MT5007 Management of Technological

Innovation

LIM CHING WU LESLIE

g0603039@nus.edu.sg
HT0063039Y
Division of Engineering & Technology Management
MT5007 Management of Technological Innovation

Introduction
In 2004, college sophomore Mark Zuckerberg wanted to build an online version of student

directory with basic information, commonly known to schools as face book [1]. Harvard did

not offer such a directory and the administration insisted that they were unable to aggregate

the information required. Thus, one night, Zuckerberg hacked into Harvard’s student records

and created a basic site called Facemash, which randomly paired photos of undergraduates

and invited visitors to determine who was “hotter”. After four hours, 450 visitors, and 22,000

photo views, Harvard administration disconnected Zuckerberg’s internet connection and took

down the site. However, Zuckerberg continued with this new project as he believed that

information should be available to all students. He added applications and expanded the

networks to other schools, and to work networks such as employees from the Central

Intelligence Agency, McDonald’s, and the U.S. Marine Corps. Eventually in September 2006,

Zuckerberg’s social networking website, Facebook.com, was opened to the public.

Presently, the site has more than 68 million active users worldwide [2]. Exhibit 1 in Appendix

A shows the population of users worldwide. Based on report by Alexa [3], the site’s traffic

ranking rose from 60th in September 2006 to 6th in February 2008. Exhibit 2 in Appendix A,

from Wall Street Journal, depicts the monthly growth in number of active users from June

2004 to June 2007. In comparison with the rival social networking sites, as seen in Exhibit 3

of Appendix A, Facebook is ranked 2nd in the “Top 10 U.S. Social Networking Site for

November 2007” report released by Nielsen Online. In January 2008, Zuckerberg reported

Facebook’s revenue at US$150 million in 2007 and projected revenue at US$350 million for

2008 [4].

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This paper examines Facebook’s revenue model and investigates on the factors that led to the

current success of Facebook, to understand and illustrate the different technological

management concepts behind this success. While the emphasis in this case study is on the

lessons learnt for a successful innovation, it also briefly discusses the other issues Facebook

is currently facing and recommends some future strategies to maintain its competitive

advantages.

Revenue Model
There were several funding from venture capitalists since the launch of Facebook. Notably

US$500,000 from Peter Thiel (co-founder of PayPal) in 2004, US$13 million from Accel

Partners in 2005, and US$25 million from Greylock Partners, Accel Partners, Meritech

Capital Partners and Peter Thiel.

The revenue model of Facebook is based on the following:

• Display advertisements – Example of revenue from this is through outsourcing

advertising deal. Besides the common banner advertisements, Facebook allows users

to make their own advertisements known as Facebook Flyers at low prices based on

number of clicks. These advertisements are filtered according to targets’ gender, age,

education status, and regional networks. Direct advertisements accounts for majority

of Facebook’s revenue.

• Sponsorship – This is in the form of homepage sponsored stories and sponsored

groups. In the former sponsorships, advertisements are displayed in the News Feed

section of Facebook users’ pages which most users pay attention to. The click-through

rates of such advertisements are higher than normal banner advertisements by ten to

twenty times. Levels of filtering (such as by gender or location) for targeted users are

applied with a premium. Sponsored groups are groups in Facebook created for

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particular brand of goods. These groups (such as Apple Students, PINK Victoria

Secret, NBA Finals Trivia Challenge) are personal environments for users to gather

and interact, transforming the brand into a participant of Facebook. The cost of each

sponsored group is US$300,000 for three months. There were 186 sponsored groups

in September 2007.

• Gifts – Users can purchase limited edition virtual gifts for other Facebook users at

US$1 per item.

Path to Success
From an innovation based on the believe of a sophomore, to one with 66 million active users

and annual revenue of US$150 million, it is not difficult to see that Facebook has been a great

success. This is also evident from the significant investment made to the company since its

launch. In October 2007, Microsoft invested US$240 million for 1.6 percent stake in

Facebook [5]. This values the Facebook at US$15 billion. Following that in December 2007,

Hong Kong tycoon Li Ka-shing US$60 million for 0.4 percent stake in Facebook [6]. And in

January 2008, German internet entrepreneurs the Samwer brothers also invested a significant

amount in Facebook [7]. This section will examine the factors which contributed to this

success.

The Untapped Market

Unlike other social networking sites which had been targeting the older demographics or

teenagers (in the case of MySpace), Facebook was designed by college students for college

students. It targeted specifically the students within each university. Students needed such

directory services and Facebook provided a better site than that of schools. With endorsement

from university students from reputable schools such as Harvard, Stanford and Yale, students

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from universities in other countries were also keen to join after Facebook added their schools

in.

