Ch. 10 - Facebook and the Business of the Social Graph: Shifting Platforms, the Revenue Hunt, Innovation, Mistakes, and Redemption on Tech's Advancing Frontier

Graph Search

evolve search beyond the keyword. With Graph Search, Facebook allows users to draw meaning from the site's social graph and to find answers from social connections.

Content Adjacency

Concern that an advertisement will run near offensive material, embarrassing an advertiser and/or degrading their products or brands.

CDN

Content Delivery Networks Systems distributed throughout the Internet (or other network) that help to improve the delivery (and hence loading) speeds of Web pages and other media, typically by spreading access across multiple sites located closer to users. Akamai is the largest CDN, helping firms like CNN and MTV quickly deliver photos, video, and other media worldwide.

FB - Why Mobile is Different

4 areas where the competitive dynamics of smartphone apps are different than browser-based < Smartphone apps can access a user's address bookThis makes it easier to rebuild the social graph for a new mobile service. < Smartphones apps can access a phone's media library and can often plug into cloud storage. This makes it easier to share photos and video than on desktop services. < Smartphone apps can use push notifications, a huge benefit for increasing engagement. While prior services needed to rely on e-mail notifications or hoped users remembered to return to a Web site, push notifications from a service instantly say, "Hey, there's something new here for you to pay attention to," and offer single-tap re-entry into a service. < Smartphone apps also get an icon on the home screen. A constant visual reminder for a service. Single-tap access is also far better than bookmarking or typing in a URL. < While a desktop site can crush a new competitor by adding a feature as a new menu item or icon, on mobile there isn't the screen real estate for this—another reason mobile seems to favor single- purpose, specialized apps.[35]

4.1 A PLATFORM PLAYER THAT MOVES FAST AND BREAKS THINGS: WHAT ALL MANAGERS CAN LEARN FROM FACEBOOK'S MISTAKES, RESPONSES, AND PURSUIT OF NEW OPPORTUNITIES - Key Takeaways

< Facebook empowers its engineering staff to move quickly, at times releasing innovations before they are perfect. The hope is that this will foster innovation and allow the firm to gain advantages from moving early, such as network effects, switching costs, scale, and learning. < While moving early has its advantages, Facebook has also repeatedly executed new initiatives and policy changes in ways that have raised public, partner, and governmental concern. < Word of mouth is the most powerful method for promoting products and services, and Beacon was conceived as a giant word-of-mouth machine with win-win benefits for firms, recommenders, recommendation recipients, and Facebook. < Beacon failed because it was an opt-out system that was not thoroughly tested beforehand and because user behavior, expectations, and system procedures were not completely taken into account. Partners associated with the rapidly rolled out, poorly conceived, and untested effort were embarrassed. Several faced legal action. < Facebook also reinforced negative perceptions regarding the firm's attitudes toward users, notifications, and their privacy. This attitude served only to focus a continued spotlight on the firm's efforts, and users became even less forgiving.

1. Introduction - Key Takeaways

< Facebook was founded by a nineteen-year-old college sophomore and eventual dropout. < It is currently the largest social network in the world, boasting more than 1.2 billion members and usage rates that would be the envy of most media companies. < Despite the firm's rapid growth and initially high stock market valuation, Facebook faces several challenges, including generating more revenue from its customer base, growing advertising, monetizing mobile, transitioning to a mobile-centric world where competitive conditions differ, protecting user privacy, and competing with a slew of new competitors challenging Facebook's openness edict—all amid rising personnel and infrastructure costs. < The firm's rapid growth and high user engagement allowed Facebook's founder to demand and receive an exceptionally high degree of control over the firm—even as the firm went public.

