1

Be familiar with
• Facebook’s origins, rapid rise, and rocky first-year
performance as a public company

Understand how
• Facebook’s rapid rise has impacted the firm’s
ability to raise venture funding and its founder’s
ability to maintain a controlling interest in the firm

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 Roughly one in every five people has an
account
Facebook accounts for
• the largest share of the most popular activity (social
networking) on the most widely used computing
devices (smartphones)
Facebook apps account for
• 30 percent of U.S. mobile internet use
85 percent of Facebook users
• coming from abroad
3

Facebook was valued at

• over $100 billion in 2012
2017
• revenues were over $40 billion and
• profits nearly $16 billion
Facebook also has concerns related to:
• Competing for user time with services that promote
private sharing
• Balancing user privacy with the potential for
delivering products that are lucrative
• Whether Facebook can remain one of the Internet’s
most successful and influential firms
4
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 Provides a context for understanding:
• Network effects and platforms
• Investors
• Talent Recruitment
• Partnerships
• Issues in the rollout of new technologies
• Privacy
• Ad models
• Business value of social media
• Differences between desktop and mobile markets

Sheryl Sandberg (Facebook COO):

• the coach, the seasoned mentor, the drill sergeant,
billionaire
• regularly named to Fortune magazine’s “Most Powerful
Women in Business” list
• came to Facebook from Google
In just three years she helped Facebook:
• Increased users ten-fold
• Devised an advertising platform that has attracted the
world’s largest brands
• Developed a sales organization that can serve a customer
base ranging from the Fortune 100 to mom-and-pop stores
Sheryl Sandberg is
• a powerful speaker and a leading advocate for increasing
the ranks of women in senior management, and
• her book on the topic, Lean In, became a bestseller
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 Identify
• the two strategic resources that are most critical to Facebook’s competitive advantage and
why Facebook was able to create resources with such strength
Explain the concept of the “social graph,” and explain
• how Facebook created a social graph stronger than that of its rivals
Understand
• role of features such as news feeds in reinforcing these strategic resources
Recognize
• that Facebook’s power in desktop services has allowed it to encroach on and envelop
other Internet businesses.
Understand
• how mobile service offerings differ from desktop efforts and recognize that the dynamics
that allowed Facebook to dominate on the desktop are substantially different in mobile
Examine
• several of Facebook’s recent acquisitions and the competitive motivations behind these
purchases
Understand
• the concept of the “dark Web” and why some feel this may one day give Facebook a
source of advantage vis-à-vis Google
Understand
• the basics of Facebook’s infrastructure and the costs required to power an effort of such
scale
7

From a social network

• initially targeted at college students,

Facebook has become

• a relentlessly advancing and evolving force,

occupying
• large swaths of user time and

expanding into
• all sorts of new markets

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 Social Graph: Global Mapping of Users,
Organizations and How they are Connected
‘Friending’:
• Is a link between nodes in the social graph
– Requires both users to approve the relationship

Network effects:
• When the value of a product or service increases
as its number of users expands

Switching costs
• Cost a consumer incurs when moving from one
product to another
• for Facebook are extremely powerful
9

Offering news feeds

• concentrated and released value from the social graph
Feeds are the lifeline
• of Facebook’s ability to strengthen and deliver user value
from the social graph by categorizing sharing
Introduced hash tags, which will:
• Help users discover conversation
• Encourage more public sharing of posts and content
Facebook beats rivals in driving traffic to newspaper
sites
• Facebook is also way ahead of Twitter and Pinterest in
overall social traffic referrals
• Games firms, music services, video sites, daily deal
services, publishers, and more all integrate with Facebook,
hoping that posts to Facebook will spread their services
10 virally
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 Dark Web: Internet content that cannot be
indexed by Google and other search engines
A lot of information on Facebook
• is private and is considered dark web
Provides access to
• user content, user opinions, and trending news that
– Google cannot access
• Facebook can tie together standard Internet search with its
dark Web content, allowing that search engine exclusive
access to its content
Graph Search to evolve search beyond the keyword:
• allows users to draw meaning from the site's social graph
and to find answers from social connections
• could become a primary source for job placement, travel
info, and even dating
11

More competition from

• Instagram, WhatsApp, Snapchat, WeChat, Line, and Kakao
Competitive dynamics differ:
Smartphones apps can
• access a user’s address book in order to rebuild the social
graph for a new mobile service
• more easily share photos and videos
• use push notifications to encourage use of the app
Smartphones have
• app icons on the home screen as a visual reminder to visit
the app and a single-tap makes it easy to use
Desktop’s larger screen
• allows for additional menu items and options – mobile
seems to prefer single-purpose, specialized apps
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 <2012>
Turned the potential rival into
• an asset for growth and another vehicle for the firm

