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Facebook Case Competition Bradley Kirby Pooja Chandramouleeswaran Yifei Zhang Andrew Grillo Ryan Volatile 1

Case Competition Entry (Facebook)

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A mock case put together as a part of a team for the Consulting Skills and Frameworks Class at Kenan-Flagler. We were tasked with coming up with a way to increase Facebook's share value. Our recommendation was for Facebook to begin charging developers for access to their online APIs.

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Page 1: Case Competition Entry (Facebook)

1

Facebook Case Competition

Bradley KirbyPooja Chandramouleeswaran

Yifei ZhangAndrew GrilloRyan Volatile

Page 2: Case Competition Entry (Facebook)

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Executive Summary

Facebook should charge top developers for access to APIs in order to increase market value by 20% in the next 5 years.

Charge for APIs

Facebook is a necessity to developers.

Facebook has market dominance.

Facebook has pricing power.

Cumulative market value increase of $15.8 billion, 30% by 2017.

In the long run, increase of $87.5 billion, 68% by 2024.

Developers Facebook Pricing

Page 3: Case Competition Entry (Facebook)

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3rd Party Application

s

PlatformAPI

Source: Team Analysis

An API acts as an interface between two applications

API

Developers

Facebook

Impact

Pricing power

APIs are a free way that developers use to build using the Facebook platform.

Page 4: Case Competition Entry (Facebook)

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Facebook’s APIs allow 3rd party apps access to its data and functionality.

API

Developers

Facebook

Impact

Pricing power

Avoid account creation

Source: Team Analysis

Promote on Facebook

Create personal content

3 examples

Page 5: Case Competition Entry (Facebook)

5

Source: Facebook, BusinessInsider

Facebook APIs significantly increase user engagement for the developers.

API

Developers

Facebook

Impact

Pricing power

See appendix for more developer success stories.

For each story published in Facebook, developers see roughly 3 clicks to their

sites.

Developers using Facebook see a 30%-200% increase

in registration on their sites.

Page 6: Case Competition Entry (Facebook)

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API

Developers

Facebook

Impact

Source: Facebook, BusinessInsider

100% increase in quarterly gross

ticket sales

4 mil increase in membership, growing

revenue 433%

Pricing power

Developers that use Facebook have seen a steep growth in users and revenue.

90% increase in membership from 1.8

million to 3.2 million users

60% increase in users since Open Graph

integration

Success Cases

Page 7: Case Competition Entry (Facebook)

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API

Developers

Facebook

Impact

Pricing power

Source: Wall Street Journal, Yahoo Finance, ORBIS

Facebook is the market dominator with over 1 billion global users, 9 million apps and 42 million pages.

If Facebook were a nation, it would rank 3rd largest in population.

$141 Billion in Value

9 Million Apps

1.01 Billion Active Users

China

Indi

a

Face

book U.S

.

Indo

nesia

1.34 1.241.01

0.31 0.24

Nation’s Population

Po

pu

lati

on

(in

bil

-li

on

s)

Page 8: Case Competition Entry (Facebook)

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Facebook outcompetes the leading competitor in attracting users and prolonging engagement.

100

1000

Monthly Active Users (thousands)

Source: Facebook’s Q3 report, Google press release

API

Developers

Facebook

Impact

Pricing power

People spend significantly more time per user on Facebook than

Google+

3 minutes 405 minutes

Google+ Facebook

Time Spent per User per Month

Page 9: Case Competition Entry (Facebook)

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Facebook’s market dominance leads to a large opportunity for revenue growth.

API

Developers

Facebook

Impact

Pricing power

Source: Team Analysis

Charging below the optimal price will limit developer

pushback

Quantity of MAUs

Pri

ce P

er

MA

U

Untapped Revenue

P*=$ 0.35

Q*= 4.8 Million

The supply/demand equilibrium (Monthly Active Users) shows area for

improvement.

Facebook users

Demand for app users

Fair Market Price

Page 10: Case Competition Entry (Facebook)

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•Cheaper monthly rate with multiple apps Discounts

Price

Apps > 1 mil users•Average annual revenue > 50 mil

•Charge only after success

$28,847/month • $0.35/user • 6% of average developer value

Developers

Fair: only charging the most successful apps

Finance: low % of developer revenues

Catalyst: more app development

Source: Team Analysis

API

Developers

Facebook

Impact

Pricing power

With a well defined pricing model, Facebook can maintain healthy new app creation while generating additional revenue from the most popular apps.

