the Perfect Startup

Five keys to their unprecedented success

LOGO
.

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faberNovel 2012 1

A quick word from Stphane Distinguin ( CEO faberNovel )

....

We all know Facebook.

We all know Mark Zuckerberg.
These are the names.
We all know the figures,
they are mind-blowing: more than
900 million members for a current
valuation of over 100 billion dollars.
At first sight, we all knew Facebook
would be the biggest start up "after
Google", Mark Zuckerberg, the Social
Network hero, a juvenile CEO signing
autographs and striking the pose like
one of the biggest rock stars of his
generation.

It is not about the IPO the entire world is

commenting on: an IPO is certainly not an
end, but a point on a startup trajectory.
Its all about perfection. Up to now, Facebook has
been the perfect startup, not because it has
succeeded in everything, but because its has built
itself step by step, in a very pragmatic way. There is
no miracle here: it is just a startup that has had an
almost perfect stance towards every challenge it has
faced to date, and has built the most fascinating
innovation platform.
Perfection is rarely encountered and even harder to
analyze At faberNovel, as we do every year, and
after Google, Apple and Amazon, we wanted to
highlight what could be the formula behind Facebook's
roaring success. Is there a formula for perfection? We
would like to share our discoveries, our dissection of
this marvel just to make it more useful for all of you. I
am not sure perfection will be achievable for all of us,
but it certainly is our best source of inspiration.

...
...
faberNovel 2012 2

This work was made for you to share, reuse, remix, rework
....

It is licensed under the Creative Commons BY-NC-SA license to allow for further
contributions by experts and users in the coming months.

You are free to share and remix/adapt the work.

You must cite this document:
faberNovel, Facebook: The Perfect Startup, May 2012.
You may not use this work for commercial purposes. You may distribute a modified
work under the same or similar license.

Why do we release this kind of work for free?

Our job is to help big organizations think and act like startups. And we
believe that this cannot be achieved without causing people to want to
innovate and explore new business models. Our ambition is to inspire you
by giving you the keys to understand new markets like Russia or successful
companies like Apple, Amazon or Facebook.

...
...
faberNovel 2012 3

Facebook is quite a big 8 year old

....

billion
Likes & Comments
per day

million
Photos uploaded
per day

million user accounts

12.8% global market share!

Average
Time spent
by users in a month

Source: Facebook S-1, May 2012

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faberNovel 2012 4

with many characteristics of a giant .

....

Instagram

Snaptu

Friendfeed

$1 billion
(2012)

$65 million
(2011)

$47.5million
(2009)

The largest tech IPO in history

$16 billion
raised on the day of the IPO

Which ranks its CEO among the TOP10 Worlds Billionaires

Source: Based on information disclosed by Facebook, May 2012; Facebooks IPO commented by Bloomberg
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faberNovel 2012 5

Altough still a small company, relative to other tech giants

....

Facebooks Page Views = 10x Youtubes

but

Facebooks Revenues = 10% Googles

$37b

1 trillion

$3.7b

100 billion

26 years ld
average Facebook employee age

Source: Facebook, Google, Adplanner June 2011

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faberNovel 2012 6

Its meteoric growth results in a remarkably high valuation per employee

....

3500 employees

$30 million valuation per employee

Obviously, they must be doing something right

Estimates: Fabernovel, based on a $100b valuation; Number of employees: Facebook, May 2012
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faberNovel 2012 7

We believe that

Facebooks
amazing performance
was driven by excellency
in business management.

Facebook is remarkable not so much in its

product or usage, but in the way they

built themselves as a company,

from inception to maturity.

Whats Facebook story?

...
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faberNovel 2012 8

Facebook isnt the first social network in history

....

Created as an embryonic
social community.
Bought by Yahoo in 1999
for $3.57 billion.
Yahoo turned the service
into free web hosting in
attempts to monetize it.
Having lost the social
element, the service
closed in 2009.

Probably the first genuine

social network
Faced technical difficulties
from 2004 to 2006
Lacked activity & content
for the users
Chose a restrictive policy
(e.g. no pseudonym)
Refused a $30 million
buyout offer from Google
Acquired in 2009 for $26
million after its reboot

A reaction to Friendster
Chose an absolute freedom
policy
Huge success among artists
and celebrities
Too much freedom
deteriorated the quality of
the website
Lacked activity for the users
Acquired by News Corp. for
$580 million in 2005
Sold for $35 million in 2011
to Specific Media

These three social networks were short-lived leaders.

Why would Facebook be different?

...
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faberNovel 2012 9

Facebook managed to survive 3 classical challenges

....

Focus

Technology

Facebook always kept the

social feature at the center of
the user-experience:
Facebooks mission is to
make the world more open
and connected.

Facebook only experienced 3

severe outages:
The most severe outage
Facebook faced was in 2010
for 2.5 hours
They experienced a few
difficulties later in 2010,
unveiling new pages
In early 2012, some
Facebooks European users
could not connect to the
platform for a few hours

Facebook stayed focused on

the big idea.

Policy
Facebook has learned from the
mistakes of its predecessors,
keeping a balance between
freedom and control:
Allowing users to modify the
content
Preventing users from
modifying the interface
Allowing brands and artists
to create special pages

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faberNovel 2012 10

It has done so with a perfect scaling strategy

....