Since the acquisition,

• Instagram has continued to operate a a separate
brand,
– tripling its user base the year following acquisition
» About 800 million by mid 2018
• Has larger usage numbers
– than Twitter and Snapchat

13

<2014>
• $16 billion in cash, $3 billion in stock

Because WhatsApp’s
• Mobile messaging posed a bigger threat than
smartphone photo sharing
• had emerged as the global leader in mobile
messaging
• usage numbers were 12 to 64 times ahead of
Facebook for mobile messaging…!

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 <2016>
A long-term bet
• keeping ahead of computing's
evolution
Prototype form
• at the time of acquisition, it's
essentially a computing screen
that you strap to your face
• Two very high-resolution
displays fill ski-goggle-like gear
with a wraparound image
covering your field of vision

"Strategically we want to start building the next major

computing platform that will come after mobile.”
- Zuckerberg
15

Each day, Facebook processes

• 2.7 billion `’Likes’
• 350 million photo uploads,
• 2.5 billion status updates and check-ins

Facebook's storage needs

• have grown by a factor of 4,000 in just four years

The Facebook cloud scattered across multiple

facilities,
• including server farms in
– San Francisco, Santa Clara, northern Virginia, Oregon,
North Carolina, Iowa, and Sweden
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 OSS powers the site
• service runs on the Linux operating system and Apache
Web server
• A good portion is written in PHP
– a scripting language particularly well suited for Web site
development,
• while some of the databases are in MySQL
– a popular open source database

Facebook receives
• 50 million requests per second, but
– 95% of data queries can be served from a huge, distributed server
cache that lives in well over fifteen terabytes of RAM

Facebook made public

• the detailed specifications of its homegrown servers
– including custom power supplies, chassis, and battery backup
• as well as plans used in the Prineville site’s building design
17
and electrical and cooling systems

Understand
• the potential strategic value of evolving from a service to a platform
– Learn from Facebook’s platform successes as well as its missteps and lost
opportunities
• how Facebook’s web-centric culture allowed for a degree of A/B testing, rapid
refinement, and error correction that isn’t as easy to obtain in an app-centric
smartphone world and see how this may have led to several of the firm’s
struggles in developing and deploying mobile offerings
Describe Facebook’s efforts
• to integrate its service with other Web sites and the potential strategic benefit for
Facebook and its partners
Recognize
• how Facebook is evolving Messenger in ways far beyond an SMS replacement,
so that it is now a platform for many additional services
– revenue-generating and strategic asset creating opportunities for the firm
Examine
• WeChat and other global platforms, and
• how their approach differs from Facebook’s
Study the Cambridge Analytica crisis
• as an example of platform failure, PR nightmare, and on-going response, and
recognize how both the platform and the firm’s monetization of user data set the
18 stage for this crisis
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 Published a set of application programming interfaces
(APIs)
• Programming hooks, or guidelines published by firms that tell other
programs how to send or receive data
Programmers can write applications that run inside a user's
profile
Developers are allowed to:
• Charge for products
• Offer them for free
• Run ads
• Keep earnings made through their app
Facebook had marshalled
• the efforts of some 400,000 developers and entrepreneurs,
• 24,000 applications had been built for the platform,
• 140 new apps were being added each day, and
• 95% of FB members had installed at least one FB application
19

Challenges Faced when Creating a Platform

Copyright violations
App makers have
• crafted apps that annoy, purvey pornography, step over the boundaries
of good taste
Privacy and Security concerns
Abuse of
• user's personal information from the profiles of Facebook users and then
sold the information to third parties
Facebook & Apple have struggled
• to find the right mix of monitoring, protection, and approval while
avoiding cries of censorship and draconian control
Platform owners beware:
• developers can help you grow quickly and can deliver gobs of value, but
– misbehaving partners can create financial loss, damage the brand, and sow
mistrust
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 Learning from Cambridge Analytica Scandal
Whistleblower at UK-based research firm Cambridge Analytica,
• detailed a surreptitious campaign to harvest user data on a wide scale,
develop psychographic profiles, and sell services that will “find your
voters and move them to actions”
– Data was accessed from an online quiz “This is Your Digital Life.”
» Only 270,000 people authorized the app to collect data, but all were told the
focus was academic research and no commercial ties were disclosed
» Facebook policy (since halted) allowed app developers to access information on
a user and their friend network - accelerated data access that created working
profiles of some 87 million users, mostly US citizens