Page 11: Case Competition Entry (Facebook)

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2013 2014 2015 2016 2017 $52.0

$54.0

$56.0

$58.0

$60.0

$62.0

$64.0

$66.0

$68.0

$70.0

0%

5%

10%

15%

20%

25%

30%

35%market value (best)

market value (normal)

market value (worst)

% increase (normal)

% increase (best)

% increase (worst)

Charging for Facebook APIs increases market values by $15.8 billion over the upcoming 5 years.

Facebook APIs can increase cumulative market value by 20%- 42% by 2017

$ bi

llion

s

% m

arket value increase

5- Yr. Cumulative Market Values

Source: Team Analysis

API

Developers

Facebook

Impact

Pricing power

Page 12: Case Competition Entry (Facebook)

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Growth in market value continues to generate $87.5 billion in market value over next 10 years.

Facebook APIs can bring in a cumulative market value increase of 56%- 73% by 2024

$ bi

llion

s

% m

arket value increase10- Yr. Cumulative Market Values

Source: Team Analysis

API

Developers

Facebook

Impact

Pricing power

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 $52.0

$57.0

$62.0

$67.0

$72.0

$77.0

$82.0

$87.0

$92.0

0%

10%

20%

30%

40%

50%

60%

70%

80%market value (best case)

market value (normal case)

market value (worst case)

% increase (worst case)

% increase normal case

% increase best case

Page 13: Case Competition Entry (Facebook)

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Risks are low comparative to the potential payoff.

RiskImpact and Speculation Mitigation

Chance Impact

Developer Attrition

Medium High Benefits of Facebook are well worth the below-market price

Negative Press High Low No impact in long run

Competitor Undercutting

Low Low Price below market Value, Alternatives give much lower value

New Platform Emerges

Low Medium Barriers to entry are extremely high

Facebook’s control of the social media market eliminate risks

API

Developers

Facebook

Impact

Pricing power

Source: Team Analysis

Page 14: Case Competition Entry (Facebook)

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Executive Summary

Facebook should charge top developers for access to APIs in order to increase market value by 20% in the next 5 years.

Charge for APIs

Facebook is a necessity to developers.

Facebook has market dominance.

Facebook has pricing power.

Cumulative market value increase of $15.8 billion, 30% by 2017.

In the long run, increase of $87.5 billion, 68% by 2024.

Developers Facebook Pricing

Page 15: Case Competition Entry (Facebook)

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Financial assumptions

Pricing

Growth in apps

Revenues & margins

Market values

Financial Model

Additional Financial Evidence

Appendix Appendix

1P/E multiple forecast

Developers’ revenue & willingness to pay

% Growth

Cash & profit margins

Multiples

2

3

4

5

Additional Evidence

Benefits

Facebook app data

Facebook user data

Additional case studies

Obsolescence

Page 16: Case Competition Entry (Facebook)

Overview of Financial Model1. Price = (LTV of a new user) x (% of users resulting from API) x (% cut for FB)

2. NPV increase= [price x (#apps > 1M users)] * (cash margin*profit margin)

3. Increase in Market Cap = New revenue x PE ratio

Input Assumptions:P/E ratio: 14 (normal)LTV of new customer: $5/year*% of new users resulting from API: 20%% cut for FB: 30%# apps > 1M & growth rate: 350 & 15% growth/yearCash Margin: 100%Profit Margin: 98%

*Based on similar companies user LTV

Appendix

Source: Team Analysis

Page 17: Case Competition Entry (Facebook)

NPV additional cash

flows

Multiplemarket

perception

Current Market

Cap

Revenues*(% profit)*(% cash)(1+cost of capital)^time*

Historical & ForecastedP/E multiple

*iterated for 5-10 years

Market value is calculated with three components.

Appendix

Source: Team Analysis

Page 18: Case Competition Entry (Facebook)

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Wdebt 0%Wequity 100%Cost of equity 0.36%

Rf 0.27%Beta 0.01RM 9.75%

WACC 0.36%

Weighted Average Cost of Capital = Wd * After Tax Cost of Debt + (1 – Wd) * Cost of EquityCost of Equity = Risk Free Rate (Rf) + Beta *(Return from Market (RM) – Rf )

Pricing methodology:

1. Necessity to increase by 20% (implicit, don't show) 2. Value to developers  3. Comparable pricing 4. Cost to fb-nuissance to users

MARKET VALUE (in $ present value)

23-Nov 51990000000Target in 2017 62388000000

Cumulative net gap 10398000000

1

2

3

Total Revenues ($)

cash margin 100%profit margin 98%

annual app growth rate 22%current # of apps 350

Financial assumptions include margin, # of apps, cost of capital, pricing, and current market value.

