Table of Content
Making Facebook a business
The social media market environment
Bargaining Power of Customers
Competitors of Facebook
Threat of New Entrants
Threat of Substitute Products
Competitive Rivalry within the Industry
“The biggest risk is not taking any risk... In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”
Mark Zuckerberg, founder and CEO of Facebook
In April 2012, Facebook, the social network giant was about to merge with the photo-sharing platform Instagram, a company that only employed 13 people and so far did not generate any revenue. However, Mark Zuckerberg, the founder and CEO of Facebook believed that the company he was about to acquire was of great value to his own firm. In previous negotiations, the sum of $ 1 billion was mentioned as a price for Instagram. The 28-year-old Zuckerberg had to act quickly. He wanted to finish the merger before the Initial Public Offering of Facebook scheduled for May 2012. Zuckerberg knew that other services like Google and Twitter were also interested in Instagram.
Facebook is a social networking platform. It allows its users to create a personal profile, add other users as friends and communicate with them by messaging, uploading photos and sharing personal statuses.
The first version of Facebook, then known by the name “thefacebook”, was programmed and launched by Mark Zuckerberg in 2004, a then 19 years old Harvard student (Phillips, 2007). He was supported by Eduardo Saverin, Dustin Moskovitz and Chris Hughes who helped him with programming, designing and financing (Mahtani, 2012). Zuckerberg initially created it exclusively for Harvard students to enable them to connect more easily, to exchange information on student events and to get information on each other's personal lives. After only one month, more than half of all undergraduate Harvard students were registered as Facebook members (Phillips, 2007). Zuckerberg gradually expanded the network by allowing students from other universities to become members of Facebook. Seven months after launching the page, one million users were registered on Facebook (Facebook, 2013). The vastly growing number of members quickly attracted investors like Microsoft which paid $ 240 million dollars for a 1.6% share of Facebook (Stone, 2007). In 2006, Facebook was opened up for everyone above 13 years of age. In December 2007, Facebook reached 360 million users (Facebook, 2013).
To remain attractive to customers, Facebook launched new features frequently. In April 2006, Facebook was first made available for mobile phones. In April 2008 Facebook launched its chat function and in February 2009 the famous “like-button” was introduced (Facebook, 2013). Throughout the early 2010s membership numbers kept rising impressively. Prior to its for May 2012 announced Initial Public offering, Facebook was the second most visited website in the world after google.com, had around 3200 employees and close to 900 million users in 2012 (Facebook, 2013; Alexa, 2013; The Economist, 2012).
Making Facebook a business
Mark Zuckerberg believed that membership fees would scare away most of potential new users of the Facebook website. Therefore, since the launch of Facebook, users are able to access Facebook without paying for its services (Golijan, 2012). Thus, no revenue is generated directly from users paying for visiting the website. Facebook had to rely largely on venture capitalists for their early operations (The Age, 2008). However, the members of Facebook are valuable customers for other companies. After recognizing the large potential Facebook had in advertising, it introduced an advertising platform called Beacon in 2007 where users could post stories about purchases recently made (Wassermann, 2011). Since then, the advertising strategy was continuously refined. Through personalized advertisement it was possible for companies to directly target their core customers. Based on contents members liked or shared in Facebook, advertisement was personalized for them. Also, Facebook continuously improved the possibility for companies to create profiles in the website to interact with customers better (Wassermann, 2011).
The advertisement strategy paid off. In 2009, Facebook was able to announce a positive cash flow for the first time in the company’s history (CBC News, 2009). From the founding of Facebook in 2004, revenues have risen continuously to $ 3.7 billion of revenue in 2011 (Lunn, 2012). From these $ 3.7 billion in revenues, $ 3.1 billion were generated by advertisements. Another large part of revenues for Facebook comes from games offered on the site, e.g. FarmVille by Zynga where gamers grow crops and trees on a virtual farm. Here, gamers pay with virtual coins they are given when starting the game. When continuing the game, users are often willing to buy extra coins with real money. 30% of the revenues generated by these games are given to Facebook. In 2011, the revenues generated by these games accounted for 12% of total Facebook revenues (Lunn, 2012).
Instagram is a photo-sharing platform that enables its users to take pictures, add filters to them and share them online. Instagram stems from the platform Burbn that was founded by Kevin Systrom, a former Google employee and Stanford graduate. The purpose of Burbn was to share locations with other users and recommend them by sharing pictures. Systrom received $ 500,000 of venture capital from Baseline Ventures and Andreessen Horowitz for developing. The platform had only a few hundred users but among them was Michel “Mike” Krieger who joined Systrom in March 2010 and they kept on developing Burbn (Sengupta, Perlroth, & Wortham, 2012).
Systrom could use experiences he got when developing the program Photobox during his college years. It was an online platform that enabled its users to send photos to other users via the Internet. Already during this time, Mark Zuckerberg offered him a job after spotting the Photobox homepage. However, Systrom did not accept the offer, as he wanted to finish graduate school first. He used this experience to continuously refine the functions of Burbn. It had many features like recommendations but the possibility of sharing pictures turned out to be the most frequently used one. For the further development the two founders started cutting out functions that were less used and focused on the frequently used ones. Recognizing that a pure photo-sharing platform would attract many users, they decided to develop a mobile photo-sharing platform and called it Instagram. It was released in the Apple App store on October 6th 2010 and on April 3rd 2012 on the Google Play Store as well. After the initial launch Krieger and Systrom received $ 7 million from Venture Capital firms like Benchmark Capital but also from Twitter founder Jack Dorsey. Just a few days after the app was released for Android they received additional $ 50 million from venture capitalists and the company was valued at $ 500 million (Primack, 2012). The idea behind Instagram was quite simple: It should provide an easy and quick way for its users to add filters to their photos and share the photos on an online platform. The developers focused on a simple to use design that allowed making uploads quickly for a better user experience. In December 2010, not even three months after the launch of the app it had 1 million users, in June 2011 5 million and in April 2012 already 30 million. While the community of users was growing they also extended their team. The first additional employee was Josh Riedel who joined the company as a Community Manager in October 2010 but only in part-time. In November 2010 Shayne Sweeney joined as an engineer and Jessica Zollman got hired as a Community Evangelist in August 2011. (Shontell, 2012) The difference between Instagram and other apps like Hipstamatic that are using filters as well, is that the application allows its users to comment the pictures of other users, follow them as friends and that it was for free. In January 2011 Instagram added the function to find other photographers and photos via the hashtag function that turned it more into a social networking platform. While using the hashtag function users can add the “#” in front of keywords in the description of the picture that it can be found by people who are searching for this tag (Instagram, 2011).