2. DISRUPTING COMPETITION, BUILDING COMPETITIVE ADVANTAGE, AND THE CHALLENGING RISE OF MOBILE - Key Takeaways

< Facebook's primary competitive advantages are grounded in network effects and switching costs. < The social graph expresses the connections between individuals and organizations. < Trust created through user verification and friend approval requiring both parties to consent encouraged Facebook users to share more and helped the firm establish a stronger social graph than other social networking rivals. < Feeds catalyze virality and promote information sharing. Facebook's position as the digital center of its members' online social lives has allowed the firm to envelop related businesses such as photo and video sharing, messaging, bookmarking, and link sharing. Facebook has opportunities to expand into other areas as well. < Facebook's dominance on the desktop has allowed the firm to encroach in new markets by essentially turning on features that, in many cases, allowed the firm to dominate categories pioneered by other firms. < The mobile market differs from the desktop in many key ways that alter competition. Access to address books, media libraries, the cloud, push notifications, home screen icons, and limited screen real estate are enforcing a new competitive reality on Facebook and rivals. < Many of the dynamics above caused Facebook to lose the lead in mobile photo sharing and messaging, but the firm's deep pockets have allowed it to acquire leading firms, removing threatening rivals and strengthening the firm's competitive assets. < Facebook has also invested in Oculus VR, an unproven but promising start-up that may transform computing by making high-quality virtual reality accessible at a reasonable cost. < Much of the site's content is in the dark Web, unable to be indexed by Google or other search engines. Some suggest this may create an opportunity for Facebook to challenge Google in search. Partnerships with Bing and Facebook's own Graph Search attempt to harness the firm's dark Web asset to answer questions. < Facebook's growth requires a continued and massive infrastructure investment. The site is powered largely on commodity hardware, open source software, and proprietary code tailored to the specific needs of the service.

3. ADVERTISING AND SOCIAL NETWORKS: A WORK IN PROGRESS - Key Takeaways

< Issues of content adjacency and user attention can make social networking ads less attractive than ads running alongside search and professionally produced content sites. < Google enjoys significantly higher click-through rates than Facebook. Rates are lower since users of social sites are there to engage friends, not to hunt for products. They are less likely to be drawn away by clicks. < Display ads are often charged based on impression. Social networks also offer lower CPM rates than many other, more targeted Web sites. Facebook also sells ads on a cost-per-click, cost-per-action, and (with apps) a cost-per-install basis. < Facebook ads can be precisely targeted since the firm has a large amount of actual data on users' self- expressed likes, interests, and demographics. Facebook has also taken steps to allow third-party databases to be incorporated into targeting ads on site while preventing the possibility that databases can be combined to reveal online information to offline partners or vice versa. < Mobile traffic is growing, and mobile ads cost less while mobile offers less screen real estate for ad inventory display. Despite concerns, Facebook ads in general and mobile ads in particular have grown at a tremendous rate and are profitable. < Ads in the news feed have the advantage of falling directly within the screen real estate that a consumer is focused on. As such, they are considered superior to ads that may occupy easy-to-ignore spaces on the right-hand side of a content window. < While Facebook has cancelled some experiments (notably "sponsored stories" ads that incorporated a user's profile information and actions into ad products), the firm has found success in mobile install ads. Some gaming firms are willing to spend as much as $10 per install for these ads. < Facebook ads offer advantages of improved targeting and social engagement. Ads allow customers to virally share a message with others. Facebook can leverage customer engagement in its own ads. And Facebook allows firms to continue to send messages to the news feeds of users who have "liked" their presence on Facebook.

Walled Garden

A closed network or single set of services controlled by one dominant firm.

Cloud

A collection of resources available for access over the Internet.

Facebook's Dominance on the Desktop

Ability to envelop markets - Photo-share service - Facebook Chat Able to apply its installed base in key markets Winner-takes-all dynamics

4.2 A PLATFORM PLAYER THAT MOVES FAST AND BREAKS THINGS: WHAT ALL MANAGERS CAN LEARN FROM FACEBOOK'S MISTAKES, RESPONSES, AND PURSUIT OF NEW OPPORTUNITIES - Key Takeaways

Activists and the media were merciless in criticizing the firm's terms of service (TOS) changes and other privacy missteps. Facebook's contrite response and user outreach while in crisis mode demonstrate lessons other organizations can learn from regarding user scrutiny, public reaction, and stakeholder engagement. The firm's policy shifts to default sharing "with friends" rather than "public," and the removal of the sponsored stories ad program are also examples of course correction in response to user concerns. The firm's revamped privacy settings and notification tools help raise awareness of issues and keep consumers in control of limits on their sharing. < Facebook has created a set of services and a platform for hosting and integrating with other services, helping the firm foster its stated mission to "make the world more open and connected." < Facebook's platform allows the firm to further leverage the network effect. Developers creating applications create complementary benefits that have the potential to add value to Facebook beyond what the firm itself provides to its users. < Most Facebook applications are focused on entertainment. And while Zynga has struggled, several have built million-dollar-plus businesses, and the number of gamers on Facebook is around 25 percent. < Despite the success of Facebook platform entertainment apps, the durable, long-term value of Facebook's apps platform remains to be seen. The shift to mobile and inconsistent policies toward developers has led to Facebook's app platform revenues stagnation and has fomented a degree of developer disappointment. < Running a platform can be challenging. Copyright, security, appropriateness, free speech tensions, efforts that tarnish platform operator brands, privacy, and the potential for competition with partners can all make platform management more complex than simply creating a set of standards and releasing this to the public.