Test

Growth

Consolidation

College Networks

Gradual opening to the world

Self-sustaining community

Low-scale
High-density
High need to connect

Build the platform

2004-2006

Word-of-mouth extension (through

invitations)
New features that drive engagement

Scale the platform

2007-2010

Improvement of existing features

New features to maintain engagement

Maintain the platform

Nowadays

Source: Quora, What are some decisions taken by the Growth team at Facebook []?, answered by Andy Johns
...
...
faberNovel 2012 11

2006 breakthrough: The News Feed Your friends ticker tape

....

With the News Feed launched in 2006, Facebook managed to automate relevant content
creation from friends activity.

The News Feed aggregates the users friends activity:

status updates, photos uploads, comments The more
friends, the more content to explore.

As every webmarketer knows: fresh content is key to

generate stickiness.
Facebooks News Feed concept goes even further:
providing user-centric content from his network, hence
tastes and interests.
News Feed gave a considerable competitive advantage
to Facebook in its battle against MySpace, because it
provides permanent user-centric content renewal.

...
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faberNovel 2012 12

Facebook motto : Product First, but with business sense

....

Mark Zuckerberg

"Facebook was not originally created to be a company. It

was built to accomplish a social mission - to make the
world more open and connected"

But Zuckerberg quickly understood that business perspective

benefits the overall management:
Straightforward and quantifiable objectives
Money can assemble the best team of developers

In order to enforce these objectives, he hired Sheryl

Sandberg as COO in 2008.
Zuckerberg met Sandberg in 2007, at a Christmas party, while
she was still Vice President of Online Sales and Operations
at Google.

...
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faberNovel 2012 13

With 56.6% of voting rights, M. Zuckerberg can keep the shareholders at bay
....

Heres an enlightening extract from Facebook S-1:

Our CEO has control over key decision making as a result of his control of a majority of our voting
stock. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares,[], in
his own interests, which may not always be in the interests of our stockholders generally.

Source: Facebook S-1

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faberNovel 2012 14

Zuckerberg even refused several opportunities to sell out

....

I admire Mark Zuckerberg for not selling out, for wanting to

make a company. I admire that a lot.
Steve Jobs (1955-2011)
Revenue
$3.7 billion

$10 million
acquisition offer
by Friendster

$15 billion
acquisition offer
by Microsoft
$1.6 billion
acquisition offer
by Yahoo

Revenue
$382,000

$300 million
invested
by DST Global
to postpone IPO

Revenue
$777 million

Source: Steve Jobs quoted in Walter Isaacson biography; acquisitions offers reported by TechCrunch
...
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faberNovel 2012 15

To sum up, Facebook managed to tackle one of the most common tensions in
any startup: Product vs. Business
....

Product

Business
vs.

Many startups struggle or fail when they find themselves

prioritizing one over the second. Facebook seems to have
passed this test quite brilliantly.

What is fascinating with Facebook ?

The way it deals with most startups challenges.

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faberNovel 2012 16

Facebooks excellency lies in managing classical startup challenges

....

Technology &
User Experience

Business model exploration

Disruption

Business & Ecosystem

Long term vision

...
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faberNovel 2012 17

1. Technology & User Experience

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faberNovel 2012 18

Facebooks platform is both a best practice in user-centric design

....

Customizable appearance thanks to

new Cover Picture

Timeline featuring the users story, with

milestones and events.

Engaging content thanks to smart

display

Facebook New Timeline, released in 2011,

replaced The Wall

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faberNovel 2012 19

and technical wizardry

....

Visual aggregation of numerous

sources of content

Third-party apps integration

Action links to out-of-platform apps

and software

...
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faberNovel 2012 20

The result let people and brands tell their story in a way that is engaging and new
....

...
...
faberNovel 2012 21

Facebook accomplishes all of this at a breakneck, startup pace

....

A new version of Facebook

is released every Tuesday

to

million
users!

= 12,000 modifications per month

More than 1,000 developers deliver code to be released each week, most of the
time small iterations sometimes completely new features.
Facebook manages to do this with a few simple rules:

#1

#2

#3

Move Fast and

Break Things

Developers are
individually responsible
for the code they write.

Mark is always right

Source: Arstechnica.com, A behind-the-scenes look at Facebook release engineering, April 2012; Facebook Developer Garage, Paris, April 2012
...
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faberNovel 2012 22

The key to Facebooks agility: its testing process

....

Facebook teams tools prove theres no need to be sophisticated to be efficient. They

work with hacker tools, such as: IRC chat (a geek instant messaging system) and P2P filesharing technology (basically content piracy tools) to release Facebook each week!

Source: Arstechnica.com, A behind-the-scenes look at Facebook release engineering, April 2012; Facebook Developer Garage, Paris, April 2012
...
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faberNovel 2012 23

Acting like a startup is not just a question of process : its a question of culture
....

Two atypical leaders.

Mark Zuckerberg, CEO
The Genius who hacked into
Harvards security network to
create the first version of
Facebook at only 20.

