Facebook’s Strategy In Perspective

One of the big technological trends of the decade has been the rise of the social Web, and I do believe that it is a trend that will drive the evolution of the Internet in the coming years. Facebook itself has been one of the biggest trends in the category. The social networking site, started in 2004, calls itself a social utility that helps people to communicate and connect with the various social groups such as family, friends, colleagues, and others in their lives. In this post, we will review Facebook’s strategy – what it is and what it should be.

Facebook’s Story
The company was founded by Harvard students Mark Zuckerberg, Eduardo Saverin, Dustin Moskovitz, and Chris Hughes. The site’s membership was initially restricted to Harvard students and gradually expanded to colleges in the Boston area, the Ivy League, and Stanford University. As it gained support, the site allowed students at other universities, followed by high school students and, finally, to anyone aged 13 or more.

In July of last year, Facebook boasted of over 500 million active users, of whom 50% logged in to their accounts every day to connect with an average of 130 friends. Facebook also says that people spend over 700 billion minutes on the website per month. According to Quantcast, as of October 2010, Facebook had more than 135.1 million unique monthly visitors from the U.S. alone.

Facebook’s Financials
Facebook remains a privately held organization and does not disclose financial information. Recently, however, the company applied for private equity funding from Goldman Sachs. Per Goldman’s reports, for the nine months ended September 2010, Facebook recorded revenues of $1.2 billion with earnings of $355 million. For fiscal 2009, the company is said to have earned revenues of $777 million with earnings of $200 million.

Facebook’s Revenue Model
Facebook gets most of its revenues from advertisements. According to eMarketer, advertising spending on social networking sites in the U.S. is expected to increase 20% over the year from $1.4 billion in 2009 to $1.68 billion in 2010. The number is expected to cross $2 billion in 2011. In the rest of the world, social advertising is expected to grow at a faster rate. From an estimated $1.13 billion in 2009, advertising spending will increase 49% to $1.62 billion in 2010 and another 51% to $2.17 billion in 2011. Analysts expected 25% of worldwide social advertising in 2010 to be spent on Facebook, compared with a 20% share in 2009. According to another report, this one by Borrell Associates, social network ad spending is expected to increase to $10 billion in 2013, $12 billion by 2014, and $14 billion by 2015.

Other revenue source includes Facebook Credits, online currency purchased by users and the only form of payment for Facebook’s online games such as Farmville and Pet Society. The currency can also be used to buy virtual gifts and cards and to make charitable donations. Facebook keeps a 30% share of these credits. Developers who wish to accept Facebook Credits can redeem the credits at a charge of $0.10 per credit, on which Facebook levies a $0.03 redemption fee. While revenue contribution from this stream is not known, analysts estimate it to account for 15% of overall Facebook revenues.

Facebook’s Acquisitions
Over the past year, Facebook has also improved its site features through talent acquisitions of small entrepreneurial firms. They acquired Octazen Solutions, a Malaysian company with expertise in importing contacts, in February. The acquisition helped Facebook enable users to add to their network using their e-mail list. Octazen has also helped Facebook develop the Find Friend Browser, which helps users search for friends based on location, organization, and so on.

To add to their photo sharing capabilities, Facebook acquired Divvyshot, a company known for their capability of making group photo sharing convenient. Using the Divvyshot team’s talents, Facebook has been able to simplify photo tagging by adding group tag, which lets users tag multiple photos in the same album.

The company went on to acquire Sharegrove, a San Mateo–based startup that helped them develop the tool to let Facebook members create private conversation groups to share chats, links, and photos. In October of this year, Facebook improved the existing version of Facebook Groups to launch a new shared space that lets members chat and share e-mail, files, and photos.

Nextstop, the travel recommendation site, was acquired in July, followed by the acquisition of a Web publishing startup, Chai Labs, for around $10 million. Nextstop had over 100,000 recommendations for places around the world, was known for its brief reviews on places, and used social elements to filter recommendations. Also within the travel segment, Facebook recently tied up with TripAdvisor to enable a personalized travel planner. Now, if users visit TripAdvisor while being logged into Facebook, they will be able to see their friends’ recommendations and reviews on hotels and places to visit.

Chai Labs specializes in semantic search technology that makes it easier for consumers of editorial content to find information within a specific vertical, such as travel or local news. Chai Labs’s core platform helps convert unstructured or loosely organized data into manageable, accessible repositories of information and uses proprietary crawling, artificial intelligence, and data mining technologies to analyze and extract insights from millions of real-time data points across the Web. The acquisition will help Facebook to improve search within Facebook Pages.

Hot Potato, a Brooklyn-based startup, was another $10 million acquisition. Hot Potato let users check in by informing others of their place, time, and activity. The acquisition was expected to help Facebook Places by adding real-time updates for events and making use of Hot Potato’s mobile-based application.

Facebook then acquired the file sharing site Drop.io, which let users exchange files or “drops” privately with their friends through Web, e-mail, or phone. Drop.io also had features including live chat, collaborative documents, and fax support.

More recently, Facebook acquired Zenbe, the creator of Shareflow, a messaging solution that lets users view a flow of communication about certain topics, and Walletin, a small gaming startup. Facebook is expected to integrate Zembe’s Shareflow into their messaging feature. Recently, they also upgraded their messaging service by having it let users decide the medium – SMS, chat, or e-mail – they want to use to send or receive messages and ensuring that all messages, irrespective of their medium, are organized and stored.

In the coming years, Facebook is expected to continue making these smaller acquisitions. Acc. to Mark Zuckerberg, “We’ve not once bought a company to get a company. We buy companies to get excellent people.”

While these investments have helped the company improve their feature functions such as Facebook Pages, contact management, private conversations, photo sharing, and Facebook Places, to name a few, it seems to me that none addresses major monetization opportunities. They do, however, seem to make users more engaged and make the site stickier, which is important, because this is what social Web advertising is trying to monetize.

Today, Facebook’s stock trades in the secondary market, mostly among employees and other small investors. The company maintains that they are still at the SEC required norm of 499 shareholders, which lets them keep their information private. However, with the recent private equity offering to Goldman, many believe that the company’s IPO may be coming soon. Goldman has valued the organization at $50 billion, translating to an earnings multiple of 140.

I believe that Facebook has nailed the social Web business model. They are on top of most social Web trends, but gaps remain in analytics, optimization, targeting, personalization, and privacy to make social media advertising more precise. As I said earlier, social networks such as Facebook have a lot of information about individuals, but they have not yet figured out ways to monetize this information and create a safe, nonintrusive, yet personalized framework through which advertisers can do high-precision targeting.

I also think they need to get into search. One of the best ways to monetize this vast area would be through vertical search, an essential component of the Web 3.0 formula. Addressing vertical and local search trends will help Facebook  create an entirely new level of monetization. While they are acquiring, looking at companies like Kayak and Indeed to enter verticals such as travel, jobs, photos, and matchmaking will address the missing vertical element in their model. And it will give them access to the all-important search market, which still is the Internet’s top monetization model.

With that, perhaps the trillion dollar valuation that some analysts are proposing may become feasible!