Case11 • FaCebook,InC.

,2015 491

Facebook, Inc., 2015

www.facebook.com, Fb
Headquartered in Menlo Park, California, Facebook is the largest social media network in the world,
with over 1.3 billion current active users of its website. Facebook ended 2014 with record numbers: MyManagementLab®
a total of 890 million users, 745 million daily active mobile users, and $3,851 million in revenue. For additional assurance of
Facebook’s revenues from advertising totaled $3.6 billion, and $257 million in collected payments learning questions which prove
and other fees. The company spent 29 percent of its revenue dollars on research and development you understand and are able to
(R&D) in 2014, and spent a record $1,831 billion on purchasing new property and equipment. apply the strategic concepts in
Facebook launched its audience network in 2014, which allowed advertisers to run their this case, go to the assignment
Facebook ads on third-party mobile applications. Then in 2015, Facebook unveiled its own section of your MyLab.
mobile advertising distributor, similar to rival Twitter’s MoPub aimed at attracting more business.
CEO Mark Zukerberg spent much of early 2015 personally traveling the world, to India, Latin
America, Africa, Jakarta, and elsewhere, meeting with groups who petition their governments for
Internet access. Given that Facebook wants to grow globally, Mr. Zukerberg describes his travels
as “really cool.” He wants to aggressively help phone companies build Internet connections glob-
ally. Only about half of Facebook’s revenues currently come from outside the United States and
Canada. Reportedly, more than 10 percent of Facebook accounts are fake.
Copyright by Fred David Books LLC. www.strategyclub.com (Written by Jason R. Willoughby,
Elizabethtown Community College)

history
Facebook was founded in February 2004 by Mark Zuckerberg and his Harvard University room-
mates. Initially, it was to be used only by Harvard University students, but eventually Zuckerberg
and the other founders gave access to the Ivy League universities and Stanford University. As
Facebook grew popular, user access was given to other universities, as well as Boston area high
school students. Today, Facebook has grown into a phenomenon and anyone over the age of 13
can have access to Facebook, a social media platform loved by millions.
After launching his initial (Thefacebook.com) website, three Harvard University seniors
accused Zuckerberg of taking their idea to create a social network called HarvardConnection.com
to create a competitive product. After the three individuals made a complaint, an investigation was
initiated, and a lawsuit filed, which was settled in 2008 for 1.2 million shares ($300 million) of
Facebook’s IPO offering.
Facebook’s initial big investment was given by the co-founder of PayPal, Peter Thiel. In
2005, the company bought the domain name facebook.com for $200,000 and dropped “the” from
the original name. The investments began to grow as in 2005, as Accel invested $12.7 million and
Jim Breyer added $1 million of his own money. Facebook has recently surpassed both Google
and Amazon in percent market share and number of users in the social media industry.

internal issues
vision and mission
Facebook’s mission statement is “to give people the power to share and make the world more open
and connected.” Although Facebook does not have an explicit vision statement, Zuckerberg men-
tions three items that reveal his desire for the company: “(1) stay connected with friends and family,
(2) discover what is going on in the world, and (3) share and express what matters to the individual.”
492
Exhibit 1 Facebook’s Organizational Structure

Chairman & CEO – Mark

Zukerberg

Chief Chief Chief Director COO– Legal/ VP, VP, VP, VP,
CIO CFO
Product Security Technology Corporate Sheryl General Global Human Business Messaging
Officer Officer Officer Development Sandberg Counsel Commu- Resources Develop- Products
nications ment

VP, Manager, Senior VP, VP, Asia VP, Europe, Director, Director,
Infrastru- Mobile Software Mobile Pacific Middle East, Global Small
cture & Software Engineer Engin- & Africa Game Business
Engi- Group eering Sales
neering

VP, VP, VP, Director, VP, GMS VP, Ads

Partnerships Advertising Growth, Video Product & Pages
& Platform & Global Engagement, Product Marketing
Marketing Operations & Mobile and
AdTech

Source: Based on Facebook’s organizational chart (http://www.theofficialboard.com/org-chart/facebook).