Sheryl Sandberg, COO

Named in the top 100 most
influential people in the world,
and still leaving work at 5:30
everyday to pick-up her children
at school.

managing an army of highly-talented youngsters

Avada Kedavra, Expecto
Patronum, Alohomora
Names of Facebook HQ meeting
rooms, inspired by Harry Potter magic
spells

Facebook average
employee is 26 years-old
By comparison, IBMs average
employee is 44 year old

Source: Mashable
...
...
faberNovel 2012 24

When it comes to new features, Facebook takes a pragmatic approach

....

Customer feedback

New News Feed

In 2011, Facebook introduced a new
News Feed which presented Top
Stories first. Despite the business
opportunity offered by this new
feature, Zuckerberg decided to
remove it and set up the latest
updates first as demanded by the
vast majority of users.

Fail fast, fail often

Deals
With Facebook Deals, the engineering
team faced a lack of traction: the
product wasnt used enough to justify it
to continue. They simply shut the
service down.

Constant improvement

Groups
Through analytics, Facebook
discovered that Groups were
cannibalizing a large portion of
their new Pages.
They decided to improve their Groups
to meet the genuine objective of the
feature, differentiating it from User
Pages.

At Facebook, modifications or removals are not seen as failures: everything is constantly tested and
modified. It is a never ending beta, with high-quality user-experience.

Source: Facebook Blog

...
...
faberNovel 2012 25

Facebooks main asset is the map generated by users data : the Social Graph
....

Women
Men

The Social Graph is in fact the digital map of real-life connections and interactions between users.
Facebook stores more than 100 Petabytes of user data. Thats 2x the size of the entire written works of
mankind (from the beginning of recorded history, in all languages).
In order to enrich this database, Facebook opened its Social Graph to third-party developers and app
editors.

Source: Facebook S-1

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faberNovel 2012 26

Facebook opened its data to third-party developers with an API: Open Graph
....

Open Graph
Open Graph is an API provided by Facebook. With users authorization, third-party
developers can access users data or publish new data on user profiles.
Whats an API? It is an Application Programming Interface, basically it is an interface through which software
components communicate with each other.

Access

Publish & Access

Access users data

with Facebook Connect

Publish rich actions and objects

in users timelines with Open
Graph 2.0
Now, users can like but also:
listen, watch, read, cook

Publish

Publish

Include links into

status updates

Publish likes in users timelines

with Open Graph 1.0

2008

2010

2012

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faberNovel 2012 27

Analyzing this graph with algorithms creates the Edge Rank

....

The Edge Rank is a score given to a piece of content for every user, depending on its interests.
Whether a particular content will be displayed or not in the News Feed of a user will depend on its Edge Rank.

Friend 1
doesnt like

User A
posts
something
about
on his Timeline

Friend 2
likes

The Edge
Rank of the
post is low
for Friend 1

The Edge
Rank of the
post is high
for Friend 2

It doesnt
appear on
his News
Feed

It appears
on his
News Feed

It is an major improvement of the News Feed, increasing content relevancy for each user.

...
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faberNovel 2012 28

Before going further, lets review some key Facebook concepts

....

News Feed

Timeline

Social Graph

Its the users Facebook

home page which
displays the user s
network activity: status
updates, photos
uploaded, links shared

Its the profile page of every

user. It displays a timeline
o n w h i c h a r e
chronologically placed the
main events of his social
life.

I t s t h e u s e r s d a t a
accumulated by
Facebook on its
platform. It can be
visualized as a social
map if each element is
put into its context.

Open Graph

Edge Rank

Its Facebooks API that

enables any third-party
developer to connect to
Facebooks database and
access the Social Graph
(with Authorization) to read
it and/or write new data.

Its the relevancy coefficient

calculated on content shared
on Facebooks platform. This
relevancy is calculated for
each piece of content
relatively to every user.

...
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faberNovel 2012 29

2. Business Model exploration

...
...
faberNovel 2012 30

Facebooks key figures

....

million users

million
Pages

users connecting every day

million
apps

in revenues in 2011
[Over $4 per user per year]
In 2009, Facebook was profitable for the first time.
In 2011 it generated $1b profit !

[$1 per user per year]

Source: Facebook S-1, May 2012

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faberNovel 2012 31

Facebooks actual business model is mainly advertising

....

In 2011 it generated

billion

in revenue,
for $1b

profit!

billion
Advertising
+17% of average
growth per quarter.

million Sale
of Facebook
Credits
+89% of average
growth per quarter.

Source: Facebook S-1, May 2012

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faberNovel 2012 32

An advertising-based business model inspired by Googles

....

Google implements CPC

Google revenues
increase x7 from
2002 to 2004

CPM advertising era

Inherited from Print, TV & Radio advertising

Performance based advertising business

models are born
2008

2002
Performance based advertising market
gets larger than CPM advertising

CPM: Cost-per-Mille

CPC: Cost-per-Click

The Advertiser buys space to the Media Sales

Agency for a thousand prints of the ad.

The Advertiser negotiates the price of one clickthrough on its ad with the Media Sales service of
the platform.

This is usually display advertising.

This is performance advertising.

Source: Google
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faberNovel 2012 33

How Facebook tried to replicate Googles formula to find out it wasnt working
for them

....

Facebook tried to replicate Googles high-value proposition: large

traffic, targeting and performance driven by search context, and
tools for advertisers.
Facebook offered two types of advertising: CPM and CPC.
Both were placed on the same spot on the right bank of the page.

