content will help you gain visibility. Equivalent in search marketing: Search Engine Optimization (SEO).

Being visible Paying to increase your visibility

Buying Sponsored Stories will guarantee your content to reach a maximum number of users. Equivalent in search marketing: Search Engine Marketing (SEM).

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•••

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But with word of mouth marketing, the whole concept of targeting changes dramatically

Brands now have to seek their fans’ engagement to turn them into brand ambassadors. They then can target fans’ friends while sparking off your fans’ engagement. It’s a win-win situation for Facebook: it delegates a part of the targeting to its users, while improving the overall quality and relevancy of content shared by brands.

Ambassadors

New target:

engagement

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••• In order to enable its social adv. strategy, Facebook created two special forces

Facebook Partner Developers They work with high-potential partners to help them integrate new social features. Even though it is a high-value service, it is free! Their job can be compared to Evangelist, Business Developer, Developer, Engineer.

Facebook Studios They promote how-tos and best-practices in this new field of “social marketing”. They will also deliver “facebook studio Awards” to the best players in the field.

Technology Marketing

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3.  Business & Ecosystem •••

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••• The Facebook ecosystem: an incredible source of economic value

Accord ing to Delo i t te , Facebook’s positive impact on European economy is

According to University of Maryland researchers Facebook’s impact on the American economy is

Facebook is at the core of a large, new economic ecosystem: apps and websites built on or integrated with Facebook, media consulting and advertising agencies, community managers…

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••• Two levels of dependence exist in Facebook’s ecosystem

Both are considered by Facebook as content providers.

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At the heart of the Facebook Ecosystem: Facebook Platform •••

The story goes that Zuckerberg, having envisioned a platform model for Facebook, met Bill Gates through Harvard’s network. Gates shared with Zuckerberg his vision of the best platform...

which he followed.

In 8 years, Facebook has built one of the biggest platforms in the world:

million apps

The largest gaming platform in the world: More daily players than XBOX+PlayStation+Wii+Gameboy altogether

Facebook was created as a platform from the beginning…

Source: David Kirkpatrick, The Facebook Effect; Facebook

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••• Facebook’s platform is built on three main tools

Facebook Platform: a set of tools to enable developers to leverage the power of social.

Open Graph Apps Canvas Apps Social Plug-ins

Timeline apps let users enhance their timeline with content coming from third-party apps. Ex: The Spotify Timeline App will automatically post wrap-ups of what you’ve been listening recently.

Canvas Apps are the “traditional” Facebook Apps that run inside Facebook. Ex: Zynga (Farmville) and many other gaming apps.

Social plug-ins are code elements that developers can embed in their websites or mobile applications to implement some of Facebook’s most important functionalities: the Like button, the Facebook Connect button, the Facebook comment module, etc.

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••• Facebook’s stance towards its ecosystem is dual

Openness Control Facebook Plaform is genuinely open without the need to ask for Facebook’s validation or permission of use. Facebook is dependent on the success of its partners : the more users interact with apps or social plug-ins, the higher Facebook’s activity.

Facebook keeps control on its platform and its product. Facebook has never hesitated to roll out big changes in its functionalities even though it harmed a certain number of its partners.

To keep users from being constantly spammed with Zynga games stories in their newsfeed, Facebook decided to display these stories only to users who actually play Zynga games.

Facebook Credits is a good example: it has been developed as a tool for developers to simplify their payment process, but Facebook takes a 30% cut and has forced them to use this payment system on their platform since 2010.

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••• Case Study: Zynga, a company born of Facebook’s ecosystem

Launch of the Facebook Platform and birth of Zynga,

a company dedicated to developing gaming Facebook

apps

Facebook accounts for 95% of Zynga’s revenue

($600M)

Zynga accounts for 12% of Facebook’s revenue

Zynga raised $1B in its IPO (biggest tech IPO

since Google’s) at a $7B valuation

Zynga launched its own web platform using Facebook Credits

Dec 2009 : 60M Monthly Active Users

Zynga agreed to sign a 5-year partnership

contract benefiting mostly Facebook

Feb 2012 : 240M Monthly Active Users

End of 2011 : Zynga launched

CityVille on Google+: Zynga

hopes it is the first step towards less

dependency on Facebook

Source: Zynga; Appdata

Zynga is the main social-games producer on Facebook. They created hit-games such as: FarmVille, Café World, FishVille, Texas Hold’em Poker, Mafia Wars… they recently bought OMGPOP, Draw Something’s creators.