Design and Core Features

The design of Facebook is centralized around the profile of the users and other core features

of Facebook which can be added on (such as Photo-Sharing, which ranked number one on the

Web with more than 2.7 billion photos on site and more than 14 million uploaded daily,

Video and Event applications). These features appealed to students. They provided

interactivity of Web 2.0 which college students like. The design is simple. It uses common

graphical user interfaces, and text links for feature navigation. The site is largely unobtrusive

and easy for students to use. Organization by classes and groups allows students to

adequately represent and express themselves. As users invest great amount of effort in

building up their profiles, and use of the core features (such as uploading high volume of

photos) actively, it creates a high switching cost for the users to other social networking sites.

Thus, the success of these core features resulted in the lock-in of users to the Facebook

platform.

The Network Effect

Network effect is a characteristic that causes a good or service to have a value to a potential

customer which depends on the number of other customers who own the good or are users of

the service [8]. In other words, the number of prior adopters is a term in the value available to

the next adopter. For social networking sites, it is important to have a critical mass of users.

The value of such networking sites to the users is in the form of being connected to more

users. Hence the participation of large number of users will encourage more users to join the

site. Prior to the public launch of Facebook, it had already established a critical mass of users

in schools and organizations. Hence, by opening the social network to the greater online

community, Facebook continued to ride on the network effect to attract more users. The

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youthful demographic that Facebook attracts is highly prized amongst advertisers, the source

of revenue for Facebook.

Strategic Partnership
In August 2006, MySpace (top ranked social networking site) and Google signed a deal for

Google to provide search and contextual ads to MySpace, in return for giving US$900

million in guaranteed payments through 2010 [9]. On the other hand, after losing out to rival

Google on the deal, Microsoft signed a deal to be the exclusive seller and provider of banner

advertising and sponsored links for Facebook [10]. By working on the dynamic relationship

among competitors and complementary service providers, Facebook was able to benefit to

the strategic partnership. This will be further elaborated in later section on recommended

future strategies.

Modular and Open Architecture

Besides the thirteen basic Facebook applications, the site has over 15,000 third party

applications built on the Facebook Platform, and increasing at 140 new applications per day.

As these third party applications are hosted on their own servers, it means that there is a

continuously growing pool of applications available for Facebook users, and other than its

core services, the expansion and maintenance of Facebook applications is almost autonomous.

This presents advantages for the users as well as Facebook.

Technically, it is possible for third party developers to build new applications as Facebook is

based on a modular architecture design and operates on LAMP (Linux, Apache, MySQL,

PHP), a free and open source software stack. It defines its own interfacing language, the

Facebook Markup Language (FBML), and opened up the Facebook API to anyone interested

in developing Facebook applications, harnessing the efforts of the community. Furthermore,

these specifications are clearly documented. Exhibit 4 in Appendix A shows the class diagram

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that illustrates the basic Facebook modular design. The resultant third party applications

developed allow users to interact (adding and removing of modules) with them in very

similar manner. Facebook’s open architecture also allows existing Web businesses to plug

directly into their social infrastructure with their own Facebook applications.

Colleges such as Stanford University and National University of Singapore started to offer

modules on Facebook programming [11]. This highlighted the academics’ perspective on the

importance of the Facebook API for social networking platforms. As such, this will also

further popularize the development of third party Facebook applications among students.

Current Issues
Privacy is one of the current major issues for Facebook. The Facebook platform collects large

sets of personal information. Although Facebook provides one of the best privacy

management tools amongst social networking sites, new users may not understand how their

information is used and how to control their privacy settings. In November 2007, Facebook

launched an advertising system known as Facebook Beacon, to connect businesses with users

and targeting advertising to the audiences they want. It allowed users to share information

from other websites for distribution to their friends on Facebook. Beacon proved to be

controversial as security researcher from Computer Associates found out that it tracked users'

off-Facebook activities even if those users are logged off from the social-networking site [12].

The other issue is threat from Google’s ambition in the area of social networking. Google’s

social networking site, Orkut, is the most popular in Latin America, with 12.4 million unique

visitors in October 2007 [13]. It implements the OpenSocial API which is Google’s

equivalent of the Facebook API for third party developers to build applications. Google

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OpenSocial is a more open cross-platform alternative when compared with Facebook API as

it supports other social networking sites such as Bebo, Friendster, Hi5, mySpace, LinkedIn,

etc. OpenSocial is Google’s solution for open and modular architecture. It allows Google to

strategize for higher market share through Orkut or assist mySpace to compete more

competitively against Facebook.

