Facebook, the online social network, had just topped one billion monthly users in 2012. How should its surging traffic be monetized? It could further invest in additional advertising products or focus on the FB Platform and enable third-party developers to distribute their own applications. Facing a steady decline in FB's stock, it became critical for the company to find sustainable growth options, particularly as more and more users access the network via a mobile device.
Mikolaj Jan Piskorski; Thomas R. Eisenmann; David Chen; Brian Feinstein
Harvard Business Review (808128-PDF-ENG)
March 18, 2008
Case questions answered:
- Why has Facebook been so successful?
- Describe the business model of the company.
- Analyze alternatives to monetize the company in order to build a sustainable business model.
- How do legal aspects impact its strategy?
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Facebook Case Answers
1. Why has Facebook been so successful?
Success can be defined in two directions when looking at Facebook. First, the pure development of user numbers with a continuous growth story resulting in over 1 billion users. If Facebook was a country it would be the 3rd largest country in the world only short behind China and India. This part is, however, only one side of its success story and does not totally explain its financial success resulting in the IPO in February 2012.
The financial success of the company is mainly a result of the capability of the platform to leverage its 2-sided character in order to monetize its business model. In the first three years of operation the company, however, solely targeted users and experienced significant growth in numbers of users by creating an atmosphere of trust. It started to monetize its business model only in 2007, after three years of operation, when it had obtained a critical mass of users that would ensure the attractiveness for businesses to advertise on the platform.
Facebook thus clearly recognized that users would not be willing to pay for the service and would have to be subsidized, while businesses would be willing to pay to have access to the large user base and therefore could be monetized. This shows that the huge success in terms of user numbers is also directly related to the company’s financial success.
Its ongoing financial success is then a result of its continuous pursuit for innovation in monetizing the money side of its platform. From simple Facebook Ads over the FB Platform to FB for Websites and Applications, it continuously managed to identify new potential revenue streams to be collected from the money side. Recently, the company also jumped on the mobile trend and even managed to overcome the challenge of not being able to place advertisements on its mobile application.
2. Describe the business model of the company.
Facebook is an online social network and thus facilitates networking and communication between individuals. In contrast to for example LinkedIn focusing on professionals, Facebook targets individuals primarily in their private lives and thus has an even larger target group.
The primary interaction on Facebook thus occurs between individuals. As a consequence, the core business of the company has a B(C2C) character. However, it actively decided not to monetize this part of its business model by subsidizing its users.
But Facebook’s business model contains another important component that is associated with its financial success, a B(B2C) component. This component is the money side of Facebook’s business model and thus accounts for the $3.7 billion in revenue the company generated in 2011. It primarily consists of the following…
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