12%

95%

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34,8M players 21,7M players 3,5M players

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••• Facebook’s ecosystem is outsourced growth

Organic growth External growth Facebook benefits from the addition of content coming from third-party apps integrating into Facebook.

Facebook always keeps an eye on high-potential teams building state-of-the-art social applications that could improve the product.

API Business By opening its platform to third-party developers Facebook virtually increases its content production without bearing the costs.

Acqui-hires Facebook already made 24 acquisitions within its ecosystem.

For Facebook, growth is not about money, growth is calculated by the amount of content available on their platform.

Gowalla They joined the Facebook Places team

Friendfeed Its team improved the News Feed

Examples:

Examples: Legal issues and technical costs for streaming music or video.

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4.  Disruption •••

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••• With mobile, the game’s rules are changing

With a growing penetration of mobile devices around the world, web-based companies such as Facebook are facing a critical challenge. Mobile will be the next interface for businesses to reach their audience. Facebook is a web-based company, that now has to be a new entrant into mobile. As with every new entrant, it had to pick a strategy:

Build Partner Buy

Smartphone penetration (US - March 2012)

or or

Tablet penetration (US – April 2012)

Source: comScore, IPSOS

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••• With all its features, Facebook could have been an excellent mobile OS*

Everything in Facebook could be translated to a mobile app. *Operating System

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••• But it’s a bit too late for Facebook to conquer the mobile market from the top…

OS shares (US) March 2012 For Facebook, building a proprietary mobile OS would mean:

Spending too much time…

… on a sector they don’t know…

… with no chance of large success.

Facebook can’t replicate its web success on mobile.

You don’t build a mobile OS as quickly as you update your platform.

Mobile sector means dealing with phone builders and carriers.

The market is now well established and blocked by the major phone builders and OS.

Smartphones sold (world) Q1 2012

Source: comScore, IDC

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••• … and Facebook failed to build strong partnerships with existing players

On Android, Facebook integration is limited to HTC’s Facebook button

Apple chose Twitter for Photo Sharing on iOS

On Android, Facebook faces another problem: atomization. It would have to partner with every single Android constructor, and implement Facebook on every single mobile, for each version of Android.

Apple decided to integrate Twitter instead of Facebook in iOS, following heated negotiations regarding the integration of Facebook Credits inside Facebook’s App. (this eventually didn’t happen, and Facebook had to go with Apple In-App purchases)

HTC Chacha HTC Salsa

iOS and Android represent 80% of the market, and they are almost closed to Facebook.

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••• So Facebook is just an app on mobile… …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

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••• … and it is a completely different perspective

Web Mobile

vs.

Facebook’s mobile app cannot provide the same level of functionalities integration as the web version.

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••• On mobile, alternatives have diluted Facebook’s user engagement

So, in its effort to reach every single user, Facebook lost the hype. Facebook emblematic features are challenged by “cooler” or more convenient apps.

News Feed

Photos

Facebook decided to focus on the expansion of the platform to all the mobile devices, rather than trying to improve the quality of its apps on main devices.

Check-ins

Credits In-App Purchase

Foursquare

New York Times

Instagram

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••• Facebook bought Instagram to get back some of its lost hype

Three reasons why Facebook had to buy Instagram, even for $1 billion:

Buy an attractive point of entry

Integrate the Instagram experience further into Facebook

Call dibs on Instagram

Photo-sharing is an essential element on mobile, and Instagram managed to create a Facebook-like level of engagement.

Even when shared on Facebook, the level of integration wasn’t beneficial enough for Facebook.

Twitter was also interested in Instagram and had already placed an offer for its buyout. Facebook had to act fast.

A quite simple product: take photo, apply funny filter, share.

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•••

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But buying apps doesn’t solve Facebook’s problem on mobile: it could be squeezed out in the next 10 years by new competing apps

Web Mobile

…

On mobile, Facebook lost the central position in the ecosystem which made its success on the web. This position is dangerous for Facebook, so they had to devise a way out.

Instagram Photo Sharing

Spotify Music

FarmVille Game

Eventbrite Ticketing

Messenger Live chat

Facebook Social

Facebook

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The phone being social, who, better than Facebook,

can understand its dynamics?

••• In fact, Facebook has no choice but to change the game’s rules

Facebook chose a 4th option to impact the market:

Build Partner Buy Innovate

Facebook is extending its Social Graph to the mobile market.

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•••

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Facebook will use the ubiquity of social relationships to build a cross-device back-end for developers

Facebook will gather data on every device and redistribute it seamlessly.

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••• Facebook circumvents the traditional mobile OS barrier-to-entry …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

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••• In May 2012 Facebook launched its mobile weapon: the Facebook App Center

Facebook’s goal with the App Center is to take advantage of this phenomenon.

