Why google failed to invent facebook?


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Why google failed to invent facebook?

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  2. 2. Table of ContentsINTRODUCTION................................................................................................................ 41. COMPANIES OVERVIEW ............................................................................................... 6 1.1. Facebook ................................................................................................................... 6 1.2. Google .................................................................................................................... 102. BUSINESS MODEL DEVELOPMENT ............................................................................ 13 2.1. Facebook business model .......................................................................................... 13 2.1.1. Target Group ..................................................................................................... 15 2.2.2. Viral network ..................................................................................................... 16 2.2.3. Credibility ......................................................................................................... 17 2.2.4. Platform with alliances ........................................................................................ 17 2.2.5. Innovation and risks............................................................................................ 183. CAPABILITIES DEVELOPMENT .................................................................................. 20 3.1 Facebook Capabilities ................................................................................................ 20 3.2. Strategic Alliances .................................................................................................... 234. DISCUSSION ................................................................................................................ 26 4.1 Facebook success strategy .......................................................................................... 26 4.1.1 Innovation and risks ............................................................................................ 26 4.1.2 Strategical alliances ............................................................................................ 27 4.1.3 Capabilties ......................................................................................................... 27 4.2 Google’s reactions ..................................................................................................... 285. INNOVATIVE BUSINESS MODEL ................................................................................ 31 5.1 The future of social networks ...................................................................................... 31 5.2 The future of internet connections ............................................................................... 32 5.3 Future of search engine .............................................................................................. 33 5.4 Business model ......................................................................................................... 33CONCLUSION.................................................................................................................. 36ACKNOWLEDGMENTS ................................................................................................... 37REFERENCES .................................................................................................................. 38APPENDIXES ................................................................................................................... 41 Appendix 1. Interview with executive director of OKIA Lauri Ilison..................................... 41 Appendix 2. Interview with Margo Veskimägi, TNS Emor, April 24, 2011 ............................ 45 Appendix 3. An interview with Marko Saue, GOAL creative director ................................... 48 Appendix 4. An interview with Silver Hage, co-founder of Ivy ............................................ 57 Appendix 5. The word map of social networks ................................................................... 65
  3. 3. ABSTRACTOnce upon a time, there were two princes of Internet, also known as Sergey Brin and LarryPage. Their magical touch enabled them to invent superior services customers had neverdreamed of on Internet, starting with web search, e-mail applications and proceeding withadvertising tools and social network. Their magic word was Google, the whole world wasGoogled. Their company went from zero to twenty billion dollars in revenues in fourhundred weeks (Auletta 2009). But then another handsome student–prince, named Mark Zuckerberg, hit thelightning sky. Google social network Orkut was launched in January 2004, and all of asudden, in February 2004 there was another social network called Facebook in the Web. Inseven years, Facebook has grown from a student project to one of the most-trafficked sitesin the world. Nowadays Facebook is the major player in social networks area. Google’sfairytale in the World Wide Web is endangered, especially in the field of social networks. Google versus Facebook is the most reflected confrontation in the Internet business.The showdown is intriguing. In our research we would like to explore why Google failed toinvent the most popular social network ever seen; what are the key success factors ofFacebook and what could be the future business model of social networking and websearch. 3
  4. 4. INTRODUCTIONMark McLaughlin, president and chief executive officer, VeriSign, has said: “Over the past25 years, the internet has strengthened communities, transformed economies and allowedpeople all over the world to come together. All this simply wouldn’t have been possiblewithout the vision, talent and creativity of these companies and individuals. The hundredsof millions of people who now use the internet daily have these trailblazers to thank for therich online experiences they enjoy today – most of which were unimaginable back in 1985when the first .com domain name was registered.” [WWW](dazeinfo.com/2010/06/01/paypal-facebook-twitter-among-top-com-ventures). Two companies, who have been facilitating people all around the world to cometogether, are Facebook and Google. Google has invested in Internet search, cloudcomputing, and advertising technologies. Googles rapid growth, since its incorporation,has triggered a chain of products, acquisitions, and partnerships beyond the companys coreweb search engine. Facebook social networking service has more than 600 million activeusers, so Facebook has impacted on the social life and activity of people. One of suchimpacts is the ability to unite family members and friends. Both companies generate their profits primarily from advertising, so these are thebiggest advertising companies, although their business is put in World Wide Web. Bothcompanies have been met with controversies: blocked in several countries, criticism onusers’ safety, claims over intellectual properties, etc., yet these two are very differentcompanies. Nevertheless, Google and Facebook have been extremely successful and are goingthrough a rapid growth.In this paper we would like to explore and find answers to the following questions: - How did companies, who started as student-projects, become so successful? - How did Facebook manage to be become one of the most influential companies in the world? 4
  5. 5. - How did Facebook’s core capabilities develop and which were the essentialalliances to grow?- What are the differences between business models of Google and Facebook?- Why did Google fail in social networking?- What is the future innovative business model in the World Wide Web? 5