Appendix

Source: Team Analysis

Page 19: Case Competition Entry (Facebook)

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1

2

3

FB necessisity Annual price in $Total revenue needed $742,714,285.71 Total 5 year payments 3,235

Annual payment cannot go below: $229,618.23

Comparables pricingfb ads $1,800,000.00

google ads $1,600,000.00 Twitter ads $43,200,000.00

average $15,533,333.33 % value 5%

Value to developers$lifetime customer value $5

total customers 1000000yearly growth 15%

2013 generated revenue $5,769,473.12 % total preferred payment margin 6.0%

Cost of fb-nuissance to users 20%

Annual Payment $346,168.39 Annual cost/ revenue generating user $0.35

Monthly Payment $28,847.37 Daily payment $961.58

Service is priced according to value to developers, as proportion of their yearly revenue from FB APIs.

Appendix

Source: Team Analysis

Page 20: Case Competition Entry (Facebook)

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Name MAU Users Gain + Gain % Average yearly user % gain

1 TripAdvisor™ 49,200,000 1,500,000 3% 15% 2 CityVille 2 20,800,000 1,100,000 6% Average % growth of new app creation3 Birthdays 21,500,000 300,000 1% 29%

4 Candy Crush Saga 18,000,000 200,000 1% Average apps % gain/yr

5 Instagram 39,000,000 200,000 0.52% 22%

6 Dungeon Rampage 2,100,000 100,000 5%

7 Jetpack Joyride 2,100,000 100,000 5%

8 Subway Surfers 4,300,000 100,000 2%

9 Ruby Blast Adventures 18,800,000 100,000 0.53%

10 Keek 4,000,000 100,000 3%

11 Static Iframe Tab 18,200,000 100,000 0.55%

12

Static HTML Iframe Tab : Custom Icons 2,400,000 100,000 4%

13 Fruit Ninja Frenzy 3,900,000 100,000 3%

14 Static HTML... [Sixth Tab] 1,200,000 100,000 9%

15 Custom Tab 5,000,000 100,000 2%16 Diggle 1,700,000 100,000 6%

17 Static HTML... [Second Tab] 4,900,000 100,000 2%

18 Stick Run 5,100,000 100,000 2%19 21 questions 10,500,000 100,000 0.96%

20 Static IFRAME Tab : Note Icon 1,400,000 100,000 8%

Revenues Yr1 price $346,168.39

# Apps 402total revenues $139,086,202.26 Revenues Yr2

price $353,091.75 # Apps 491

total revenues $173,524,234.84 Revenues Yr3

price $358,388.13 # Apps 607

total revenues $217,713,844.09

Revenues Yr4price $363,047.18

# Apps 780total revenues $283,296,383.28 Revenues Yr5

price $366,677.65 # Apps 954

Yearly growth in APIs is 22%.

1

2

3

Appendix

Source: Team Analysis

Page 21: Case Competition Entry (Facebook)

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$ m

illio

ns

2013 2014 2015 2016 2017 $-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0

$450.0

normal casebest caseworst case

  Annual Revenues (present values) in $ mil    Years 2013 2014 2015 2016 2017normal case $139.1 $173.5 $217.7 $283.3 $349.6 best case $168.3 $210.0 $263.4 $342.8 $423.1 worst case $112.7 $140.6 $176.3 $229.5 $283.2

Revenues increase exponentially to $423 mil by 2017. 5-Yr. Revenues

Appendix

Source: Team Analysis

Page 22: Case Competition Entry (Facebook)

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Years 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Market value (worst case) $53.3 $55.0 $57.0 $59.7 $62.9 $66.08 $69.05 $72.02 $74.97 $77.75 $80.08 $81.28 Market value (normal case) $53.9 $56.3 $59.2 $63.0 $67.8 $71.14 $74.34 $77.54 $80.71 $83.70 $86.21 $87.51 Market value (best case) $54.6 $57.2 $60.3 $64.5 $69.6 $73.03 $76.32 $79.60 $82.86 $85.93 $88.51 $89.83 % increase (worst case) 3% 6% 10% 15% 21% 27% 33% 39% 44% 50% 54% 56%% increase (normal case) 4% 8% 14% 21% 30% 37% 43% 49% 55% 61% 66% 68%% increase (best case) 5% 10% 16% 24% 34% 40% 47% 53% 59% 65% 70% 73%

Market values expected to increase by $81.3-90.0 bil by 2014.