Traffic:

Performance:

Facebook is the most

time-consuming
website with 8h18
per user per month,
and 1 trillion PV.

Facebook enhances
action by introducing
rich ads, with a Title,
Picture, and Text.

Targeting:

Tools:

Facebook uses the

data provided by
users. It supposedly
provides a 90%
accuracy.

Facebook sets up its

own advertising
platform with all the
targeting options.

The average click-through rate in 2010 proved Facebooks advertising weakness :

Google

Traditional banner advertising

Facebook

Source: WordStream, 2010

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...
faberNovel 2012 34

And yet, Facebook has generated a lot of money out of its advertising
....

Revenue from advertising:

Q4 2011

million $

increase YoY

With the average user spending 8

hours and 18 minutes a month on
Facebook, there is potential for much,
much more.

Revenue per minute of user activity (Q4 2011)

Source: Facebook S-1, May 2012; Estimates Fabernovel

...
...
faberNovel 2012 35

So Facebook decided to do what it is best at

....

Facebook
invents
SOCIAL

advertising
And extends its platform philosophy
to its monetization strategy.
It is neither an epiphany nor a direct strategy:
it has been implemented
Facebook-style, through small iterations.

Lets see how.

...
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faberNovel 2012 36

A critical notion to understand: Facebook is not a social network

....

The network is how each person is related to another.

...
...
faberNovel 2012 37

it is a social media
....

Facebook is also a digital content exchange platform of our social network.

...
...
faberNovel 2012 38

A simple feature led to a whole new social thinking strategy

....

In 2009, Facebook introduced the Like action

The Like feature generated so much traction that Facebook
was eager to implement it everywhere.

...
...
faberNovel 2012 39

Applied to brands, the like button developed the social graph even further
....

...
...
faberNovel 2012 40

Applied to third-party content, it improved social discovery

....

In one-click on any type of content, users could recommend the content they
stumbled upon to their friends. With this feature, Facebook deeply evolved:

News about users

social network

Content sharing
(articles, videos,)

...
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faberNovel 2012 41

Facebooks Like had become a real economy

....

In 2011

More than

There were

Average Like User

years old

million websites
had integrated the
Like button

million

average amount of friends

likes a day

more clicks on external links

A few examples:

On Gawker.com
Facebook integration
increased traffic by 200%

On NHL.com

On NBA.com

Facebook visitors are

reading 92% more articles

Facebook was #2
referral source.

Source: Facebook, 2011

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...
faberNovel 2012 42

Focus on: the Viral Loop

....

*139 is the average size of Facebook users networks, Source: Facebook S-1

...
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faberNovel 2012 43

Facebook decided to look for new interactions that could strengthen and qualify
this relationship with brands
....

...
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faberNovel 2012 44

With its new version of Open Graph, Facebook is able to qualify the actions of its
users more precisely
....

2012

Facebook now has a granular view of how its users are related to brands, products, services
Case Study: Spotify
Spotify was one of the first to set the example, at f8
conference* in 2011.

Example:

How did it use the new Open Graph features?

Users activity on Spotify is recorded and published on
Facebook. The action is defined as listening and both the song
and the artist are identified.
* The f8 conference is the annual meeting of Facebook developers, similar to Apples WWDC

...
...
faberNovel 2012 45

How powerful is this relationship exactly? We asked Dailymotion

....

Dailymotion is YouTubes main competitor. They saw

the potential of Open Graph at the f8 Conference in
September 2011.
After f8, technical teams at Dailymotion were granted a direct access to Facebook Tech Support in order to
integrate Open Graph publications on their service.

+10% in 4 months

million
video views per day

with Open Graph

Though beneficial for Dailymotion, they didnt

really enjoy it at first: many users complained
that it was too invasive and spammed their
News Feed.

million
video views per day

Dailymotion worked with Facebook to improve

the user experience: implementing Privacy
buttons (turn off Open Graph publications) on
their video, and aggregating the publications
on Facebooks walls to avoid spam.

Source: Dailymotion
...
...
faberNovel 2012 46

Facebook now monetizes this Viral Loop effect with Sponsored Stories
....

Sponsored stories January 2012

With Sponsored Stories, Facebook introduces digital word of mouth marketing.
Brands can now amplify the Viral Loop effect by purchasing impressions of
Branded Activities on targeted users.
Different types of branded activities:

Likes

OpenGraph publications

Check-ins

(Mark likes Starbucks)

(Mark drank a Cappuccino at Starbucks)

(Mark is at Starbucks)

...
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faberNovel 2012 47

Sponsored Stories: how does it work exactly? Case study, Starbucks

....

Reach among Starbucks fans with

Sponsored Stories:

Everyday, Starbucks gets tagged in

Branded Activities
(without having to pay for it)

75%

Here, Sheryl just checked-in with one of

her friends.

Depending
Depending
on on
thisthis
updates
Edge
Rank,
updates
Edge
Rank,
publication
thethe
publication
willwill
appear
in friends
appear
in friends
News
Feeds.
News
Feeds.

Sponsored

Reach among Starbucks fans

without Sponsored Stories:

16%
The story appears on Sheryl friends News feed whose
profiles match Starbuckss targeting.