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Code of Conduct
According to Facebook’s corporate governance report, “Facebook Personnel” are expected to act
lawfully, honestly, ethically, and in the best interests of the company while performing duties on
behalf of Facebook. The company code of conduct applies to all Facebook personnel, including
members of the board of directors (in connection with their work for Facebook), officers, and
employees of Facebook, Inc. and its corporate affiliates, as well as contingent workers (e.g.,
agency workers, contractors, and consultants) and others working on Facebook’s behalf.

Organizational Structure
Facebook has 14 subsidiaries, as follows: Facebook Benelux, Facebook Brazil, Facebook
Canada, Facebook France, Facebook Germany, Facebook India, Facebook Italy, Facebook Korea,
Facebook Norway, Facebook Portugal, Facebook Spain, Instagram, Oculus VR, and WhatsApp.
Facebook’s top executives are listed in Exhibit 1, along with an organizational chart of the com-
pany. Note the company structure is a hybrid, being divisional by region and by product. Some
analysts suggest the structure is too complex, with overlapping duties, and would prefer to see
something similar to a strategic business unit (SBU) structure.

Segments
As indicated in Exhibit 2, Facebook is segmented both by region, having four regions, and by
revenue source, Advertising as well as Payments and Other Fees. Note that roughly one half of
Facebook’s revenues are generated from the United States and Canada.

Finance
Facebook’s income statement is provided in Exhibit 3. Note that the firm’s net income more
than doubled in 2014. Facebook’s balance sheet is provided in Exhibit 4. Note the company’s
goodwill more than doubled, partly because Facebook in 2014 acquired the messaging service
WhatsApp for $19 billion.

Exhibit 2 Facebook’s Revenue Segments (in millions of USD)

7%

Advertising
Payments & Other Fees

93%

1st Quarter 2ndQuarter 3rdQuarter 4thQuarter

Revenue - Geography 2014 2014 2014 2014

USA & Canada $1,179 $1,308 $1,514 $1,864

Europe $698 $824 $844 $1,030
Asia-Pacific $354 $431 $492 $554
Rest of the World $271 $347 $353 $403

Source: Based on Facebook’s 2014 Form 10-K.

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Exhibit 3 Facebook’s Income Statements (in millions of USD)

Report Date December31,2014 December31,2013

Revenues $12,466 $7,872

Operating expenses 7,472 5,068
EBIT 4,994 2,804
Interest 84 50
Other income (loss) — —
EBT 4,910 2,754
Tax 1,970 1,254
Income from continuing operations 2,940 1,500
Other items (15) (9)
Net income 2,925 1,491

Source: Based on Facebook’s 2014 Annual Report Page 57 and Yahoo Finance.

Exhibit 4 Facebook’s Balance Sheets (in millions of USD)

Report Date December31,2014 December31,2013

Assets
Cash and equivalents $11,199 $11,449
Accounts receivable 1,678 1,109
Other current assets 793 512
Total current assets 13,670 13,070
Property, plant & equipment 3,967 2,882
Goodwill 17,981 839
Intangible assets 3,929 883
Other assets 638 221
Total assets 40,184 17,895

Liabilities
Short-term debt 180 277
Accounts payable 378 268
Other current liabilities 866 555
Total current liabilities 1,424 1,100
Long-term debt 119 237
Other liabilities 2,545 1,088
Total liabilities 4,088 2,425

Common stock — —
Retained earnings 6,099 3,159
Paid in capital and other 29,997 12,311
Total equity 36,096 15,470