Little evidence at this point that it curtailed Facebook use

Facebook has shut down
• app access to friend data,
• 200 apps, and
has begun auditing “thousands” of apps,
notified users who have had their data compromised, and
introduced a host of new tools
21

Messaging is “one of the few things that people

actually do more than social networking,” - Zuckerberg

Facebook Messenger Platform

• allows firms to build AI powered chatbots that
interact with customers
• has also become a payments platform, allowing
users to send and receive money with their
contacts
• allows developers to build their products that
integrate directly via Messenger

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 Allows developers
• to link web pages and app usage into the social graph
– puts itself at the center of identity, sharing, and personalization

Offers Website operators

• the choice to accept a user’s FB credentials for logging in

Allows firms
• to make their sites more personalized by leveraging its data

Strategic benefit - The measures allow Facebook

membership to increase in value by:
• Enhancing network effects
• Strengthening switching costs
• Creating larger sets of highly personalized data to leverage
23

Some applications
• were accused of spamming friends with invites
Security concerns, privacy breaches, and apps
• that violated the intellectual property of other firms
Open approach has
• caused asset weakening and problems with revenue sharing
Too much data portability leads to
• Free rider problem: Taking advantage of a user or service without
providing any sort of reciprocal benefit
Obstacles to smooth user integration have increased
The Web may be endangered by …
• FB’s collossal walled garden: Closed network or single set of services
controlled by one dominant firm
• Facebook’s wall closes off a large part of the Web within itself
– Stifles innovation, exchange, and competition
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 Describe
• the differences between the FB and Google ad models
Understand how
• content adjacency and user attention create challenges for
– social network operators and
– firms seeking to advertise on social networks

Explain
• the hunt versus hike metaphor,
• contrast the relative success of ad performance on search
compared to social networks, and
• understand the factors behind the social network’s struggles
Recognize how
• firms are leveraging social networks for brand building,
25
product engagement, and driving purchase traffic

Understand FaceBook’s
• considerable advantages and efforts w.r.t. ad
targeting
Compare FaceBook’s
• conventional advertising metrics with those of
Google, as well as FB’s mobile app install program
– Understand
» the unique opportunity and potential challenges FB faces as it
expands its app install program

Recognize the challenges

• that mobile advertising presents for FB and
– understand
» why mobile is also a potential opportunity
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 Problems in advertising on social networks
Content Adjacency
• Concern that an advertisement will run near offensive
material,
– embarrassing an advertiser and/or degrading their products/ brands

Because of Content Adjacency

• “Brand advertisers largely consider user-generated content
as low-quality, brand-unsafe inventory” for running ads
- IDC report

Dispelling concerns
• hinges on a combination of evolving public attitudes toward
content adjacency issues in social media, as well as better
technology and policing of the context in which ads appear

27

User Attention Problem and the Difference

between Google (search) and Facebook (social)
While users go to Google to hunt, they go to
Facebook as if they were going on a hike
• they have a rough idea of what they’ll encounter, but
– this often lacks the easy-to-monetize, directed intent of search

Usage patterns are reflected in click-through rates

• Google users click on ads around 1 - 2% of the time
• FB click-throughs can register as low as 0.02 %

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 <2014>

29

Precise targeting
• In a significant "big data" play for more accurate consumer
targeting, FB now allows advertisers to combine externally
collected data with FB’s insights
• Other FB initiatives will allow brands to upload e-mails,
phone numbers, and addresses from their proprietary CRM
databases to show ads to existing customers who are on FB

Mobile advertising
• over 90% of FB's monthly active users visited using mobile
devices, and over half only access using mobile
– Mobile users provide FB with a steadier flow of customer interaction
throughout the day
• The "Instant Articles" service
– helps vendors overcome the problem of slow page loads and
30 content that's poorly formatted for mobile
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 Fewer ads at a higher price point
• creates a better user experience and higher profits
Ads were moved
• from the sidebar to the newsfeed and it has produced a
higher return on the ad's investment
Building better ads
• through social engagement
FB Mobile App Install program
• "hitting an annual run rate in the hundreds of millions of
dollars."
Video on Facebook is booming
• and presents yet another content serving (and ad sales)
opportunity that Facebook can develop and exploit
31

Recognize
• how user issues and procedural implementation can derail even well-
intentioned information systems efforts
• the risks in being a pioneer associated with new media efforts, and
– understand
» how missteps led to FB and its partners being embarrassed (and in some cases
sued) as a result of system design and deployment issues