Around $0.36 CPM in the US

(source SocialBakers.com)

With Sponsored Stories, Starbucks can make sure the story will
appear on Sheryl friends News feed. Starbucks pays to boost its
Edge Rank towards targeted profiles.

Source: Facebook
...
...
faberNovel 2012 48

It all sums up to two well-known webmarketing concepts

....

Being visible
Integrating with Facebook platform will
make your content visible by Facebook
users.
e.g. through Like, Facebook Connect, or
Open Graph.
Providing engaging content will help you
gain visibility.

Paying to increase your visibility

Buying Sponsored Stories will guarantee
your content to reach a maximum number of
users.
Equivalent in search marketing: Search
Engine Marketing (SEM).

Equivalent in search marketing: Search

Engine Optimization (SEO).

...
...
faberNovel 2012 49

But with word of mouth marketing, the whole concept of targeting changes
dramatically
....

New target:

engagement

Ambassadors

Brands now have to seek their fans engagement to turn them into brand
ambassadors.
They then can target fans friends while sparking off your fans engagement.

Its a win-win situation for Facebook: it delegates a part of the targeting to its users,
while improving the overall quality and relevancy of content shared by brands.

...
...
faberNovel 2012 50

In order to enable its social adv. strategy, Facebook created two special forces
....

Technology

Marketing

Facebook Partner Developers

Facebook Studios

They work with high-potential partners to

help them integrate new social features.

They promote how-tos and best-practices in

this new field of social marketing.

Even though it is a high-value service, it is

free!

They will also deliver facebook studio

Awards to the best players in the field.

Their job can be compared to Evangelist,

Business Developer, Developer, Engineer.

...
...
faberNovel 2012 51

3. Business & Ecosystem

...
...
faberNovel 2012 52

The Facebook ecosystem: an incredible source of economic value

....

Facebook is at the core of a large, new economic ecosystem: apps and websites
built on or integrated with Facebook, media consulting and advertising agencies,
community managers

According to Deloitte,
Facebooks positive impact
on European economy is

According to University of Maryland

researchers Facebooks impact on the
American economy is

...
...
faberNovel 2012 53

Two levels of dependence exist in Facebooks ecosystem

....

Both are considered by Facebook as content providers.

...
...
faberNovel 2012 54

At the heart of the Facebook Ecosystem: Facebook Platform

....

Facebook was created as a platform from the beginning

The story goes that Zuckerberg, having envisioned a platform

model for Facebook, met Bill Gates through Harvards network.
Gates shared with Zuckerberg his vision of the best platform...
which he followed.
In 8 years, Facebook has built one of the biggest platforms in the world:

million
apps

The largest gaming platform in the world:

More daily players than XBOX+PlayStation
+Wii+Gameboy altogether

Source: David Kirkpatrick, The Facebook Effect; Facebook

...
...
faberNovel 2012 55

Facebooks platform is built on three main tools

....

Facebook Platform: a set of tools to enable developers to leverage the power of social.

Timeline Apps

Timeline apps let users

enhance their timeline with
content coming from third-party
apps.
Ex: The Spotify Timeline App
will automatically post wrap-ups
of what youve been listening
recently.

Canvas Apps

Canvas Apps are the traditional

Facebook Apps that run inside
Facebook.
Ex: Zynga (Farmville) and many
other gaming apps.

Social Plug-ins

Social plug-ins are code

elements that developers can
embed in their websites or
mobile applications to implement
some of Facebooks most
important functionalities: the Like
button, the Facebook Connect
button, the Facebook comment
module, etc.

...
...
faberNovel 2012 56

Facebooks stance towards its ecosystem is dual

....

Openness
Facebook Plaform is genuinely open
without the need to ask for Facebooks
validation or permission of use.
Facebook is dependent on the success
of its partners : the more users interact
with apps or social plug-ins, the higher
Facebooks activity.

Control
Facebook keeps control on its platform
and its product.
Facebook has never hesitated to roll out
big changes in its functionalities even
though it harmed a certain number of
its partners.

Facebook Credits is a good example: it has been developed as a tool for developers to
simplify their payment process, but Facebook takes a 30% cut and has forced them to
use this payment system on their platform since 2010.
To keep users from being constantly spammed with Zynga games stories in their
newsfeed, Facebook decided to display these stories only to users who actually play
Zynga games.

...
...
faberNovel 2012 57

Case Study: Zynga, a company born of Facebooks ecosystem

....

Zynga is the main social-games producer on

Facebook. They created hit-games such as: FarmVille,
Caf World, FishVille, Texas Holdem Poker, Mafia
Wars they recently bought OMGPOP, Draw
Somethings creators.

12%

Zynga accounts for 12%

of Facebooks revenue
Facebook accounts for
95% of Zyngas revenue
($600M)

95%

Zynga launched its own web

platform using Facebook
Credits

Launch of the Facebook

Platform and birth of Zynga,
a company dedicated to
developing gaming Facebook
apps

Zynga agreed to sign

a 5-year partnership
contract benefiting
mostly Facebook
Zynga raised $1B in its
IPO (biggest tech IPO
since Googles)
at a $7B valuation

21,7M players 34,8M players

3,5M players

End of 2011 :
Zynga launched
CityVille on
Google+: Zynga
hopes it is the first
step towards less
dependency on
Facebook

Dec 2009 : 60M Monthly Active Users

Feb 2012 : 240M Monthly Active Users

Source: Zynga; Appdata

...
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faberNovel 2012 58

Facebooks ecosystem is outsourced growth

....