Future Strategies
Although Facebook is enjoying tremendous growth in market share, there are threats from

Google and myriad of smaller social networking sites (such as Ning) which target at niche

markets. With innovative features and rapid changing market trend, these small social

networking sites have the potential of disrupting the market leaders. There is a need for

Facebook to reinvent itself, and rethink what is its main business. This paper recommends the

strategies which Facebook may adopt.

Expansion to Mobile Platforms

In 2007, Facebook tied up with T-Mobile to add its platform to Research in Motion (RIM)

BlackBerry devices [14]. Mobile platforms present opportunities for Facebook to meet users’

needs away from the desks. In a study released by Comscore in June 2007, in Japan, the

number of users using mobile phones to access the Internet (estimated 53.6 million) was

almost equal to the number users doing so using personal computers (estimated 53.7 million)

[15]. This illustrated the potential size of the market and suggested that regions which with

higher adopting rate of mobile Facebook, may be the areas with high personal computer

penetration.

Beyond the Facebook Platform

Web 2.0 has changed the average user’s web browsing experience tremendously. It has

enabled users with relatively average computer know-how to publish more content to the

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World Wide Web. Facebook is one of these many interactive applications (such as eBay,

Blogger, Wikipedia, etc.) using Web 2.0 technology. Facebook will become the de facto

service provided of users’ web content (such as photos, videos, profile, etc.), if it can expand

beyond its core website, and enable users to easily integrate the full array of Web 2.0

applications. The Facebook portal will serve as the main shop-front for users’ activities and

content authoring, which widgets integrated at other sites will serve out the content to more

people. This is another way of exploiting Network Effect as reaching out to more people will

attract them to join and improving on the content.

Corporation with More Brands

Brands can make use of Facebook as a tool to get closer to the consumers (offering latest

products and news) and gathering feedback (for improvement or observing trends) on their

products. By relating brand preference more prominently to the users’ profiles, it is likely that

users in the same community will try these brands as well. Through customizing and

marketing such opportunities to more brands, Facebook will be able to secure more

sponsorship and provide value-add to users at the same time.

Connecting to Trends
The Facebook users’ profiles are source of information on users’ preferences and background.

Facebook applications such as “Books iRead” capture the users’ interests. Besides pushing

the advertisements to users through contextual-aware advertising, Facebook can link these

entities of interest (such as book titles or movie titles) directly to the internet shopping web

sites (such as eBay or Amazon) of these items. Users browsing these profiles are more

motivated to click-through these links than those in advertisements. There is a trend of

increasing online sales. In a 2007 Forrester report, it predicted a rise of 18 percent of online

sales to US$259.1 billion [16]. Thus, by connecting to trends and integrating with services,

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Facebook can produce a business model that them to mutually benefit (such as sharing profit

of directed sales for internet shopping).

Looking Outside Social Networking

The modular architecture of Facebook can be applied to fields outside social networking. One

such example is using it as a teaching tool. As college students are very familiar with the

Facebook interface, schools can make use of the Facebook Platform to be interactive tools for

instructional purposes.

Facebook Brand Culture

As seen in many successful brands, developing a brand culture is the key to sustaining

success. With the success of one single product, users will be able to identify with products of

same family (such as in the case of Apple with the “i” products, eg. iPod, iPhone, etc.).

Similarly, Facebook can continue to target other markets by developing a brand culture and

products from its initial success. Through customization based on profiles of other targeted

market, Facebook can launch hybrid versions of its current social networking site and other

products using its brand culture (such as sites for the older demographic).

Creative Organizational Culture

Creativity and innovation are absolutely critical in today’s economy for firms to stay

competitive. Facebook will also need to constantly innovate in its infrastructure and

technology, to meet the users’ needs and improve in its performance. There different ways to

build innovation as part of their organizational culture. It is necessary for Facebook to

recognize the importance of innovation in the organizational culture, and adapt the success

formulas from innovative companies to suit individual firms [17].

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Conclusion
The key strength of Facebook is its modular and open architecture, which enabled it to

exploit the network effect. As a first mover in this aspect, it had rapidly gained market share

over incumbent such as mySpace and Friendster. Strategic partnership ensured long term

funding. However, the competitors, such as Google Orkut and mySpace, have also adopted

open architecture. Thus, first mover advantage will slowly be eroded. Therefore, it is

important for Facebook to look beyond its success factors and expand on them when

strategizing for the future. This paper also briefly highlighted the current issues and

recommended strategies to sustain the growth, such as connecting directly to trends and

moving beyond the Facebook platform. While these recommendations are merely possible

way forward, it is important to recognize that strategies should change according to the

dynamics of the competitors, complements, trends and technology.