  6. 6. 1. COMPANIES OVERVIEW1.1. FacebookFacebook is a social utility that helps people to communicate more efficiently with theirfriends, family and co-workers. Facebook is one of the most-trafficked sites in the worldand has had to build infrastructure to support this rapid growth, while the company has thelargest users’ base in the world. Facebook is a part of millions of people’s lives all aroundthe world providing unparalleled distribution potential for applications and the opportunityto build a business that is highly relevant to people’s lives. The company developstechnologies that facilitate the sharing of information through the social graph, the digitalmapping of people’s real-world social connections [WWW] (facebook.com/press). Facebook was founded by Mark Zuckerberg in February 2004, initially as anexclusive network for Harvard students. Prior to launching Facebook, Mark Zuckerberghad experimented with a number of different web products. In fact, his first attempttargeted at the Harvard student body was called FaceMash, which drew criticism from theniversity and some students, prompting Mark to drop the service. The original idea for theterm Facebook came from Zuckerberg’s high school (Phillips Exeter Academy). TheExeter Face Book was passed around to every student as a way for students to get to knowtheir classmates for the following year. It was a physical paper book until Zuckerbergbrought it to the Internet. Once the site Facebook was ready for users, the Facebookfounders blasted e-mails to Harvard students to let people know about the site. The teamhad access to the e-mail addresses of Harvard students at each dorm. Thus e-mailmarketing, viral feature sets, and word of mouth was how Facebook was launched. Giventhe immediate positive reaction that Facebook received at Harvard, Facebook began rollingout the service to other universities. It was a huge hit: in 2 weeks, and within four months,Facebook added 30 more college networks. Facebook members skyrocketed in 12 monthsfrom 13 to 24 million active members. Facebook did not use a targeted geographic roll-outstrategy in the early days; they received registration requests from students at other schools, 6
  7. 7. and then prioritized which schools to open, based on the number of these requests.[WWW] (www.startup-review.com, www.crunchbase.com) In summer 2004, Facebook got its first investment $500,000. Now, with millions ofusers, Friendster attempted to acquire the company for $10 million in the mid 2004.Facebook turned down the offer and received subsequently $12.7 million in funding.Facebook continued to grow, opening up to high school students in September 2005 andadding an immensely popular photo sharing feature the next month. Facebook subsequentlyopened up to work networks, eventually amassing over 20,000 work networks. Finally inSeptember 2006, Facebook was opened to anyone with an e-mail address [WWW](www.crunchbase.com). In the summer of 2006, Yahoo attempted to acquire the company for $1 billiondollars. Reports actually indicated that Zuckerberg made a verbal agreement to sellFacebook to Yahoo. A few days later when Yahoo’s stock price took a dive, the offer waslowered to $800 million and Zuckerberg walked away from the deal. Yahoo later offered$1 billion again, but this time Zuckerberg turned Yahoo down and earned instant notorietyas the “kid” who turned down a billion [WWW] (www.crunchbase.com). One sour note for Facebook has been the controversy with social networkConnectU. The founders of ConnectU, former classmates of Mark Zuckerberg at Harvard,allege that Zuckerberg stole their original source code for Facebook. The ordeal has gone tocourt, and has now been resolved. Notwithstanding this lingering controversy, Facebook’sgrowth in the fall of 2007 was staggering. Over a million new users signed up every week,200,000 daily, totaling over 50 million active users. Facebook received 40 billion pageviews a month. Long gone were the days of Facebook as a social network for collegestudents. 11% of users are over the age of 35, and the fastest growing demographic areusers over 30. Facebook has also seen huge growth internationally; 15% of the user base isin Canada (see more for Appendix 5). Facebook users’ passion, or addiction, to the site isunparalleled: more than half use the product every single day and users spend an average of19 minutes a day on Facebook. Facebook is tightly integrated into the daily media practicesof its users. More than 2.5 million websites have integrated with Facebook. Facebook is 6th 7
  8. 8. most-trafficked site in the US and top photo sharing site with 4.1 billion photos uploaded[WWW] (www.facebook.com/press). In October 2007, Facebook was valued over $15 billion, making it the 5th mostvaluable US Internet company, yet with only $150 million in annual revenue. [WWW](www.crunchbase.com). Facebook timeline is shown on Drawing 1. Facebook’s income is generated mainly from the brand advertising, Facebook adsworking on the same basis as Google Adwords, they are paid ads, and there are two ways tokeep a track of them: 1. You can pay a certain amount per thousand impressions (also known as CPM), which denotes the number of people who see the ad. Facebook keeps track of how many people click it. You can also pay for each time a person actually clicks an ad. This is known as cost per click (CPC). 2. You can keep everything very simple by seeing if you can get some extra traffic, fans, or sales, or you can get sophisticated and carefully monitor the traffic to see if you can calculate your return on investment. You can spend as little or as much as you want. Generally, the strategy is to try running an ad over a certain period of time such as a week or a month and see how many people view it. If you are advertising a Facebook page, you can see how many people become fans based on a certain number of dollars spent, if you are selling a product. Ideally, you see how many sales of the product result (Kelsey 2010). The average advertising revenue generated by Facebook for every 1,000 searchesconducted on its website has declined from an estimated $8 to $5 currently. Revenue persearch (RPS) is primarily a function of the click through rate (CTR) on ads placedalongside search results, as well as the price paid by advertisers for every user click (CPC).Facebooks RPS is expected to decline over time as Facebook is not yet a search engine atits core like Google, Microsofts Bing or Baidu. It also is not an open web portal like Yahooor AOL and requires users to login to run searches. Also the international mix of totalsearches increases will lead to RPS decline [WWW] (community.nasdaq.com). Facebook’s main competitors include MySpace, Bebo, Friendster, LinkedIn,Tagged, Hi5, Piczo, and Open Social. 8
  9. 9. News Feed and Mini Feed introduced, registration for anyone (Sept) Expanded to add Marketplace launched, Facebook Platform Facebook Connect work networks launched with 65 developers and over 85 became generallyM.Zukerberg and co-founders launced Share feature Facebook grew to support more than (May) applications available Facebook from Harvard added 800 college networks (Nov) (May) (Dec.) (Feb) (May) Facebook mobile feature Over 400M launced Virtual gift shop Facebook Ads Facebook Chat active users Facebook expanded to Standford, Facebook added high launched launced launched More than 200M (Apr.) (Feb.) Columbia and Yale schools networks active users (Feb.) (Nov.) (Apr.) (Mar.) (Sept.) (Apr.) 2004 2005 2006 2007 2008 2009 2010 Facebook Photos were added to application, added Usernames More than 20M international schools network More than 100 M launched active users (Oct.) Development platform launced, notes active users (June) (Apr.) application introduced, strategic relationship (Aug.) Groups of applications, the Wall is formed with Microsoft for banner ad added as profile feature syndication Over 150M (Sept.) (Aug,) More than 50M active users, active users More than 12M Facebook Platform for Mobile (Jan.) active users launched (Dec) (Oct.) 1M active users (Dec) More than 5,5M active users (Dec) Drawing 1. Facebook timeline and key facts. 9