For Facebook, growth is not about money, growth is calculated by the amount
of content available on their platform.

Organic growth

External growth

Facebook benefits from the

addition of content coming from
third-party apps integrating into
Facebook.

Facebook always keeps an eye on

high-potential teams building state-ofthe-art social applications that could
improve the product.

API Business

Acqui-hires

By opening its platform to third-party

developers Facebook virtually
increases its content production
without bearing the costs.

Facebook already made 24

acquisitions within its ecosystem.

Examples:
Legal issues and technical costs for
streaming music or video.

Examples:
Gowalla
Its team implemented Facebook Places

Friendfeed
Its team improved the News Feed

...
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4. Disruption

...
...
faberNovel 2012 60

With mobile, the games rules are changing

....

Smartphone penetration

Tablet penetration

(US - March 2012)

(US April 2012)

With a growing penetration of mobile devices around the world, web-based

companies such as Facebook are facing a critical challenge.
Mobile will be the next interface for businesses to reach their audience.
Facebook is a web-based company, that now has to be a new entrant into
mobile.
As with every new entrant, it had to pick a strategy:

Build

or

Partner

or

Buy

Source: comScore, IPSOS

...
...
faberNovel 2012 61

With all its features, Facebook could have been an excellent mobile OS*
....

Everything in Facebook could be translated to a mobile app.

*Operating System

...
...
faberNovel 2012 62

But its a bit too late for Facebook to conquer the mobile market from the top
....

For Facebook, building a proprietary mobile OS

would mean:

OS shares (US) March 2012

Spending too much time

You dont build a mobile OS as quickly as you update
your platform.

on a sector they dont know

Mobile sector means dealing with phone builders and
carriers.

Smartphones sold (world) Q1 2012

with no chance of large success.

The market is now well established and blocked by the
major phone builders and OS.

Facebook cant replicate its web success

on mobile.

Source: comScore, IDC

...
...
faberNovel 2012 63

and Facebook failed to build strong partnerships with existing players

....

iOS and Android represent 80% of the market, and they are almost closed to Facebook.

HTC Salsa

HTC Chacha

Apple chose Twitter for Photo Sharing

on iOS

On Android, Facebook integration is

limited to HTCs Facebook button

Apple decided to integrate Twitter instead of

Facebook in iOS, following heated negotiations
regarding the integration of Facebook Credits
inside Facebooks App. (this eventually didnt
happen, and Facebook had to go with Apple
In-App purchases)

On Android, Facebook faces another problem:

atomization. It would have to partner with every
single Android constructor, and implement
Facebook on every single mobile, for each version
of Android.

...
...
faberNovel 2012 64

So Facebook is just an app on mobile

....

...
...
faberNovel 2012 65

and it is a completely different perspective

....

Web

Mobile

vs.

Facebooks mobile app cannot provide the same level of functionalities integration as the web version.

...
...
faberNovel 2012 66

On mobile, alternatives have diluted Facebooks user engagement

....

Facebook decided to focus on the expansion of the platform to all the mobile devices,
rather than trying to improve the quality of its apps on main devices.

So, in its effort to reach every single user, Facebook lost the hype.
Facebook emblematic features are challenged by cooler or more convenient
apps.

Credits

Check-ins

In-App Purchase

Foursquare

News Feed

Photos

New York Times

Instagram

...
...
faberNovel 2012 67

Facebook bought Instagram to get back some of its lost hype

....

Three reasons why Facebook had to buy Instagram, even for $1 billion:
Buy an attractive
point of entry
Photo-sharing is an
essential element on
mobile, and Instagram
managed to create a
Facebook-like level of
engagement.

Integrate the Instagram

experience further into
Facebook
Even when shared on Facebook,
the level of integration wasnt
beneficial enough for Facebook.

Call dibs on Instagram

Twitter was also interested in
Instagram and had already placed
an offer for its buyout. Facebook
had to act fast.

A quite simple product:

take photo, apply funny filter, share.

...
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faberNovel 2012 68

But buying apps doesnt solve Facebooks problem on mobile: it could be

squeezed out in the next 10 years by new competing apps
....

Web
Mobile

Facebook

Facebook Messenger Instagram

Social
Live chat Photo Sharing

Spotify
Music

FarmVille
Game

Eventbrite
Ticketing

On mobile, Facebook lost the central position in the ecosystem which made its
success on the web.
This position is dangerous for Facebook, so they had to devise a way out.

...
...
faberNovel 2012 69

In fact, Facebook has no choice but to change the games rules

....

Facebook is extending its Social Graph to the mobile market.

The phone being social,

who, better than Facebook,
can understand its dynamics?
Facebook chose a 4th option to impact the market:

Build

Partner

Buy

Innovate

...
...
faberNovel 2012 70

Facebook will use the ubiquity of social relationships to build a cross-device backend for developers
....

Facebook will gather data on every device

and redistribute it seamlessly.