Appendix

Source: Team Analysis

Page 23: Case Competition Entry (Facebook)

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Normal Best WorstMultiples 14 16 12

Market value Yr 1.Revenue x margin $136,304,478 $164,928,419 $110,406,627

r rate 0.36% 0.36% 0.36%NPV increase $135,809,047 $164,328,947 $110,005,328

Market value increase $1,901,326,655 $2,629,263,146 $1,320,063,935

Market value Yr 2Revenue x margin $170,053,750 $205,765,038 $137,743,538

r rate 0.36% 0.36% 0.36%NPV increase $168,819,794 $204,271,951 $136,744,033

Market value increase $2,363,477,120 $3,268,351,217 $1,640,928,400

Market value Yr 3Revenue x margin $213,359,567 $258,165,076 $172,821,249

r rate 0.36% 0.36% 0.36%NPV increase $211,041,493 $255,360,207 $170,943,610

Market value increase $2,954,580,906 $4,085,763,310 $2,051,323,315

Market value Yr 4Revenue x margin $277,630,456 $335,932,851 $224,880,669

r rate 0.36% 0.36% 0.36%NPV increase $273,615,951 $331,075,301 $221,628,920

Market value increase $3,830,623,313 $5,297,204,810.37 $2,659,547,043.22

Market value Yr 5. Revenue x margin $342,642,287 $414,597,167 $277,540,252

r rate 0.36% 0.36% 0.36%NPV increase $336,460,311 $407,116,977 $272,532,852

Market value increase $4,710,444,359 $6,513,871,627.73 $3,270,394,226.32

GRAND TOTAL 15760452354 21794454112 10942256920% increase 30% 42% 21%

Market values are calculated in 3 steps.

1

2

3

Appendix

Source: Team Analysis

Page 24: Case Competition Entry (Facebook)

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The P/E multiple has fallen from 100x to expected of 15x by year end 2013.

Appendix

Source: Team Analysis

Page 25: Case Competition Entry (Facebook)

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The 2013 % change in P/E multiple is expected at - 40.2%.Date Open High Low Close Volume Adj Close* Closing % change

Average daily change: -0.21%Average yearly change: -40.38%

Appendix

Source: Team Analysis

Page 26: Case Competition Entry (Facebook)

Apple, Inc eBay Inc. Google Baidu, Inc. Good (2017)

Normal (2017)

Bad (2017)

0

5

10

15

20

25

Yahoo Finance P/E Ratios for other tech companies

After continued market volatility, Facebook’s multiple is projected to approach that of established technology companies.

Extremely High Current P/E

ratios for recent social media

IPOs

Facebook:

135.49

LinkedIn:

694.13

Due to a yearly decrease of *40%, Facebook multiple in 2017 will be 14

Source: Finance.yahoo.com, Team Analysis*

Appendix

* See previous slide

Page 27: Case Competition Entry (Facebook)

Life Time Value of consumer internet companies is often >$20

Instagram: $28.57 ($1B valuation, 25M users)

Facebook: ~$56 ($56B valuation, 1B users)

Spotify: $150 ($3B valuation, 20M users)

Sources: WSJ, Forbes

Appendix

Page 28: Case Competition Entry (Facebook)

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Source: Facebook

The creation of Facebook apps has seen remarkable growth in the past year.

2011 20120

100000020000003000000400000050000006000000700000080000009000000

10000000

Facebook App Growth

Year

Num

ber o

f app

s cre

ated The number of

Facebook apps have increased 28.5% in the past year alone.

Appendix

Page 29: Case Competition Entry (Facebook)

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Source: Facebook, BusinessInsider

Social Plugins Personalization

Analytics Co-Branding & Advertising

APIs can bring multi-dimensional benefits.Appendix

Page 30: Case Competition Entry (Facebook)

Most popular Facebook apps in October 2012, by monthly active users (in millions)

Scribd

Zynga Slingo

Microsoft Live

Bing

Spotify

Samsung Mobile

Yahoo! Social Bar

Diamond Dash

Pinterest

Birthdays

FarmVille

Static HTML: iframe tabs

Static Iframe Tab

0.00 5.00 10.00 15.00 20.00 25.00 30.00

25.90

23.80

23.40

23.00

22.90

21.40

21.10

20.10

20.00

19.70

18.60

18.60

17.90

As of November 26, 2012 there were 345 Apps with 1 Million MAUs or more

Source: Statista, Appdata.com

Average MAUs of sample=4,774,367

Appendix

Page 31: Case Competition Entry (Facebook)

Number of monthly active Facebook users from 2008 to 2012, worldwide (in millions)

Number of users in millions

197.00242.00

305.00360.00

431.00482.00

550.00608.00

680.00739.00

800.00845.00

901.00955.00

1,007.00

100.00

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

Aug'08 Mar'09 Jun'09 Sep'09 Dec'09 Mar'10 Jun'10 Sep'10 Dec'10 Mar'11 Jun'11 Sep'11 Dec'11 Mar'12 Jun'12 Oct'12