  10. 10. 1.2. GoogleGoogle’s software initiatives encroach on every media industry, from telephone totelevision to advertising to newspapers to magazines to book publishers to Hollywoodstudios to digital companies. More than 70 percent of all searches worldwide have beendone through Google search box (for key facts see Table 1). The search makes 97 percentof their money. Google’s YouTube does two-thirds of all Web video traffic. Google’sDoubleClick is the foremost digital advertising service company. Google’s advertisingrevenues reaching 30 billion dollars a year, account of 40 percent on all the advertisingdollars spent online. Google News aggregates 25,000 news sites daily (Auletta 2009). Google has been always seeking to construct a formula, an algorithm that graphsand predicts behavior. Google believes that every aspect in the world is unlocked with data.They require facts, beta testing, mathematical logic. Their ideal is to have so muchinformation about their users that Google can devise an algorithm that provides a singleperfect answer. Google’s goal is to store 100 percent of each individual’s data, what Googlecalls “transparent personalization”. This would allow Google to choose which informationto show you, reducing inefficiencies. The goal of the company is customer satisfactionthinking Google as one product (Auletta 2009). Google began in January 1996 as a research project by Larry Page and Sergey Brinwhen they were both PhD students at Stanford University in California. While conventionalsearch engines ranked results by counting how many times the search terms appeared onthe page, the two theorized about a better system that analyzed the relationships betweenwebsites. They called this new technology PageRank, where a websites relevance wasdetermined by the number of pages, and the importance of those pages, that linked back tothe original site. Eventually, they changed the name to Google, originating from amisspelling of the word "googol", the number one followed by one hundred zeros, whichwas picked to signify that the search engine wants to provide large quantities of informationfor people. Originally, Google ran under the Stanford University website, with the domaingoogle.stanford.edu. [WWW] (/en.wikipedia.org/wiki/Google). 10
  11. 11. On September 7, 1998 was the day when Google was officially incorporated by amission to organize the world’s information and make it universally accessible and useful[WWW] (/en.wikipedia.org/wiki/Google). Today, the company’s influence on the Web is undeniable. Practically everywebmaster wants his or her site listed high on Googles search engine results pages(SERPs), because it almost always translates into more traffic on the corresponding Website. “The Internet,” said Google chief economist, Hal Varian, “makes informationavailable, Google makes information accessible.” Google’s servers contain a tremendousamount of data about its users, and this database grows exponentially as search and thevariety of Google services multiply (Auletta 2009). Googles influence is not limited to just the Web. Google services include: Gmail,Google Earth, Google Maps, Google Video, Picasa, Orkut, cloud computing applicationssuch as Desktop or Docs, etc. (for Google facts see Drawing 2). Google does its part toaddress global warming – it places on its roofs the installations of solar photovoltaic panels(Auletta 2009). 11
  12. 12. Table 1. The number of Google employees and growth in revenue and profitDrawing 2.Timeline of Google progress [WWW] (google.com/intl/en/corporate/history) 12
  13. 13. 2. BUSINESS MODEL DEVELOPMENT2.1. Facebook business modelFacebook business model is based on the network effect which causes a service to have avalue to a potential customer dependent on the number of customers already owning thatgood or service. According to Sheryl Sandberg, Facebook business is merely advertising,that is what they are focused on and it is working well [WWW] (businessweek.com).Facebook started as a social network project, rather than a serious business, but the rapidlygrowing userbase made it possible to also grow as a business. Facebook functioned as a successful platform for educational institutions in earlieryears attracting investors and developers, but it functioned without a significant profit. In2007, when the website became public, the revenues started to grow and the company wasfully oriented to business (see Table 2). Table 2. Facebook growth model 2007-2010 [WWW] researched by authorsWhen Facebook platform went public and revenues started increasing, the profits weremade from Gifts and Ads (Marketplace). The value Facebook offers has remained more or 13
  14. 14. less same through the years, although customer segments and revenue sources havechanged (Drawing 3). Drawing 3. Facebook business model starting in 2004. In 2010, Facebook offers social networking platform just as in 2004, but is workingits way out of the boundaries of Internet. The main focus in development is in the mobilenetwork and rapidly increasing revenue streams come mainly from advertising (Drawing4). 14
  15. 15. Drawing 4. Facebook business model in 2010 The success of Facebook business model does not lay in only intelligent businesssolution, the main reason for revenue growth was the gigantic user base Facebook managedto gather. So the key factors are the main reasons that helped to grow the number ofFacebook users.2.1.1. Target GroupFacebook was created with a clear idea of the service they wanted to provide the user with.They managed to reach the right target group, which had a large impact on its success.Zuckerberg developed a personal niche for his site in making it specifically for college and 15
  16. 16. university communities. Facebook, being a closed environment for students, had enormousgrowth in a very short period of time. Picture 1. The interace of thefacebook.com (2004-2005)2.2.2. Viral networkIn addition to wisely selected target group, one of the key factors for success was using thenetwork effect and leading the users to create the needed content. The informationpublished on each profile — relationship statuses, location, interests — has little value, ifyou are browsing strangers. Having a network with people you have met or might meet,and getting access to the information they share, adds value for people to join in. And eachperson joining adds value to anyone using Facebook. What made the user base numbergrow so large was the wall feature. The wall made it possible to share more informationand interact with more contacts. The viral algorithm and constantly updated live feed are 16
  17. 17. the key factors why the growth was surprisingly rapid (Appendix 4). Google is stillscrambling to develop a secret social networking like website (Google Me to rivalFacebook) [WWW](dazeinfo.com). Google has been pinched by the core due to enormousrise of Facebook and company has barely anything in hand that can encounter such asituation, besides being just a spectator; at least for now.2.2.3. CredibilitySocial networks have not been as successful in the past for being too one-dimensional andunreal. Facebook was able to create a network where people would use their own pictureand real name instead of a pseudonym. Mr. Lauri Ilison, the executive director of OKIA,believes that this aspect is one of the key factors of Facebook growth: “This has created acompletely new quality in the content. As people use their own name, they have an innercontrol mechanism that stops them from writing improper things. They just do not want tolet others see and read what they might anonymously write.” (Appendix 1). In earlier socialnetworks (such as Friendster, MySpace) it is possible to browse through various people’sprofiles and add them as friends, but the likelihood of you actually meeting these onlinefriends is very small. Facebook, on the other hand, is the opposite. The network of realpeople has a factor of credibility, which on one hand helps to keep the information flowmodest and on the other hand makes people want to be a part of it.2.2.4. Platform with alliancesWith such database, Facebook was able to lure in more and more investors and developers,and co-operation with developers helped to increase the time spent on Facebook.Applications created on the Facebook platform helped to keep users entertained and spendmore time on the webpage. Attracting the interest of enterprises, Facebook launchedFacebook Ads in 2007. 17