...
...
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Facebook circumvents the traditional mobile OS barrier-to-entry

....

...
...
faberNovel 2012 72

In May 2012 Facebook launched its mobile weapon: the Facebook App Center
....

Facebook App Center is a cross-device web and mobile App Store:

On the mobile App Center, users can browse apps, and if a mobile app requires installation, they will
be sent to download the app from the App Store or Google Play.

In November 2011, Facebook enabled a new

feature for mobile app developers: they could
set up their mobile apps IDs on the platform so
that mobile users, when clicking on a link
mentioning the app, could directly be
redirected to the app, or the store.
For the single month of April 2012, Facebook
had already sent 160M users to third-party
mobile apps.
In May 2012, 90M users were sent directly to
Apples App Store!

Facebooks goal with the App

Center is to take advantage of this
phenomenon.

Source: Facebook
...
...
faberNovel 2012 73

Facebooks App Center positions itself prior to the classic distribution platforms
....

...
...
faberNovel 2012 74

Facebook App Center offers value to both users and app developers
....

Users

App Developers

Discovery
Discovery of new apps is a critical
issue for mobile users nowadays,
with an ever-increasing number of
apps.
Facebook offers its
recommendation and peerselection power to solve this
problem.

Marketing
App developers have very
restricted options if they want to
promote their app.
Facebook offers its social
marketing power to enable
virality on app promotion.

...
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faberNovel 2012 75

And with Mobile Sponsored Stories, Facebook monetizes apps promotion

....

In April 2012, Facebook launched its Sponsored Stories on Mobile. From now on, some
sponsored stories will appear in mobile users newsfeeds.

These Sponsored stories can link directly to the App Store

or App Center

From now on, app developers can integrate a

viral, word-of-mouth, marketing campaign on
mobile, using Facebooks advertising.
This is no coincidence if 7 of iOS Top 10 apps and
8 of Android Top 10 apps are integrated with Facebook.

Source: Facebook
...
...
faberNovel 2012 76

If successful, Facebook can become the apps merchandising expert

....

Apps marketing is a very lucrative business. According to our partners at Applidium*, the
sector offers to Facebook an ideal mix for their strategy:

High-costs

Limited cross-device actions

A marketing campaign to get an app in the TOP5

of iOSs App Store in France costs between
$10,000 and $30,000. For the US, this price
would go over $50,000.

Compared to iOS, it is hard to promote

successfully an app on Android. The main
reason for that is the fragmentation of the
Android market in terms of devices.

Facebooks App Center will help editors market

their apps. It will be easy for Facebook to
monetize this help if it proves efficient.

Facebooks power resides in the fact that they

can redirect their users directly to the app on any
device.

With more than 500,000 apps on iOS App Store only, Facebook is entering a
huge market.

* Applidium is faberNovel's subsidary specialized in Apps Design & Development.

...
...
faberNovel 2012 77

The App Center is beneficial to Facebook in many ways

....

Improve the average quality of Facebook Apps

Facebook has set guidelines of quality for the apps aspiring to be displayed in
the App Center.

Foster Facebook integration in third-party apps

To fully benefit from Facebooks viral promotion, app developers will have to
implement the latest social features offered by Facebook.

Generate revenue
Facebook also introduced the first guidelines to offer Paid Apps inside the App
Center. Apps could also integrate Facebook Payments.

Increase the amount of Facebook Apps

The opportunity to offer Paid Apps will create a new economic opportunity for
developers.

...
...
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Facebook, a 21st century telco

...
...
faberNovel 2012 79

Facebook is a new breed of telco

....

Basically, Facebook does the same job as a telco:

Maintain a network, give people an identity

and provide communication tools
But its telecommunication offer is much broader than that of todays telcos:

Devices
Facebook is king of
the web and has
already more than
50% of its users on
mobile devices.

Reach
Facebook has 901
million users across
the world and it will
probably reach the 1
billion users milestone
in 2012, thats a 14%
global market share!

Interactions
In Facebook, people
share a lot more
diverse type of
content: message,
photos, comments,
like, videos, articles,
music,

Live profiling
Facebook manages
and stores the data
that make the
conversation. It is able
to understand what its
network is doing, in
real-time.

...
...
faberNovel 2012 80

Quite an irony: Facebook is still dependent on brick-and-mortar telcos

....

Facebooks network is built upon telcos networks

It will be interesting to watch in the coming years how this relationship will evolve. Will there be
a clash? Will they partner? Merge? Will Facebook offer solutions to create a Mesh Network?

...
...
faberNovel 2012 81

Both business models are built upon the monetization of a strong technological
asset
....

Wires and pipes network

Social Graph

Classic telcos have no idea of what their

network is carrying.

Facebook sees and stores the data

flowing in its network.

Hence the value of the network is limited

to the value of the infrastructure.

Hence the value of the network

depends on the utility potential of this
data.

...
...
faberNovel 2012 82

but they monetize it differently

....

Free
30% cut
$ per user
(ARPU business)

CPC/CPM
Tomorrow?

$ / data
Telcos monetization is flat
The high competition has forced them to
package their offer, triggering a
convergence between business and home
solutions, and decreasing prices.
It is a simple linear revenue model
dependent on the number of users.