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References

[1] E. McGirt, Hacker. Dropout. CEO, Fast Company, 19 Dec 2007.

http://www.fastcompany.com/magazine/115/open_features-hacker-dropout-ceo.html
Retrieved on 27 Feb 2008.

[2] Facebook Statistics, Facebook, 2008.

http://www.facebook.com/press/info.php?statistics
Retrieved on 27 Feb 2008.

[3] Facebook Traffic Details, Alexa, Feb 2008.

http://www.alexa.com/data/details/traffic_details/facebook.com?q=facebook
Retrieved on 27 Feb 2008.

[4] K. Swisher, Chatty Zuckerberg Tells All About Facebook Finances, All Things
Digital, 31 Jan 2008.
http://kara.allthingsd.com/20080131/chatty-zuckerberg-tells-all-about-facebook-finances/
Retrieved on 27 Feb 2008.

[5] B. Stone, Microsoft Buys Stake In Facebook, The New York Times, 25 Oct 2007.
http://www.nytimes.com/2007/10/25/technology/25facebook.html?_r=3&ref=media&oref=lo
gin&oref=slogin&oref=slogin
Retrieved on 28 Feb 2008.

[6] E. Auchard, Li Ka-Shing Foundation Buys Facebook Stake, Reuters, 3 Dec 2007.
http://www.reuters.com/article/technologyNews/idUSN0344520920071204
Retrieved on 28 Feb 2008.

[7] J. Bowker, Samwer Brothers Buy Stake In Facebook, Reuters, 15 Jan 2008.
http://www.reuters.com/article/rbssTechMediaTelecomNews/idUSL1562367720080115
Retrieved on 28 Feb 2008.

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[8] Network Effect, Wikipedia, 2008.

http://en.wikipedia.org/wiki/Network_effect
Retrieved on 1 Mar 2008.

[9] Google Signs $900m News Corp Deal, BBC News, 7 Aug 2006.

http://news.bbc.co.uk/2/hi/business/5254642.stm

Retrieved on 1 Mar 2008.

[10] K. Q. Seelye, Microsoft to Provide and Sell Ads on Facebook, the Web Site, The New

York Times, 26 Aug 2006.

http://www.nytimes.com/2006/08/23/technology/23soft.html?ex=1313985600&en=21cbf30b

709596b9&ei=5088&partner=rssnyt&emc=rss

Retrieved on 1 Mar 2008.

[11] S. P. Aune, Stanford University Offers Facebook Development Class, Mashable

Social Networking News, 10 Sep 2007.

http://mashable.com/2007/09/10/stanford-facebook/

Retrieved on 2 Mar 2008.

[12] J. C. Perez, Facebook Admits Ad Service Tracks Logged-Off Users, PC World, 3 Dec

2007.

http://www.pcworld.com/article/id,140225-c,webservices/article.html

Retrieved on 2 Mar 2008.

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[13] O. Kharif, Google’s Orkut: A World of Ambition, Business Week, 8 Oct 2007.

http://www.businessweek.com/technology/content/oct2007/tc2007107_530965.htm

Retrieved 3 Mar 2008.

[14] S. Lawson, Facebook, RIM Team to Bring Social Networking to BlackBerrys, CIO,

25 Oct 2007.

http://www.cio.com/article/148550/Facebook_RIM_Team_to_Bring_Social_Networking_to_

BlackBerrys

Retrieved on 5 Mar 2008.

[15] Mobile Phone Web Users Nearly Equal PC Based Internet Users In Japan, ComScore,

20 Sep 2007.

http://www.comscore.com/press/release.asp?press=1742

Retrieved on 5 Mar 2008.

[16] Online Sales To Soar Again This Year, Forrester.com, 2007.

http://www.forrester.com/ER/Press/Release/0,1769,1145,00.html

Retrieved on 10 Mar 2008.

[17] C. W. Lim, Building An Innovative Organizational Culture, National University of

Singapore, 2007.

Cover Picture taken from Google Scholar Blog, University of British Columbia.

http://weblogs.elearning.ubc.ca/googlescholar/archives/043221.html

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Appendix A: Tables and Charts

Exhibit 1: Population of Facebook Users.

Exhibit 2: Monthly Facebook Users Growth from June 2004 to June 2007.

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Exhibit 3: Nielsen Online Report October 2007.

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Exhibit 4: Facebook Platform Class Diagram.

A-3