  18. 18. In 2007, the Revenue growth was 188% from $52 million to $150 million, whichindicates that Facebook is on the right path and makes strategically useful alliances[WWW](en.wikipedia.org/facebook). Alliances can be defined as voluntary arrangementsbetween enterprises in order to create more innovative ideas, products and technologies. InFacebook case the alliances go further. The whole business model concept is built on anidea that while providing an effectively working viral social platform, the content can beadded by partners. Applications provided through alliances were beneficial to Facebookfirstly, by keeping users on the platform for longer period of time and secondly, thedevelopers were boosting the revenue stream (Gulanti 1998). Facebook Connect, launched in 2008, was also an innovative solution. Facebookusers were provided with an opportunity to use various other websites while keeping theiridentity via Facebook. Zuckerberg was able to successfully integrate user database withpartners the users could benefit from. As Teece suggests, managing efficient alliances canbe a key factor in succeeding. “The ability to manage alliances effectively has beensuggested to be a firm-level dynamic capability that enables a firm to integrate, build andreconfigure internal and external competences to address rapidly changing environments inorder to create innovative forms of competitive advantage given path dependencies andmarket positions.” (Teece 1997). Facebook Places together with Facebook Deals has opened another market toFacebook. Enterprices benefit from the advertising via Facebook and reaching large targetgroup, which keeps them offering deals. The deals in turn keep users logging in to placesand creating a more detailed social graph for Facebook.2.2.5. Innovation and risksOne of the success factors was Zuckerberg’s ability to take risks in order to find innovativesolutions. Facebook had more technical solutions that helped Facebook to develop, forexample, the opportunity to tag people on pictures. It was revolutionary at that time(Appendix 4). The whole concept of Facebook as a social network has been innovative 18
  19. 19. from the start. Innovations always deal with change. It cannot be viewed from only oneprocess perspective focusing on technological or project management issues. Innovationsare about people, organizations, and culture (Pontiskoski, Asakawa 2010). Facebookconsistently approaches innovation and privacy changes with a do-it-first-and-then-see-what-happens attitude. Zuckerberg is keenly aware of the importance of rapid deploymentand iteration. At the heart of the process is the notion of "hacking", which Zuckerberginsists is not about breaking and entering: "Its about being unafraid to break things in orderto make them better.". However, it has often done a bad job in explaining to users what it is doing, why,and when, as well as what kind of control users have over this. But Facebooksaggressiveness on the privacy front is a big reason for the sites success. From a businessperspective, Facebooks approach to innovation is smart. And if Facebook wants tomaintain its competitive edge, it will do what it has to do to smooth over the latest blow-up,and then go forth with the same approach and attitude it has had all along. Facebookdesigner Soleio Cuervo says: "What we make wont last, but we make things fast and get totest our ideas quickly with real users. Were in it for the impact." [WWW](www.fastcompany.com). If Facebook were to radically change its approach to innovation,meanwhile, seeking prior approval for every change it makes, its innovation would slow toa crawl. It would also sacrifice the opportunity to roll out innovations that initially freakpeople out. 19
  20. 20. 3. CAPABILITIES DEVELOPMENT3.1 Facebook CapabilitiesEach organization is a collection of unique resources and capabilities that provides the basisfor its strategy and the primary source of its returns. In the 21st century hyper-competitivelandscape, a firm is a collection of evolving capabilities that is managed dynamically inpursuit of above-average returns. Thus, differences in a firms performances across time aredriven primarily by their unique resources and capabilities rather than by an industrysstructural characteristics [WWW] (www.1000ventures.com). Resources are inputs of a firms production process, such as capital, equipment, theskills of individual employees, patents, finance, and talented managers. Resources areeither tangible or intangible in nature. With increasing effectiveness, the set of resourcesavailable to the firm tends to become larger. Individual resources may not yield to acompetitive advantage. It is through the synergistic combination and integration of sets ofresources that competitive advantages are formed [WWW] (www.1000ventures.com). A capability is the capacity for a set of resources to integratively perform a stretchtask or an activity. Through continued use, capabilities become stronger and more difficultfor competitors to understand and imitate. As a source of competitive advantage, acapability "should be either so simple that it is highly imitable nor so complex that it defiesinternal steering and control." [WWW] (www.1000ventures.com). A core competency is a deep proficiency that enables a company to deliver uniquevalue to customers. It embodies an organization’s collective learning, particularly on howto coordinate diverse production skills and integrate multiple technologies (Leonard-Barton1992). The value of the core competencies can be enhanced by combination with theappropriate complementary assets (Teece, Pisano, et al. 1997). Such a core competencycreates sustainable competitive advantage for a company and helps it to branch into a widevariety of related markets. Core competencies also contribute substantially to the benefitsthe company’s products offer customers. Understanding core competencies allows 20
  21. 21. companies to invest in the strengths that differentiate them and set strategies that unify theirentire organization (Rigby 2007). Facebook develops technologies that facilitate the sharing of information throughthe social graph, the digital mapping of people’s real-world social connections. At thebeginning of 2006, Facebook became an opened platform for general public. Facebookstarted to create more different applications to keep users informed about each other, sharemoments, and enrich social life without the need to browse profiles. Facebook built avariety of core applications: Photos, Events, Videos, Groups, and Pages. This way the linksdid not dissolve, but added relevance to the social network as it grew. Later on they addedmore core applications, for instance, the Like button. Like button is deeply integrated withone’s profile and helps Facebook get a very accurate reading on the type of stuff one isinterested in. With the Like button, users do not even have to log in anymore; they arealways connected to Facebook. Since the Like button was introduced, it was seen onebillion times in the first 24 hours [WWW] (www.bloomtools.com). In 2010, Facebook launched a new application: Facebook Places. Facebook Placesis a location based on service for use within the Facebook social network through mobiledevices. It competes with other stand-alone location-based check-in services includingFoursquare and Gowalla. The Facebook Places feature lets users check into physicallocations so that others can see where they are. The interface also shows users checking inwho else is located nearby. In addition to the information about the user locations beingspread across groups of friends, each location will also have its own newsfeed listing recentactions and check-ins that have taken place. Users checking in are also able to tag friendswho are visiting along with them in a similar format to how photos are tagged. Facebookstated at the Places launch event that the service serves three core purposes. With FacebookDeals it is possible for the user to see what offers are nearby and share those deals with hisor her friends. It allows the users to state where they are for other people to see, it helps theusers to find out where other people currently are, and it also shows what is going on atnearby locations. When logged in, the users can view lists of friends that are in physicallocations nearby and connect with them through the service as well as in person [WWW](www.mahalo.com). Facebook Places together with Facebook Deals has opened another 21
