Question

In May 2005, FACEBOOK was in use at over 800 colleges and universities and received $12.7 million in investment from venture capital firm Accel Partners. 4 High school and international school networks were added in the fall of 2005. By year’s end, Facebook had achieved $9 million in revenue and accumulated six million monthly active users (MAUs). 5 The following year was another strong one for the company. In addition to launching Facebook Mobile, it hit 12 million MAUs and earned $48 million in revenue. In April of 2006, Greylock Partners, Meritech Capital Partners, and PayPal co-founder Peter Thiel invested $27.5 million in Facebook. By September, anyone with a verifiable e-mail address could sign up, which paved the way for exponential user growth. More features were added over the next several years to further enhance the site’s user functionality, including a developer platform, chat capabilities, the Like button, and an e-commerce payment feature, among other things. The global footprint Facebook had achieved by 2012 was astronomical. Facebook tracks the number of monthly active users (MAUs) and daily active users (DAUs) as a means to assess users’ engagement. Users who have logged into Facebook within a 30-day period are counted as monthly active users. In the same way, daily active users measure the number of users who have logged in within a 24-hour period. In addition to 1.06 billion monthly active users (MAUs), Facebook had 618 million daily active users (DAUs), a 30 percent increase over December 2011. Exhibit 1 shows the MAUs, DAUs, and mobile MAUs from 2009 to 2012. Approximately 80 percent of the site’s users live outside the U.S. and Canada, and the website is available in more than 70 languages. 6 Globally, there were, on average, 2.7 billion likes and comments per day and over 100 billion friend connections by the end of 2011. In 2012, Facebook brought in $5.09 billion in sales, a 37 percent increase over 2011 ( Exhibit 3 ). The company generated 84 percent of its revenue through advertising services and collected the rest through social gaming fees charged to platform developers. Facebook’s ad revenues are predicted to rise to $7.64 billion in 2014 (see Exhibit 4 ), but there is still plenty of room for Facebook to grow. 9 Google and Yahoo make nearly $88 per user of their search engines, whereas Facebook makes only $15 per user account. Mark Zuckerberg’s Graph Search announcement on January 15, 2013, launched the third pillar of Facebook’s social ecosystem. The three pillars consist of News Feed, Timeline, and Graph Search.  NEWS FEED Released in September 2006, News Feed quickly became a core feature of Facebook. It is at the heart of a user’s homepage and provides regular updates of friends’ posts, photos, events, group memberships, and so on. TIMELINE An updated version of the profile page, called Timeline, was launched in September 2011. It allows each user to paint a complete life story on his or her profile. Users can select what information to share and with whom to share it.  GRAPH SEARCH Zuckerberg calls the network of connections between people the social graph. Facebook, as a product, is an attempt to map the global social graph in the form of a massive database. Graph Search is a search bar that hovers at the top of every Facebook page.

CREATING VALUE FOR DEVELOPERS Approximately 15 percent of Facebook’s revenue is generated through its developer platform, which was first launched in May 2007 with 85 developers and 65 apps. 49 The platform is a set of development tools and application programming interfaces (APIs) that enables software and web developers to create innovative experiences for the Facebook community. Facebook’s f8 conferences, held near-annually, bring together developers, entrepreneurs, and innovators to collaborate on new websites, apps, and devices that take advantage of the Facebook platform. 50 Zynga, creator of the game FarmVille and many other wildly popular games, is currently the largest developer; the fees collected from Zynga accounted for 12 percent of Facebook’s revenue in 2011, but declined in 2012 51 as the popularity of Zynga’s games declined. 52 Other examples of developer integration using the platform include the ability for users to listen to music on Spotify, read news and sports Through products such as Open Graph, Social Plugins, and Payments, Facebook offers significant value to developers.