Total liabilities & equity 40,184 17,895

Source: Based on Facebook’s 2014 Annual Report Page 56 and Yahoo Finance.
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Marketing Strategy
Until November 2014, most Facebook users obtained free marketing and advertising of a prod-
uct or service by creating posts on their “wall” to their mass audience. But a new system was
installed toward the end of 2014. Individuals now wanting to gain exposure based on free adver-
tising and marketing will no longer obtain the high-traffic distribution to their page “fans.” The
only way entrepreneurs and small business owners can receive high volumes of distribution of
their materials is to pay Facebook for their product service exposure. The more money paid by
the individual or business, the more reach their message will be distributed.
Another marketing item Facebook has initiated is product ads, which show users pictures of
products and prices, once the user has visited the specific product’s website, based on the users’
interests and/or location. Facebook now also offers a work-oriented product similar to LinkedIn
and rivals Microsoft, Google, and Salesforce.com. The new Facebook “professional” service
enables users to keep their personal postings, pictures, and identity separate from the profes-
sional and work content. The new service includes online chatting with professional colleagues,
which is a serious challenge to LinkedIn, the leading business-oriented social network. The new
service comes with tools to share and store documents, taking aim at products and services from
Microsoft, Google, and Salesforce.com. Facebook has a significant advantage in any competi-
tion, given its reported 1.35 billion users who are active monthly and 864 million who use it
daily, compared to LinkedIn’s claims of 332 million registered users, but only 90 million persons
visited the site from July through September 2014.
Facebook’s wide following is its main competitive advantage, because of what is commonly
referred to as the network effect in business and economics. Much of the value comes from the
availability of other people with similar interests that you may want to market to or interact
with professionally or personally. Two disadvantages of Facebook, however, and reasons many
companies have banned employees from using the service at work, is that (1) many persons lose
significant productivity at work by spending too much time on Facebook and (2) Facebook has
faced privacy criticisms for years. Information leaked through employees “communicating” on
Facebook could potentially land in the hands of competitors, causing damage to the business. It
is unclear yet whether the new Facebook “professional” service will charge users or be paid for
by advertising.
For a decade, digital marketers have been constrained to an increasingly outdated technology
known as the cookie, which are still used to measure and target digital ads. Best described as bits
of code dropped into web browsers, cookies generate poor approximations of how many people
view a digital ad and provides inaccurate estimates of how many times any given individual sees
an ad. Cookies give unreliable measures of clicks and sales and are not used on mobile apps.
However, from 2015 to 2017, Facebook-owned Atlas aims to take digital marketing beyond the
cookie to (1) correct cookies’ inaccuracies and (2) discover what’s happening within the cookie-
less world of mobile apps. Atlas strives to be able to connect offline purchases and conversions
to digital ads shown across mobile apps and the Web. In essence, Facebook’s Atlas is an ad server
that allows ad buyers to measure, target, and optimize digital and mobile ads across digital apps
(i.e., not just on Facebook).
For Facebook, Google, Yahoo!, Microsoft, and AOL, the primary revenue sources are
Internet advertising. Exhibit 5 reveals the percentage of total digital display ad revenues for each
company.

Exhibit 5 Digital Display Ad Revenues: Facebook versus Rivals

2010 2011 2012 2013 2014

Google 12.1% 13.5% 15.4% 18.0% 21.2%

Facebook 11.5% 14.1% 14.4% 15.2% 15.5%
Yahoo! 14.0% 11.0% 9.3% 8.0% 7.0%
Microsoft 5.2% 4.9% 4.5% 4.3% 4.0%
AOL 4.7% 4.3% 3.6% 3.1% 2.7%

*These data include advertising on desktop and laptop computers, mobile phones, and tablets.
Source: Based on http://www.quora.com/Who-are-facebooks-biggest-competitors-and-why
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Instagram
Facebook recently acquired Instagram, whose primary customer base is teenagers. Instagram is
the Web’s leading photo-sharing and video-sharing social media service and is on pace to top
100 million users in the United States by 2018. Instagram surpassed Twitter in early 2015 as the
second-most used social media service in the region after its parent company, Facebook. The
number of U.S. users of Instagram climbed by nearly 60 percent to 64.2 million in 2014 versus
the year-earlier. Twitter ended 2014 with 48.4 million users in the United States, an increase
of 12 percent. However, Instagram’s user growth is expected to climb to 21 percent in 2015,
15 percent in 2016, and 10 percent in 2017, whereas Twitter’s user growth is expected to decline
to 9 percent in 2015, 8 percent in 2016, and 7 percent in 2017. Analysts expect that by 2018,
Instagram will have 106.2 million users in the United States, up 7 percent, compared to Twitter,
which is projected to have 66 million users and year-over-year growth of 6 percent. Although
Instagram has customers of all ages, roughly 62 percent of all teens in the 12 to 17 age group
used Instagram regularly in 2014.