Localization

Adapting products and services for different languages and regional differences.

Network Effects

Also known as Metcalfe's Law, or network externalities. When the value of a product or service increases as its number of users expands.

APIs

Application Programming Interfaces Programming hooks, or guidelines, published by firms that tell other programs how to get a service to perform a task such as send or receive data. For example, Amazon provides application programming interfaces (APIs) to let developers write their own applications and Web sites that can send the firm orders.

ARPU

Average Revenue per User While Facebook has, at times, been the Web's most visited destination, its user base generates far less cash on a per-person basis than Google does. Facebook's ARPU is 1/6th Google's, but more than 2x Twitter's.

CPC

Cost per Click

CPI

Cost per Install

Precise Targeting

Example, a wedding photography studio targeted ads at women aged twenty-four to thirty whose relationship status was engaged

4.3 A PLATFORM PLAYER THAT MOVES FAST AND BREAKS THINGS: WHAT ALL MANAGERS CAN LEARN FROM FACEBOOK'S MISTAKES, RESPONSES, AND PURSUIT OF NEW OPPORTUNITIES - Key Takeaways

Facebook has extended its reach by allowing other Web sites to leverage the site. Using the firm's Open Graph tools, Facebook partners can add the "Like" button to encourage viral sharing of content, leverage Facebook user IDs for log-in, and tap a user's friend and feed data to personalize and customize a user's experience. < These efforts come with risks, including enabling free riders that might exploit the firm's content without compensation and the potential for privacy and security risks. < While Facebook's Web site is easy to update and push out to all users, or to test on a subset of users on a smaller scale, the firm does not have this kind of control over mobile apps. < Some fear that Facebook may be an all-too-powerful walled garden that may stifle innovation, limit competition, and restrict the free flow of information. < Global growth is highly appealing to firms, but expensive bandwidth costs and low prospects for ad revenue create challenges akin to the free rider problem. < Despite concern, Facebook is investing in new technologies and access services that promise to dramatically lower Internet access barriers, with a goal to bring billions of customers online. Consumers not only represent potential ad revenue growth as markets develop and incomes increase but also entirely new product lines, such as mobile banking, may emerge from within emerging markets.

The Hunt vs the Hike

Hunt - Google; a task-oriented expedition to collect information that will drive a specific action Hike -

Big Bets: Bringing Potential Rivals and Platform Powerhouses into the Facebook Family

Instagram: Photo-sharing mobile app purchased for $1 billion - introduced ads, began earning money WhatsApp: purchased for $19 billion - The acquisition was not to increase FB total revenue but to survive in the global shift to mobile. Oculus VR: purchased for $2 billion - Zuckerberg has also said, "Strategically we want to start building the next major computing platform that will come after mobile."[50] Adds Luckey, "This isn't about sharing pictures. This is about being able to share experiences."

Dark Web

Internet content that can't be indexed by Google and other search engines.

CPM

Most banner ads don't charge per click but rather CPM, or cost per thousand impressions (the M representing the roman numeral for one thousand)

OSS

Open source Software Software that is free and whose code can be accessed and potentially modified by anyone.

TOS

Terms of Service

Crowdsourcing

The act of taking a job traditionally performed by a designated agent (usually an employee) and outsourcing it to an undefined generally large group of people in the form of an open call.

Switching Costs

The cost a consumer incurs when moving from one product to another. It can involve actual money spent (e.g., buying a new product) as well as investments in time, any data loss, and so forth.

Social Graph

The global mapping of users and organizations and how they are connected.

Free Rider Problem

When others take advantage of a user or service without providing any sort of reciprocal benefit.