Source: Statista

Appendix

Page 32: Case Competition Entry (Facebook)

Number of mobile monthly active Facebook users March 2009 to October 2012, worldwide (in millions)

Number of users in millions

Mar2009 Jun2009 Sep2009 Dec2009 Mar2010 Jun2010 Sep2010 Dec2010 Mar2011 Jun2011 Sep2011 Dec2011 Mar2012 Jun2012 Oct2012

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

35.00 50.0075.00

101.00129.00

155.00

196.00

245.00

288.00325.00

376.00

432.00

488.00

543.00

604.00

Source: Statista

Appendix

Page 33: Case Competition Entry (Facebook)

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2009 2010 2011 2012

0.35

0.608

0.845

1.01Number of Facebook Users in Billions

Facebook has seen remarkable growth in users.Appendix

Source: Yahoo! Finance

Page 34: Case Competition Entry (Facebook)

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Facebook’s growth is expected over the next 10 years.

Appendix

Source: Wall Street Journal

Page 35: Case Competition Entry (Facebook)

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Source: IBIS World

Facebook is a market dominator, carrying 61% of market share.

See appendix for more developer success stories.

LinkedIn14%

Facebook61%

Twitter4%

Other22%

Market Share

Appendix

Page 36: Case Competition Entry (Facebook)

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Fab, an e-commerce website, has integrated with Facebook to increase their number of users.

Objective

• To integrate the Like and Share Links social plugins on their product to encourage people to discuss products with friends.

Implementation

• Fab.com launched their Open Graph implementation to make it easier for people to share their purchases and favorite products on their timelines.

Results

• referral traffic from Facebook has doubled and membership has grown from 1.8 million to more than 3.2 million users.

Source: Facebook

Appendix

Page 37: Case Competition Entry (Facebook)

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Pinterest, a virtual pinboard, has integrated with Facebook to increase their number of users.

Objective

• To attract new users and re-engage existing users through the Open Graph.

Implementation

• Pinterest built Open Graph stories to prompt people to add the app to their timelines.

Results

• Since launching their Open Graph integration, the number of Facebook users visiting Pinterest every day has increased by more than 60%.

Appendix

Source: Facebook

Page 38: Case Competition Entry (Facebook)

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Flipboard, a smartphone social magazine, integrated with Facebook to increase retention rates.

Objective

• Increase distribution by helping users discover the content their friends are sharing.

Implementation

• Flipboard integrated the News Feed, Walls, Pages, and Photo Albums as sections within Flipboard social magazine.

Results

• Retention was 50% higher for users who signed into Facebook compared to users who did not sign in through Facebook.

Appendix

Source: Facebook

Page 39: Case Competition Entry (Facebook)

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Myspace charges top developers on an unfair and unattractive developer platform.

Developers pay $50,000-$100,000 a week to be one of four “featured” apps. This revenue model disincentives small developers to use Myspace

Facebook’s Revenue Model Advantages

• Charges only established developers

• Weekly prices are 15 to 30% less (average of $14,924/week)

• MAU volume much greater

• First Mover advantage

Sources: Myspace.com, www.businessinsider.com/, socialtimes.com, Team Financials

Appendix

Page 40: Case Competition Entry (Facebook)

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Myspace, a direct competitor, takes advantage of Facebook’s free APIs.

Appendix

Source: MySpace.com

Page 41: Case Competition Entry (Facebook)

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Facebook should take risks and learn from the failures of their predecessors.

"Create a culture of risk taking," DeWolfe says. "People get so excited about seeing

their ideas coming to fruition.”

And that might be MySpace's ultimate lesson: sometimes the biggest risk is trying

not to take one at all.

-Chris Dewolfe, Myspace Co-founder

Forbes: Push For Ad Dollars Derailed MySpace, Co-Founder Chris DeWolfe Says

1. Get Curious About What’s not working-Don’t get defensive-Don’t defer blame

2. Listen to the Weirdos-They usually have the best ideas-Great ideas don’t always make sense at first

-Erica Andersen, Forbes Contributer

Forbes: 2 Ways Google, Facebook – And You – Can Keep From Becoming Obsolete

Sources: http://www.forbes.com/sites/erikaandersen/2012/07/16/2-ways-google-facebook-and-you-can-keep-from-becoming-obsolete/, Business Source Complete

Appendix

Source: MySpace.com

Page 42: Case Competition Entry (Facebook)

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Old technology loses little value during the introduction phase, but increases in obsolescence as new technology enters adoption phase.

Source: Technology Life-Cycles

Appendix