Competitors
Although there are hundreds of online social media websites, the major competitors of Facebook
include Instagram, Snapchat, LinkedIn, Google+, and Twitter. Snapchat is a more private medium
than Facebook, which is why it’s growing in popularity. Snapchat only lets you send “snaps” to
the friends selected by the user. Compared to Snapchat, LinkedIn is not as nearly as popular with
social media usage, but LinkedIn is gaining users and platform time from Facebook due to the
professional nature of LinkedIn. Google+ and Twitter compete with Facebook for users and time
spent on social media.

Snapchat
Three Stanford University students created the Snapchat photo messaging system in July 2011.
In 2013, Snapchat launched an application named Snapkidz for users 13 years of age and
younger, with those users only being able to save photos on their local drive; they are not able
to send pictures to anyone. In October 2014, with the demand to raise more funds and users for
this application, Snapchat released their first 20-second movie trailer for the film Ouija. This
was their first paid advertising venture into the market. Currently, Snapchat caters to sending
over 700 million videos and photos for current users. Snapchat is a photo messaging applica-
tion whereby users can take photos, record videos, add text and drawings, and send them to a
controlled list of recipients. These sent photographs and videos are known as “Snaps.” Users
set a time limit for how long recipients can view their Snaps (as of April 2014, the range is
from 1 to 10 seconds), after which they are hidden from the recipient’s device and deleted
from Snapchat’s servers. According to Snapchat in May 2014, the app’s users were sending
700 million photos and videos per day, and Snapchat Stories content was being viewed 500
million times per day. The company has a valuation of $10 to $20 billion, depending on various
sources.

LinkedIn Corporation (LNKD)

LinkedIn is a professional social networking service that has over 260 million users in
200  countries. Headquartered in Mountain View, California, LinkedIn has three major business
units: talent solutions, marketing solutions, and premium subscriptions. Companies can utilize
LinkedIn talent solutions for employee procurement. Individuals seeking employment can pay
a premium subscription to find job openings. LinkedIn continues to acquire competing firms to
help complement its current product offerings. A key recent acquisition was Digg, a social news
site, in 2012. As its growth continues, LinkedIn’s 2014 market penetration was highest in the
United States, the United Kingdom, Canada, and Australia. India was the fastest-growing coun-
try of LinkedIn users that grew to 20 million during 2014.

Google, Inc. (GOOG)

Google+ is an identity service and a social network with up to 540 million active users. About
30 percent of Google+ customers use the application on their smartphones. Beginning at age 13,
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Exhibit 6 Facebook vs Rival Firms

Facebook LinkedIn Twitter

# Full-Time Employees 9,200 6,900 3,900

$ Net Income $2,900 M ($15.7 M) ($578 M)
$ Revenue $12,400 M $2,218 M $1,403 M
$ Revenue/Employee $1,348,000 $321,000 $360,000
$ EPS Ratio $1.03 $(0.37) $(0.98)
$ Market Cap. $251 B $26.9 B $24.6 B

Source: Based on Yahoo Finance 2014 data and other sources.

teens may create a Google+ account. There are services that set Google+ apart from its com-
petitors such as circles, streams, Hangouts, Hangouts on Air, and the +1 button. One item that
Google+ users and advertisers will benefit from is SEO (Search Engine Optimization), as being
on Google+ will boost search results rankings.

Twitter, Inc. (TWTR)

Headquartered in San Francisco, Twitter is a social networking service that allows individuals
to send tweets within their network. Tweets are 140-character messages and can be posted only
by registered users. By the end of 2014, Twitter had more than 500 million users. The company
has several revenue services to generate income, such as paid advertising to companies that
can be compared to Google Adwords. Twitter offers a self-service advertising system for small
business owners. Total revenue for 2014 was $1.4 billion compared to $664.89 million the prior
year.
Exhibit 6 provides comparative data for Facebook and its direct competitors. Note both
LinkedIn and Twitter reported negative net income in 2014.