  22. 22. market to Facebook. Enterprices benefit from the advertising via Facebook and reachinglarge target group, which keeps them offering deals, and the deals keep users logging in toplaces and creating a more detailed social graph for Facebook. Dynamic capabilities are the firm’s ability to integrate, build, and reconfigureinternal and external competencies to address rapidly changing environments. The term“capabilities” emphasizes the key role of strategic management in appropriately adapting,integrating, and reconfiguring internal and external organizational skills, resources, andfunctional competences to match the requirements of a changing environment. Firmcapabilities need to be understood not in terms of balance sheet items, but mainly in termsof the organizational structures and managerial processes which support productive activity(Teece, Pisano, et al. 1997). Dynamic capabilities thus reflect an organizations ability to achieve new andinnovative forms of competitive advantage given path dependencies and market positions.(Leonard-Barton 1992). A dynamic capability framework is that today’s rapidly changingmarkets force firms to respond quickly and to be innovative. One of the innovative solutions was the News Feed. Facebook News Feed is all-important page that users see when they first log on to the site. News Feed, a personalizedfeed of one’s friends updates. News Feed has evolved quite a bit since it launched in 2006,they offered some insight into the algorithms that allow News Feed to show you relevantcontent, collectively called EdgeRank. News Feed only displays a subset of the storiesgenerated by one’s friends - if it displayed everything, there is a good chance one would beoverwhelmed. At a high level, the EdgeRank formula is fairly straightforward. Every itemthat shows up in one’s News Feed is considered an Object. If one have an Object in theNews Feed (say, a status update), whenever another user interacts with that Object they arecreating what Facebook calls an Edge, which includes actions like tags and comments[WWW] (www.techcrunch.com).Each Edge has three components important to Facebook’s algorithm: 22
  23. 23. - First, there’s an affinity score between the viewing user and the item’s creator — if you send your friend a lot of Facebook messages and check their profile often, then you’ll have a higher affinity score for that user than you would, say, an old acquaintance you haven’t spoken to in years. - Second, there’s a weight given to each type of Edge. A comment probably has more importance than a Like, for example. And finally there’s the most obvious factor - time. The older an Edge is, the lessimportant it becomes [WWW] (www.techcrunch.com). Facebook did not create a community where one never existed before; rather theyprovided an important information and communication service to a pre-existing offlinecommunity. Facebook created a high utility online service for enabling pre-existing socialbehaviors within an offline community.3.2. Strategic AlliancesLeading companies, particularly in such dynamic industries as biotechnology, computers,and infotechnology, have increasingly used different kinds of cooperative inter-organisational relationships (e.g., contractual alliances, consortia, joint ventures) to improvetheir resource endowment and to master strategic uncertainty better than their competitorsTo implement corporate and business strategies successfully, firms often cannot rely onsingle high-profile alliances. They need a comprehensive alliance portfolio strategy thatprovides access to required external resources, using several coordinated alliances(Hofmann 2007). The strategic alliance is cooperation or collaboration which aims for a synergywhere each partner hopes that the benefits from the alliance will be greater than those fromindividual efforts. The alliance often involves technology transfer (access to knowledge andexpertise), economic specialization, shared expenses and shared risk. (Mowery, Oxley et.al. 1996). One of the fastest growing trends for business today is the increasing number ofstrategic alliances. Creating different strategic alliances has been one of the key success 23
  24. 24. factors for Facebook. Thereof Facebook has assured the rapid progress of its platform. In2007, Facebook and Microsoft Corp. announced that the two companies would expand theiradvertising partnership and that Microsoft will take a $240 million equity stake inFacebook’s next round of financing at a $15 billion valuation. Under the expanded strategicalliance, Microsoft will be the exclusive third-party advertising platform partner forFacebook. In 2009, The Nielsen Company and Facebook announced a multi-year, strategicalliance to help marketers’ better use the Internet to develop and market new products. Thealliance combines Facebook’s global consumer reach with Nielsen’s market researchexpertise to provide better insight and information to marketers around the world. SherylSandberg, “Facebook is an increasingly vital link between consumers and brands,” saidJohn Burbank, CEO of Nielsen’s online division. “We will now be able to add deepknowledge of this important social network to our unmatched media measurement andconsumer insight across all three screens. Together we will be able to provide the missingelements to clients seeking better understanding of how Web content and online advertisingaffect consumer behavior.” [WWW] (www.adoperationsonline.com). In 2010, Facebook announced an alliance with PayPal, which will now be apayments provider for Facebook Credits. Now, Facebook users can buy Facebookadvertising and its virtual currency, Credits, using the online payment service. Hundreds ofmillions of dollars were spent last year on the social games that are played on Facebook’splatform, analysts estimate. Companies such as Zynga and Playfish sell virtual goods tousers who play games such as Mob Wars and Restaurant City. But until now Facebook hasnot taken a cut of those transactions. The social game companies turned instead to PayPaland a handful of other payments providers to sell credits for individual games. Facebook istesting the use of Credits within games and other applications on its platform. By allowingusers to pay for in-game purchases with Credits, Facebook hopes to simplify theexperience, allowing users to have a Facebook wallet of sorts, and likely taking a smallcommission on the payments. “We want to give the people who use Facebook, as well asadvertisers and developers, a fast and trusted way to pay across our service,” Dan Levy,director of payment operations at Facebook, said in a press release. “As our business has 24
  25. 25. grown, offering local methods of payment has become increasingly important foradvertisers who want to buy Facebook Ads. Teaming with PayPal, a global leader in onlinepayments makes this possible.” [WWW] (www.socialmedia.globalthoughtz.com). Also, in 2010 Facebook and FarmVille’s Zynga enter into five-year alliance.Facebook and Zynga have entered into a five-year strategic relationship that increases theirshared commitment to social gaming on Facebook and expands use of Facebook Credits inZyngas games. The agreement provides a solid foundation for both companies to continueto work together to provide millions of people with a compelling user experience for socialgames [WWW] (www.ditii.com). 25
  26. 26. 4. DISCUSSION4.1 Facebook success strategyThere are various reasons why a small start-up enterprise was able to gain market share atthe expence of a large corporate brand. What made the success possible was a number ofstrategially right moves.4.1.1 Innovation and risksFacebook software engineer Alex Moskalyuk said that Facebook has no direct strategy toattract users from competitor sites. "You can spend your time worrying about thecompetitors or you can spend your time innovating your product," he said. "We chose to dothe latter and not the former." [WWW] (smh.com.au). Facebook moto has been “to breakthings”. In order to reach some new level on knowledge or content, something needs to bebroken. While Google is considering failing an acceptable norm as long as the process isoccurring fast and progress in some other field is made, Facebook had a different approach.Facebook values the process of experimenting and getting results and willingness to breakthe pattern. While unlearning is a difficult process, re-learning and executing it the hardestfor human psychology [WWW] (http://www.fastcompany.com). Facebook had more technical solutions that helped it to develop, for example, theopportunity to tag people on pictures. It was revolutionary at that time (Appendix 4). Thewhole concept of Facebook as a social network has been innovative from the start.Innovations always deal with change. It cannot be viewed from only one processperspective focusing on technological or project management issues. Innovations are aboutpeople, organizations, and culture (Pontiskoski, Asakawa, 2010). 26