Facebook App Center is a cross-device web and mobile App Store: On the mobile App Center, users can browse apps, and if a mobile app requires installation, they will be sent to download the app from the App Store or Google Play.

Source: Facebook

In November 2011, Facebook enabled a new feature for mobile app developers: they could set up their mobile apps IDs on the platform so that mobile users, when clicking on a link mentioning the app, could directly be redirected to the app, or the store. For the single month of April 2012, Facebook had already sent 160M users to third-party mobile apps. In May 2012, 90M users were sent directly to Apple’s App Store!

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••• Facebook’s App Center positions itself prior to the classic distribution platforms …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

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••• Facebook App Center offers value to both users and app developers

Users

Discovery App Developers

Marketing

Discovery of new apps is a critical issue for mobile users nowadays, with an ever-increasing number of apps. Facebook offers its recommendation and peer-selection power to solve this problem.

App developers have very restricted options if they want to promote their app. Facebook offers its social marketing power to enable virality on app promotion.

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••• And with Mobile Sponsored Stories, Facebook monetizes apps promotion

In April 2012, Facebook launched its Sponsored Stories on Mobile. From now on, some sponsored stories will appear in mobile users’ newsfeeds.

From now on, app developers can integrate a viral, word-of-mouth, marketing campaign on mobile, using Facebook’s advertising.

These Sponsored stories can link directly to the App Store or App Center…

Source: Facebook

This is no coincidence if 7 of iOS Top 10 apps and 8 of Android Top 10 apps are integrated with Facebook.

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With more than 500,000 apps on iOS App Store only, Facebook is entering a huge market.

High-costs

••• If successful, Facebook can become the apps merchandising expert

Apps marketing is a very lucrative business. According to our partners at Applidium*, the sector offers to Facebook an ideal mix for their strategy:

* Applidium is faberNovel's subsidary specialized in Apps Design & Development.

Limited cross-device actions

A marketing campaign to get an app in the TOP5 of iOS’s App Store in France costs between $10,000 and $30,000. For the US, this price would go over $50,000. Facebook’s App Center will help editors market their apps. It will be easy for Facebook to monetize this help if it proves efficient.

Compared to iOS, it is hard to promote successfully an app on Android. The main reason for that is the fragmentation of the Android market in terms of devices. Facebook’s power resides in the fact that they can redirect their users directly to the app on any device.

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http://applidium.com/en/

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••• The App Center is beneficial to Facebook in many ways

Improve the average quality of Facebook Apps Facebook has set guidelines of quality for the apps aspiring to be displayed in the App Center.

Foster Facebook integration in third-party apps To fully benefit from Facebook’s viral promotion, app developers will have to implement the latest social features offered by Facebook.

Generate revenue Facebook also introduced the first guidelines to offer Paid Apps inside the App Center. Apps could also integrate Facebook Payments.

Increase the amount of Facebook Apps The opportunity to offer Paid Apps will create a new economic opportunity for developers.

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Facebook, a 21st century telco •••

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••• Facebook is a new breed of telco

Basically, Facebook does the same job as a telco:

Maintain a network, give people an identity and provide communication tools

But its telecommunication offer is much broader than that of today’s telcos:

Devices Interactions Reach Facebook is king of the web and has already more than 50% of its users on mobile devices.

In Facebook, people share a lot more diverse type of content: message, photos, comments, like, videos, articles, music,…

Facebook has 901 million users across the world and it will probably reach the 1 billion users milestone in 2012, that’s a 14% global market share!

Live profiling Facebook manages and stores the data that make the conversation. It is able to understand what its network is doing, in real-time.

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••• Quite an irony: Facebook is still dependent on brick-and-mortar telcos

Facebook’s network is built upon telcos’ networks It will be interesting to watch in the coming years how this relationship will evolve. Will there be a clash? Will they partner? Merge? Will Facebook offer solutions to create a Mesh Network?

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•••

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Both business models are built upon the monetization of a strong technological asset…

Wires and pipes network Social Graph

Classic telcos have no idea of what their network is carrying. Hence the value of the network is limited to the value of the infrastructure.

Facebook sees and stores the data flowing in its network. Hence the value of the network depends on the utility potential of this data.

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••• … but they monetize it differently

Telcos’ monetization is flat Facebook’s monetization is selective and variable

The high competition has forced them to package their offer, triggering a convergence between business and home solutions, and decreasing prices. It is a simple linear revenue model dependent on the number of users.