External Issues
Pinning, tweeting, posting, tagging, texting, liking, and other social media lingo have become a
major part of daily lives, with almost two billion people in the world being active users of social
media applications. However, social media users increasingly feel commercialized when pop-up
ads cover their computer screens while surfing social media platforms. Companies must figure
out a way to utilize advertising that creates comfort when seen by individuals.
The age of users continues to be an external issue. Facebook currently has a policy that
children age 13 or younger must have parent consent to create a page on their platform, which
parallels with the Children’s Online Privacy Protection Act (COPPA). Approximately 1 of 8
Americans show signs of having a social media addiction, which consists of declining social
relationships, anger and depression when the Internet is not available for use, lying about usage,
and experiencing high levels of happiness when using the Internet. Other characteristics of this
addiction consist of waking up in the middle of the night to check Facebook, checking social
media before getting out of bed, and using social media to cover up everyday life problems.
A new Facebook application enables users to comment on political debates and issues. Users
connecting via the Facebook platform and the company pushing the idea of political impact
caused the Egyptian government to ban Facebook in their country. Facebook created a political
action committee in 2011 with the Federal Election Commission. It was named the FB PAC.
Google+ is banned by the People’s Republic of China and Iran. Currently, in Mainland China,
it is not blocked, but government intervention has slowed down the loading of the Google+ pro-
gram enough to where users have to wait a large amount of time to utilize the program.
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Social Media and Personal Branding

A new trend is the idea of using social media platforms to create a person brand whereby indi-
viduals are combining their social media applications to create a personal brand or image that
directly relates to future employment. A common practice for human resource managers is to
perform a search on potential employees. One company, Klout, has grasped the idea that society
has become aware of individual brands, and has made it easier for human resource managers to
review a potential employee’s social media influence. Headquartered in San Francisco, Klout is
a private company that measures social media analytics to rank an individual’s social influence.
One’s Klout score can be between 1 and 100. As President Obama’s score is 99, the likes of
Justin Bieber and actress Zooey Deschanel have scores of 92 and 86, respectively. To put a Klout
score into perspective, my (the case author) clout score is currently 53. The higher the score, the
better it is for individuals looking to be hired at large corporations in the United States. Klout
uses Bing, Facebook, Foursquare, Google+, Instagram, LinkedIn, Twitter, and Wikipedia data to
create Klout user profiles that are assigned a unique “Klout Score.”

The Future
Social media use is growing exponentially. A key question moving forward is: Where will the
large amounts of data be stored? Who will control the stored data? Will government interven-
tion play a part of using the stored data? Does Facebook have a right to store and even sell this
information?
Google and Facebook are becoming closer friends. Both companies want more people on-
line, searching around and clicking on ads. Both firms are finding new ways to make it happen—
from selling smartphone data plans, to using solar-powered drone aircraft as floating cell towers,
to partnering with telecom providers in the developing world to get people hooked on apps. Both
companies recently gave updates on their efforts at the Mobile World Congress wireless show in
Barcelona, Spain, in March 2015. At the meeting, Facebook CEO Mark Zuckerberg and Google
Vice President Sundar Pichai told attendees they plan to collaborate more, but are taking very
different approaches to getting the world connected. Internet.org is Facebook’s fledgling effort to
create new users in countries with little or low Internet use. Zuckerberg revealed at the meeting
that his company has launched apps with basic free services in six countries: Zambia, Ghana,
Kenya, Tanzania, Colombia, and most recently, India. The app is customized for each coun-
try and telecom operator, in order to attract new users while not hurting the telecoms’ already
existing base of customers. Facebook offers free versions of services users already pay for— a
primary reason why Internet.org does not include the WhatsApp messaging service.
Develop a three-year strategic plan for Facebook’s CEO, Mr. Mark Zukerberg.