  27. 27. 4.1.2 Strategical alliancesApplications created on the Facebook platform helped to keep users entertained andspending more time on the webpage. Facebook business model concept is built on an idea,that while providing with an effectively working viral social platform, the content can beadded by partners. Applications provided through alliances were beneficial to Facebookfirstly by keeping users on the platform for longer period of time and secondly, thedevelopers were boosting the revenue stream (Gulanti). Zuckerberg was able to successfully integrate user database with partners the userscould benefit from. As Teece suggests, managing efficient alliances can be a key factor insucceeding. “The ability to manage alliances effectively has been suggested to be a firm-level dynamic capability that enables a firm to integrate, build and reconfigure internal andexternal competences to address rapidly changing environments in order to createinnovative forms of competitive advantage given path dependencies and market positions.”(Teece 1997). In addition to the developers, Facebook managed to involve a large number ofpartners through Facebook Connect, Facebook Places, Facebook deals. Zuckerberg wasable to successfully integrate user database with partners the users could benefit from andalso creating a more detailed social graph for Facebook. Companies have three ways to win by adopting distributed concreation. First, theycan capture value from the cocreated product itself. Second, companies can capture valueby providing a complementary product or service. Third, they can benefit indirectly fromthe cocreation process – for example, through enchanced brand or strategic position(Bughin J, Chui M, et.al. 2008).4.1.3 CapabiltiesDynamic capabilities are the firm’s ability to integrate, build, and reconfigure internal andexternal competencies to address rapidly changing environments. Google has wide varietyservices and products whether Facebook is concentrating only on social networking. 27
  28. 28. Thereof Facebook can focus more on development of one certain platform. Capabilitiesneed to be understood not in terms of balance sheet items, but mainly in terms of theorganizational structures and managerial processes which support productive activity.(Teece, Pisano et al. 1997) Facebook growth has been enormous because of its great competencies. A corecompetency is a deep proficiency that enables a company to deliver unique value tocustomers. It embodies an organization’s collective learning, particularly of how tocoordinate diverse production skills and integrate multiple technologies. (Leonard-Barton1992) The value of core competencies can be enhanced by combination with theappropriate complementary assets. (Teece, Pisano et al. 1997) Dynamic capabilities thus reflect an organizations ability to achieve new andinnovative forms of competitive advantage given path dependencies and market positions.(Leonard-Barton 1992) A dynamic capability framework is that today’s rapidly changingmarkets force firms to respond quickly and to be innovative. Facebook did not create a community where one never existed before; rather theyprovided an important information and communication service to a pre-existing offlinecommunity. Facebook created a high utility online service for enabling pre-existing socialbehaviors within an offline community.4.2 Google’s reactionsAt the beginning of 2008, two key executives left Google (Sheryl Sandberg and ElliotSchrage), one accepting the title of chief operating officer at Facebook and one get incharge of overseeing Facebook’s relations with outside developers. Their move drewattention to Facebook and highlighted the strained Google. Google was already anxiousabout Facebook, and their leave elevated Google’s discomfort. Facebook had 123 millionunique visitors in May 2008, a 162 percent increase over the previous May, and Facebookhad passed its rival MySpace. Nevertheless, it would have been a mistake for either 28
  29. 29. company to rush to compete while the danger is orienting your strategy to what the other isdoing (Auletta 2009). Nevertheless, Google is challenged. Its social network site Orkut, has seen itsmarket share slip in countries like India and Brazil, where it was once dominant. Even insearch, there has been slippage in Russia; a private start-up named Yandex has a marketshare approaching 50 percent, well ahead of Google. Companies like Apple are angry aboutAndroid. Amazon is mounting a cloud-computing challenge as Google is mounting anelectronic book challenge. Google knows that one day its cold war with Facebook wouldturn hot (Auletta 2009). Facebook built up a community of two hundred million users in just five years.Facebook is a glass house. Google is removing all subjectivity and just looks at the data.And the data eventually becomes a crutch for every decision, paralyzing the company andpreventing it from making any daring design decisions (Auletta 2009). Google’s biggest future concern is size, growing too big and losing focus andbecoming bureaucratic. Critics both inside and outside Google believe the company hasreal management issues. Google can be seen overmanaged and undermanaged at the sametime having a control mechanism at the top that has inordinate control and although there istoo much freedom. Google is just focused on central processing computers and ignores theprocessing of the human brain. Google’s engineers are too wedded to their algorithms. AsGoogle search has become more dominant, a chorus of complaints will be heard. By givingso much weight to the numbers of links a page received rather than the quality of theinformation reported (Auletta 2009). 29
  30. 30. 30
  31. 31. 5. INNOVATIVE BUSINESS MODEL5.1 The future of social networksThe most important issues regarding social networks are security and privacy. In order tocontinue growth, social networks must reorganize the social relationships and make itpossible for users to rank their relationships. As people in real life can choose what amountof their “self” they would like to share, the same should apply to social networks. Forexample - a business contact we would like to keep could become a contact on ourFacebook profile, but the information we share to our close friends might jeopardize thatformal connection. The perception of person via ones profile needs to be differentaccording to the role of the relationship starting from a profile picture and basic informationto sharing thoughts and links. Also, value from a Facebook service can be very differentdepending on the main purpose of using social network, and also by demographical factors(Heide, Kenneth 2006). Relationships between individuals are in constant progress, but social networks, asvivid as they may be, show only linear connections. When connection is made, one isbefriended, until chosen to end the relationship. What would help the growth of a socialnetwork is an algorithm that would help a relationship grows naturally. When connection ismade, the person will become a contact, which you interact with by showing your politeformal “self”. By frequent interaction, sharing and communication, the person willautomatically become a closer acquaintance. The longer we are a member of a social network, the bigger the number of contactsinevitably gets. Large number of contacts needs to be organized, but most people find eventhe existing contacts to difficult to maintain. When people don’t have to tune the privacysettings themselves and it is done automatically, the system is more likely to succeed. Asthe problem is that most settings are too difficult and complex for common users tounderstand (Appendix 1, 3, 4). 31