Facebooks monetization
is selective and variable
Facebooks relationship with its users is
different from the one it has with its
partners, or with its advertisers
The result is a strong leverage that
Facebook can pull to earn money from
highly-profitable partners.

...
...
faberNovel 2012 83

Our take: Five challenges awaiting Facebook

...
...
faberNovel 2012 84

# 1: Facebook will have to protect its users

....

Challenge
With nearly 1 billion users, Facebook now reaches a little less than 50% of the Internet world
population. Its challenge will soon be securing its user base over acquiring new users.

Facebooks answer
Privacy guidelines for developers

Legal protection

After a huge amount of complaints from users,

Facebook introduced new privacy guidelines:
developers are encouraged to implement Privacy
Switch buttons.

There has been a lot of noise around a story

involving a recruiter who asked a candidate for
access to his Facebook account. Facebook
declared that, in such case, it would use its
legal team to sue employers.

Stealth mode

Our take
When evolving from a startup to a big company, priorities evolve. Having grown its user base to
this extent, Facebook now has a lot more responsibilities than before. Part of this
responsibility is to curb third-party developers enthusiasm in exploiting the data of its users.
Facebook has to switch from an open position, with guidelines, to a firm position: with rules.

...
...
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# 2: Facebook will have to be included in every part of the social conversation

....

Challenge
In a nutshell, the quantity of the content on the platform drives traffic and drives Facebooks
business model. If a large part of the social conversation was to be happening outside
Facebook, it could have dramatic consequences for the company.

Facebooks answer
Existing solutions
Facebook has already opened a lot of solutions
to integrate out-of-platform conversations inside
Facebook: comments plugins, live chat for live
events,

and Innovation
Facebook believes in its technical teams capacity
of innovation. They will devise new way of
connecting third-party content to its platform.

Our take
Facebook has to be the tool on which the social conversation happens. It means that they have to cover
anything that is a hot topic, anywhere the conversation happens. So Facebook not only needs to offer a
connection to its platform, but have a strong value proposition to persuade content providers into
integrating with Facebook.

...
...
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# 3: Facebook will have to sell its new social advertising

....

Challenge
Being a pioneer means that even if they face no challenger on this specific market in the near
future it will have to persuade marketers that their product is a good buy and, to a certain
extent, a better buy than other online advertising resellers.

Facebooks answer
Evangelization
With the Marketing Teams and the new Facebook Studio both working at identifying best-practices,
Facebook wants to persuade advertisers of the efficiency of social advertising.

Our take
Evangelization is not enough to convince advertisers. Facebook actually adopts a developer point of
view on this challenge: providing a technical solution, trying to spark off excitement, and providing bestpractices as a documentation. In fact, Facebook has to develop its own social metrics in order to prove
the efficiency of both its products and advertising. In the past, every media had to create its own metrics:
print, press, radio, TV, web and now social media has to follow the rule.

...
...
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# 4: Facebook will have to distribute its data

....

Challenge
The constant excitement surrounding Facebook comes from the gigantic quantity of data they
possess. Facebook has to transform this potential into real money, without scaring away its
users - as discussed in #1.

Facebooks answer
Facebook Connect & Open Graph 2.0
Facebook has broadly opened its data to third-party developers with Facebook Connect. They can now
quickly build customized user experiences with the use of this data.

Our take
Even though Facebook is helping other apps to generate value by lowering the barrier-to-entry to social
traction, this doesnt generate revenues directly. But Facebook is not exploiting its main potential: lasersharp, real-time targeting for advertising. It doesnt need to be the advertising reseller, Facebook could
simply open a Targeting API to which any advertiser could connect, paying for the service: a price for a
thousand requests for example.

...
...
faberNovel 2012 88

# 5: Mastering these 4 challenges, Facebook will rise as the perfect social data startup
....

...
...
faberNovel 2012 89

We are faberNovel
We help large organizations think and act like startups!
We help our clients make the most of digital opportunities and emerging
practices. We build on tomorrows challenges to deliver significant impact.
We are designers, business analysts, and engineers.

We work ideas into successful projects.

We make innovation happen.
facebook.com/faberNovel

@faberNovel

www.fabernovel.com

...
...
faberNovel 2012 90

Contact us

We welcome your questions & comments on our work.

Please let us know what you think!

We also like to present our work in person.

Ask us for a live presentation of this study!

And wed love to tell you more about faberNovel.

Were just a click away.

...
...
faberNovel 2012 91

Stphane Distinguin

Cyril Vart

Founder & CEO

@fano

Partner & VP Strategy

@cyrilvart

Marie-Caroline Lanfranchi

John Geraci

Partner & Project Director

@mariecaroline

General Manager, faberNovel NYC

@johngeraci

Maxime Coupez

Kvin Smouts

Senior Project Manager

@mc0up3z

Junior Project Analyst

@kevinsmouts

Design Team

Benoit Talabot
Partner & Art Director
@bybent

Jules Mah
Graphic Designer
@julesmahe

Acknowledgements

Dailymotion, Applidium, Inside Facebook, Mashable, TechCrunch, ReadWriteWeb, Business Insider, Fast Company, Arstechnica, Quora,
Wordstream, Business Insider, Comscore, IDC, IPSOS

...
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faberNovel 2012 92

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