Question

How has Facebook sustained success? Why the acquisitions? Why the slow integration of big acquisitions? Why the advertising model?

Answer 1

Facebook has been able to sustain its success due to several factors. The company has been able to create a network effect and this is a competitive advantage for the company. The deed pockets of Facebook have enabled it to sustain its competitive advantage. Network effect of Facebook helps it with multiplier effect in terms of user addition and in terms of advertisement revenue. Facebook has been able to sustain its success due to ‘economic moats’. Economic moats are nothing but sustainable competitive advantage. Thus the economic moat for Facebook is the network effect. Besides its large base of users the company also owns applications like WhatsApp and Instagram. This has helped the company to leverage the advantaged of network effect to full extent.

Prominent acquisitions by Facebook include WhatsApp, Oculus VR, Instagram, Atlas Solutions etc. There are three main reasons for acquisitions by Facebook. Firstly it helps the firm to add to its user base (through acquisitions like WhatssApp). Secondly it helps the company to have control over the relevant technologies (through acquisitions like Oculus VR). Thirdly Facebook uses acquisitions to acquire talent. Many technology companies have pool of experts and talented manpower. Having these people on their payroll allows Facebook to be relevant in the constantly changing and evolving industry that they are a part of.

Slow integration of big acquisitions can be attributed to various HR issues, cultural integration, and to technology transfer. Talent challenges that slow down the integration process are challenges pertaining to leadership assessment, retention of employees etc. Technology transfer has been perhaps the biggest reason for slow integration of big acquisitions by Facebook.

Advertising model of Facebook is based on user-targeted advertisements. The company uses this model as it has a unique capability to generate revenue by providing targeted advertisements. The company leverages its user database that it has. The company is able to extensively use its user database, their likes and dislikes, and their preferences to target relevant advertisements for the users. The company also, in a restricted way, sells its data to generate revenues. The company relies on this model as it allows the company to charge a premium from advertisers due to higher relevance of their advertisements, compared to other online and digital platforms.