  32. 32. Since people have a need to keep some amount of information they share moreprivate, there are trends for that need reflect in social networks. For example, Facebookenables private groups that are widely used (Appendix 3, 4). In order the social networks tokeep growing, there is a need for a more complex social graph.5.2 The future of internet connectionsThe trend of the networks in general is to become more flexible and mobile. Socialnetworks are expanding their barriers and stepping outside the known frames. New smartphones collect enormous amount of data, it is possible to gather and store digital data oncalls made and received and how long each lasted. In addition, the chips in the phone’sGPS track a user’s location, the length of stay, and other mobile users in touch. Tappingthis sort of data is reality mining compared to Google’s data mining. Mobile phone willreplace your credit card, your keys becoming your personal remote control to life [WWW](http://uk.finance.yahoo.com). Facebook has also taken steps to make the mobile application of Facebook moreversatile and is focused on expanding its mobile service [WWW](http://www.reuters.com).Considering what opportunities technology offers, Facebook maysoon expand from a platform you have to log in to visit. Taking Apple iPhones popular application as an example – application called Bumpallows persons to befriend each other by bumping their iPhones together. Luxury cars usesmart remote controls that adjust the settings – seat, mirrors, heating, etc – by the needs ofthe user. Technical solutions inspired from these examples could make is possible to addapplications to mobile phones that would recognize people’s Facebook profiles, suggestfriendships or enable adding contacts, for example, by shaking hands. Together withintelligent privacy control, the network of connections could have even more significantvalue. 32
  33. 33. 5.3 Future of search engineGoogle search engine has a very complex method of getting the most accurate results. Butleaving the click rate, popularity and the time spent on the pages aside, the search resultsare very anonymous. What could add a value and credibility to the search would be thesocial connections. 2010 Google Search algorithms did not consider social networkingelements for searches conducted for certain websites, but things have changed since then.Google has added a feature that finds connections via networks like Twitter or Blogger, butthat data is in most cases very poor, while Facebook would give a wide overview ofconnections. The more versatile and complex the network, the more useful the data can befor users [WWW](http://socialbarrel.com).5.4 Business modelThe future business model is to integrate social networks with a search engine to create apersonal value for information. Facebook has an enormous base of users, but they are alsostruggling to devise ad-friendly formats. Social networks might be able to sell more ads ifthey share more of their users’ private information with advertisers, but when Facebooktried that approach in 2007 with an ad program called Beacon, they failed to get willingnessto participate (Auletta 2009). 33
  34. 34. Social media has become a powerful tool that influences what people buy. Theinaugural Asia Pacific Social Media Report states that from China and India to Australia,online reviews are a major influence in buying electronics items, cosmetics, cars and food,among other things. Developments in social media cannot be overlooked: “Businesses canno longer afford to simply observe the social media phenomenon, they need to embrace it.”[WWW] (http://www.physorg.com). Integrating the two most commonly used features in the web: search engine andsocial network, it is possible to offer personalized services. With personalization comescredibility that adds value to the advertisers. When advertising is so accurately targeted thatit takes references from social contacts in consideration, it is possible to get larger fees and 34
  35. 35. increase revenues. 35
  36. 36. CONCLUSIONThis research described the strategies and alliances that Facebook made in order to succeedas a business and outperformed Google with a social network platform. There are variousreasons why a small start-up enterprise was able to gain market share in expense of a largecorporate brand. Facebook was created with a clear idea of the service they wanted to provide theuser with. They managed to reach the right target group, which had a large impact on theirsuccess. Zuckerberg developed a personal niche for his site in making it specifically forcollege and university communities. Facebook functioned as a successful platform foreducational institutions in earlier years attracting investors and developers, but functionedwithout significant profit. In 2007, when the website became public, the revenues started togrow and the company was fully oriented to business. There are various reasons why a small start-up enterprise was able to gain marketshare in expense of a large corporate brand. What made the success possible was a numberof strategically right moves: innovative and bold attitude towards risk taking and managingstrategically useful alliances. 36
  37. 37. ACKNOWLEDGMENTSThis paper was written in February and March 2011. We could not have this story withoutmany wonderful persons. First of all, we would like to thank Mr. Alar Kolk, who wasextremely patient in listening our business model developments and for asking criticalquestions as a regard to the value proposition of the innovation. Our special thanks goes to Mr. Marko Saue, creative director of Goal Marketing,who gave us crucial insights of how to compare two incomparable territories. Weappreciate the contribution of Mr. Silver Hage, the co-founder of Ivy Creative Collective,whose enthusiasm, considering endless opportunities in Facebook, gave us a lot ofinspiration how to shape the future business model in searching and social networkingbusiness. We would like to thank Mr. Margo Veskimägi, the head of Baltic region in TNSEmor, who opened the outback, why there should be a dose of skepticism regarding thefuture of social networks and advertising. We have received valuable advice from Mr.Lauri Ilison, the head of business development in OKIA, who described the technicalsolutions and future opportunities in Google and Facebook. We have received generous help from Ms. Siret Laasner, who gave a close initialreading to correct our English. We would also like to share credit with Mr. Erki Närep andMs. Tiina-Katrina Kaber, who helped us putting the interviews into clean-cut English. And last but not least, our respect goes to two friends Mr. Kristjan Gabral and Mr.Priit Pärle, who designed the jacket of our research. 37
  38. 38. REFERENCESAuletta, K. (2009). Googled. Virgin BooksBoulton C., Foating on Carr’s cloud, eWEEK, April 7, 2008 ,11.Bughin J, Chui M, Johnson B. (2008). The next step in open innovation. The McKinseyQuarterly, 1-8.Davenport T.H., Iyer, B. (2008). Reverse Engineering: Google’s Innovation Machine.Harvard Business Review, April 2008, 59-68.Ellison, N. B., Steinfield, C., & Lampe, C. (2007). The Benefits of Facebook "Friends:"Social Capital and College Students Use of Online Social Network Sites. Journal ofComputer-Mediated Communication (12), 1143-1168.Gulanti, R. (1998). Alliances and Networks. Strategic Management Journal, 19(4): 293-317.Heide J. B., Kenneth H. W. (2006). Friends, Businesspeople, and Relationship Roles: AConceptual Framework and a Research Agenda. Journal of Marketing Vol. 70 , July, 90-103Hoffmann, W. H. (2007), Strategies for managing a portfolio of alliances. StrategicManagement Journal, 28(7): 827–856Iyer, B., Davenport, T.H., (2008), Reverse Engineering Google’s Innovation Machine.Harvard Business Review, April, 59-68Kelsey, T. (2010). Social Networking Spaces: From Facebook to Twitter And EverythingIn Between. Apress: 26-50, 147-178.Leonard-Barton, D. A. (1992). Core Capabilities and Core Rigidities: A Paradox inManaging New Product Development." Strategic Management Journal 13: 111-125.Mowery, D.C., Oxley, J,E ,. Silverman B, S, (1996) Strategic Alliances and InterfirmKnowledge Transfer, Strategic Management Journal, Vol. 17, Special Issue: Knowledgeand the Firm pp. 77-91Pontiskoski e., Asakawa K., Overcoming Barriers to Open Innovation at Apple, Nintendoand Nokia. International Journal of Human and Social Sciences, 5:1 2010, 27.Rigby, D.K. (2007). Managament Tools: 22. Boston: Bain & Company. 38