Facebook’s Initial Public Offering (IPO) Facebook’s IPO on May 18, 2012, was one of the largest in U.S. history, dwarfing even that of Google in 2004. 85 With an IPO price set at $38 per share, Facebook was valued at $104 billion and planned to raise approximately $18.4 billion through its IPO. 86 Facebook valuations historically have been optimistic. Before its IPO, Facebook was valued by several companies—Yahoo offered $1 billion for the company, Microsoft invested in October 2005 at a valuation of $15 billion, Accel Partners sold its stake at a $35 billion valuation in November 2010, and Goldman Sachs led funding at a $50 billion valuation in January 2011. These valuations and the hype around Facebook’s IPO made it one of the most anticipated public offerings to date (see Exhibit 13 ). In 2011, Facebook had earned $3.71 billion in revenue and $1 billion in net income. These recent earnings, combined with Facebook’s lofty valuation, equated to a high P/E of 104 for Facebook. In comparison, other large-cap NASDAQbased companies have much lower P/Es: Apple has a ratio of 18.2, Google sits at 21.33, and Microsoft is at 11.33. To match these expectations, Facebook knew it would have to grow its earnings quickly in 2013 and beyond.

UNDER SCRUTINY Discussions over the declining stock prices put Morgan Stanley, the NASDAQ exchange, and Facebook executives under great public scrutiny. Morgan Stanley and Facebook’s CFO have been criticized for making changes to the price and number of shares just before the offering. These shares and prices were set at the far upper end of the limit for the company. 93 As a result, the NASDAQ faces a review of its systems and procedures by the SEC. 94 Perhaps the sharpest criticism may have been offered against Mark Zuckerberg, whom many have perceived as an untested CEO.

DEFENSIVE MEASURES After a disappointing start, concerns about Facebook’s stock price deepened in the fall of 2012, as investors prepared for the release of a large portion of public shares scheduled to hit the market in late November (see Exhibit 15 ). Zuckerberg and other company executives had indicated on September 5, 2012, that they would not sell more shares than were necessary to cover their tax liabilities. This measure was taken as a statement of faith in the company’s future. Facebook also sought to protect its stock prices by buying back 101 million shares before the lockup periods expired and more shares become available for sale.

A New Business Model? Facebook’s IPO has put tremendous pressure on Sandberg and the Facebook team to come up with a strategy to justify Facebook’s $100 billion valuation in the stock market. Sandberg needs to come up with a business model that will generate sufficient income to justify this valuation. She sees competitors like LinkedIn using a combination of freemium and subscription business models. Google’s revenue stream, in contrast, relies on advertising more than anything else; it generates $88 in advertising revenue per user. 102 For Facebook to follow such a path, it would need to increase its advertising revenue per user, which currently sits at $15, substantially. Facebook is also pushing to expand to other countries. These markets have vast numbers of potential users, but revenues per user are lower than in the U.S. Can the market size make up for the lower per-user revenues? What effect might local competitors have in foreign markets? And what about Instagram? Is there a way to monetize that acquisition to a larger degree? Are there other acquisitions that Facebook should make? Sandberg remembers how quickly MySpace lost its first-mover advantage after focusing too much on monetization. She wants to ensure that Facebook does not encounter a similar fate. The clock is ticking. What business model and monetization strategy should she propose?

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What is the case about?

What are the important events that occurred in the case?

What can we learn from reading the case?

What advice do you have for the leaders in the case and/or company in the case?

Answer 1

A) The case is about Facebook's great growth journey from May 2005 and the need to reshape their business model in the future to cope with the very high investor expectations given their unprecented valuation.

B) 1) Facebook had 9 million dollar in revenue at end of May 2005

2) In 2006 , Facebook launched Facebook mobile and the revenue zoomed to 48 million dollars

3) By 2012 facebook had an astronomical growth with 5.09 billion dollars in revenue with 84 percent of the revenue coming from advertising and others as social gaming fees.

4) Facebook planned to raise 18.4 billion dollars through its IPO on May 2012

5) Facebook was valued at $104 billion with a P/E ratio of 104 which is very high when compared with tech peers like Google , Apple etc ..

6) In Sept 2012 , FB has decided to buyback 101 million shares in order to protect the falling share price of facebook.

7) FB has to reelook at their business model to justify its 100 billion dollar valuation by sustaining growth and increasing revenue and profits.

C) Valuation of a company is very critical especially when the company goes for an IPO . Monetization may be a temporary solution to add value to shareholders but it might not be a long term solution.

D) 1) The company should definitely try to increase its market share in countries other than US despite having a low revenue per user.

2) The company can raise money through other sources to fund their inorganic growth strategy. Acquiring a competitor like Instagram will significantly increase their market share.

3) To combat local competition , Facebook can try considering raising money from local markets and get listed on their stock exchanges . This can fund their inorganic growth strategy.