Examine
• the challenges that leveraging potentially sensitive consumer data,
altering privacy settings, and changing terms of service may present to
innovative firms
Learn about the
• fake news crisis, motivations of bad actors, challenges the firm faces in
dealing with the issue, limitations of technical and human-based
solutions, and potential longer-term damage to the firm
Highlight areas of opportunity and concern
• regarding FB’s designs on emerging market growth
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 The road around Facebook's campus is named "Hacker Way."
Graffiti-laden walls underscore
• that FBis a creative and edgy place, and
Slogans like
• "Done is Better than Perfect" and
• "Move Fast, Break Things" are
Cultural signposts that
• direct staff to keep an eye on what has helped make the firm successful
FB’s "no-beta" culture
• tolerates mistakes on the road to progress
The willingness to take bold risks
• on new initiatives has allowed the firm to push forward with innovations
that many users initially resisted but eventually embraced
– By examining some of Facebook's mistakes, managers can raise their
internal awareness of pitfalls associated with implementing technology
initiatives, and by watching

Facebook's responses to missteps,

• managers can gain insight into effective course correction if initial efforts
33 run into trouble

In order to keep the ideas humming, Facebook

• regularly rotates technical staff
– Every eighteen months employees are required to leave their teams
and work on something different for at least a month

Getting people into new groups

• helps the firm’s geniuses more broadly share their
knowledge, generates idea flow, and prevents managers
from developing fiefdoms
Runs hackathons, all-night sessions with one key rule:
• no one is allowed to work on what they normally do

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35

<Nov.2007 to Sept.2009>
The launch, public outcry, resulting PR disaster, and eventual repeal
• of Facebook's high-touted "Beacon" platform provide a lesson for managers
– regarding the peril in introducing system modifications without considering their full
implications
Beacon effort started from a simple question:
• Could the energy and virulent nature of social networks be harnessed to offer
truly useful consumer information to its users?
Zuckerberg was so confident of the effort
• that he stood before a group of Madison Avenue ad executives and declared
that Beacon would represent a "once-in-a-hundred-years" fundamental change
in the way media works
User reaction to Beacon was swift and brutal
"We've made a lot of mistakes building this feature, but we've made even
more with how we've handled them.” - Zuckerberg on Beacon
Beacon's failure
• is a cautionary tale of what can go wrong if users fail to broadly consider the
impact and implications of an information system on all those it can touch

36
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 Technology has no built-in morality, and
• tools to connect can become tools for abuse

There can be immediate physical danger

• from the spread of Fake News

Exploiters have different motivations

• Get people fired up to spread content virally
• Anyone who clicks through to view the fake news sites is
lining the exploiters pockets
• Election tampering
– the highly sophisticated campaign allegedly undertaken by agents
acting on behalf of the Russian government
» as many as 150 million Americans may have been exposed over
Facebook and Instagram in the time leading up to the 2016 presidential
election
37

New ToS (Terms of Service)

• was offered in a way that solicited user comments

Facebook settled
• a series of governmental inquiries in a deal with the
U.S. Federal Trade Commission

Facebook agreed
• to undergo twenty years of regular third-party
privacy audits, and to a host of additional
restrictions

38
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 Facebook is already massively global
• with most of its revenue coming from outside the USA

While global growth can seem like a good thing,

• acquiring global users isn’t the same as making money from
them
– The NYT points out, fewer than half of global Internet users have
disposable incomes high enough to interest major advertisers

However, ignoring a market that’s unprofitable today,

• a rival could swoop in and establish network effects and
other assets that are unbeatable tomorrow

Concerns
• aren’t just financial and technical;
39
• they’re also political and ethical

<Nonprofit>
Zuckerberg has declared Internet access to be a "human right."
• his explicit goal is "to make sure that actually, literally every single
human being on Earth has an Internet connection."
Why are so many offline? Three reasons:
• Data is too expensive for many of the world's poorest citizens;
• Services aren't designed for emerging market use by populations who
need ultra-low bandwidth services that run reliably on very low-end or
old, recycled hardware; and
• Content is not compelling enough to draw in non-users
Facebook supported by leading mobile phone firms
Internet.org
• crafts non-exclusive partnerships with local carriers to offer a free tier of
services, a sort of "Internet dial tone" that includes social networking (of
course), as well as vital information such as weather, health care
information, education, and food prices, all through a lightweight app
that runs on very low end phones

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41

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