Facebook’s relationship with its users is different from the one it has with its partners, or with its advertisers… The result is a strong leverage that Facebook can pull to earn money from highly-profitable partners.

$ per user (ARPU business)

Free

30% cut

CPC/CPM

$ / data Tomorrow?

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Our take: Five challenges awaiting Facebook •••

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# 1: Facebook will have to protect its users •••

With nearly 1 billion users, Facebook now reaches a little less than 50% of the Internet world population. Its challenge will soon be securing its user base over acquiring new users.

Challenge

Facebook’s answer

••• Our take

Privacy guidelines for developers After a huge amount of complaints from users, Facebook introduced new privacy guidelines: developers are encouraged to implement Privacy Switch buttons.

Legal protection There has been a lot of noise around a story involving a recruiter who asked a candidate for access to his Facebook account. Facebook declared that, in such case, it would use its legal team to sue employers.

Stealth mode

When evolving from a startup to a big company, priorities evolve. Having grown its user base to this extent, Facebook now has a lot more responsibilities than before. Part of this responsibility is to curb third-party developers’ enthusiasm in exploiting the data of its users. Facebook has to switch from an open position, with guidelines, to a firm position: with rules.

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# 2: Facebook will have to be included in every part of the social conversation •••

In a nutshell, the quantity of the content on the platform drives traffic and drives Facebook’s business model. If a large part of the social conversation was to be happening outside Facebook, it could have dramatic consequences for the company.

Challenge

Facebook’s answer

••• Our take

Existing solutions… Facebook has already opened a lot of solutions to integrate out-of-platform conversations inside Facebook: comments plugins, live chat for live events,…

Facebook has to be the tool on which the social conversation happens. It means that they have to cover anything that is a hot topic, anywhere the conversation happens. So Facebook not only needs to offer a connection to its platform, but have a strong value proposition to persuade content providers into integrating with Facebook.

… and Innovation Facebook believes in its technical team’s capacity of innovation. They will devise new way of connecting third-party content to its platform.

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# 3: Facebook will have to sell its new social advertising •••

Being a pioneer means that even if they face no challenger on this specific market in the near future it will have to persuade marketers that their product is a good buy and, to a certain extent, a better buy than other online advertising resellers.

Challenge

Facebook’s answer

••• Our take

Evangelization With the Marketing Teams and the new Facebook Studio both working at identifying best-practices, Facebook wants to persuade advertisers of the efficiency of social advertising.

Evangelization is not enough to convince advertisers. Facebook actually adopts a developer point of view on this challenge: providing a technical solution, trying to spark off excitement, and providing best-practices as a documentation. In fact, Facebook has to develop its own social metrics in order to prove the efficiency of both its products and advertising. In the past, every media had to create its own metrics: print, press, radio, TV, web… and now social media has to follow the rule.

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# 4: Facebook will have to distribute its data •••

The constant excitement surrounding Facebook comes from the gigantic quantity of data they possess. Facebook has to transform this potential into real money, without scaring away its users - as discussed in #1.

Challenge

Facebook’s answer

••• Our take

Facebook Connect & Open Graph 2.0 Facebook has broadly opened its data to third-party developers with Facebook Connect. They can now quickly build customized user experiences with the use of this data.

Even though Facebook is helping other apps to generate value by lowering the barrier-to-entry to social traction, this doesn’t generate revenues directly. But Facebook is not exploiting its main potential: laser-sharp, real-time targeting for advertising. It doesn’t need to be the advertising reseller, Facebook could simply open a “Targeting API” to which any advertiser could connect, paying for the service: a price for a thousand requests for example.

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# 5: Mastering these 4 challenges, Facebook will rise as the perfect social data startup •••

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@faberNovel facebook.com/faberNovel www.fabernovel.com

••• We work ideas into successful projects. We make innovation happen.

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Cyril Vart Partner & VP Strategy @cyrilvart

Maxime Coupez Senior Project Manager @mc0up3z

Marie-Caroline Lanfranchi Partner & Project Director @mariecaroline

Acknowledgements …………………………………………………………….…………………………………………………

Dailymotion, Applidium, Inside Facebook, Mashable, TechCrunch, ReadWriteWeb, Business Insider, Fast Company, Arstechnica, Quora, Wordstream, Business Insider, Comscore, IDC, IPSOS

…………………………………………………………….…………………………………………………

Kévin Smouts Junior Project Analyst @kevinsmouts

John Geraci General Manager, faberNovel NYC @johngeraci

Design Team …………………………………………………………….…………………………………………………

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Benoit Talabot Partner & Art Director @bybent

Jules Mahé Graphic Designer @julesmahe

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