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  41. 41. [WWW] Will your mobile phone replace your credit card?http://uk.finance.yahoo.com/news/Will-mobile-phone-replace-yahoofinanceuk-819430351.html?x=0 (12.03.2011)APPENDIXESAppendix 1. Interview with executive director of OKIA LauriIlisonWho are the main competitors for Facebook at the moment? It is difficult to say. Today there is no one else with similar capacity. All otherplayers on the field are clearly smaller. It might be better to think of possible competitors inthe future.What separates Facebook from other social networks? We should rather wonder why is Facebook so big. For me the logic behindFacebook finding a critical amount of users is very simple. Thanks to the great number ofusers the snowball kept growing. Small networks may try, but the snow will not stickanymore.Looking at the bigger picture, the qualitative difference is made with forums and virtualworlds.What factors influenced the growth of Facebook? 41
  42. 42. Facebook was the first to have people use their real names and actual pictures. Noother network, including Orkut, managed that and people could join using a pseudonym.There have been forums and other ways to communicate, but Facebook managed to showpeople the benefits of using their real names and pictures. This has created a completelynew quality in the content. As people use their own name, they have an inner controlmechanism that stops them from writing improper things. They just do not want to letothers see and read what they might anonymously write.Privacy has been an essential part of Facebook. Do you see anonymity returning? Anonymous users are not credible. When the Internet reached the masses, it was funto comment newspaper articles and in forums, but no one would take these commentsseriously. A recent case with the newspaper Äripäev acts as an example here. Informationwas published that was statistically false. An anonymous comment was added stating: “Thenumbers are incorrect, fix it”, but nothing was done. Had the commentator used their realname, the problem would probably have been fixed.Where is Facebook headed, what is being developed? I think Facebook will try out every gadget that has been used in the previousnetworks, for example the trading opportunity. We can see Facebook coming out withDeals. Today there is already the subgroups possibility where users can create groups withlimited visibility in order to keep information only in a close circle without even the friendsof friends being involved. There are prototypes of different ideas out there that have notworked out yet and are easy for Facebook to pick up and utilise thanks to their massivenumber of members. Facebook does not have to do much to remain fresh. It is difficult tocompete with Facebook because they just have so many users. Statistically, fourth of allweb clicks in the USA are made in Facebook. When you think about it you realise it isreally a monopoly and it is scary to imagine a world without Facebook. On the other hand itcan be seen how Facebook offers an added value in the crisis situations of today’s worldstarting with what is happening in the Middle East to elections in North Africa. 42
  43. 43. How could Facebook develop as a commercial means? I think it is similar to everything else – it is promising in the beginning, then comesthe phase of excessive use or even abuse which is followed by a cooling and stabilisingperiod. Take, for example, the Google advertising engine. It only makes sense to use it to acertain degree as eventually you want your product or service to be found on its own. Aweb banner blindness exists also in Facebook. If you are using Gmail, you probably do notpay attention to the column on the right. We now have developed a skill to view Facebookwhile avoiding advertisements and only finding our friends’ updates.Will Facebook stick to the minimalistic adverts instead of flash solutions? Facebook is dancing on the razor’s edge. They would like to sell more, but shouldthey? Perhaps they should raise the price? With a critical mass it is wiser to increase theprice and the outcome is as lucrative. I do not see Facebook aiming at flash solutions sincein its graphic design Facebook has always been very conservative. Actually the graphicinterface is kept even too stagnant: changes are not made very quickly and they are keptrather simple as it is feared that the users might otherwise not find the new applications.Still, Facebook dares to test new solutions and applications on members... You mean external apps? I see that as an important aspect to Google as well.Respect for Google Wave for example – when the company realised it was not working,they pulled the plug quickly. The problem for many global companies is the inability todecide to give up on investments that do not work. Google’s philosophy is to take downanything that does not work. This solution has a much better perspective than trying toendlessly improve something that just will not work. By letting go of Wave, Googlebasically released development resources – tens and tens of people became free to work onnew solutions. Since Google realised their Wave was not viable, they are considered asserious competition to others. 43
  44. 44. In general, how do you see the future of social networks, what is the source of theirturnover? I think a point of fulfilment will be reached and quality time will be found outsidesocial networks. Creating turnover is often a problem in the business world. For example,when two mobile operators are competing, they often campaign in order to win overcustomers. Statistically, around 5-10% of customers keep changing their preferences but inthe long run it is not useful. The goal of social networks is to secure a steady growth, but this does not mean thatthey should change their business model. I believe that one day social networks may exitthe advertising world. Whether they can achieve real sales, becomes clear over time. Thereare people who start as great fans of social networks but grow weary over time and find itall quite meaningless. I would rather see a better information filter that outlines the reallyinteresting updates. I want to see a portion of my friends who actually write somethingworthy of my time.What about Google? I think we should appreciate the solutions that Google is working on rather than justlooking at what is available to the general public. The logic is this: when you are creating astart-up, you cannot focus on solutions that can be realised today but on the solutions thatcan be sold in five year’s time. This is why I think that Google has a lot more in the oventhan Facebook does. For example the Android phone software, which is essentially aGoogle solution. The business model of Google products in only just emerging.Could Google create its own social network? I think it is a matter of time and Google willnot give up. It is purely business – they have to figure out how to bring users back fromFacebook or create a whole new qualitative level to support the Google business model.What will Facebook do about Google is unknown, but there is a lot to think about. On theother hand, Facebook has a wide circle of users which means there is a lot of material tobase new growth upon.The Google user base is different, they do not need Google as a network. 44
  45. 45. Of course. People are disloyal – if they find a better approach, they will go there. Abetter example is what Google is doing today for their business clients. As a startingbusiness, all you need is a computer and Internet connection, everything else will beprovided by Google. This is no longer advertising business, but providing a service – awhole different approach.Appendix 2. Interview with Margo Veskimägi, TNS Emor, April24, 2011Who are the key competitors of Facebook? Facebook is entertainment, thus the entire Internet is its competitor. Facebookcarries different meanings for different people: for some the main device is e-mail, forsome instant messaging, for some YouTube. This means that there is no particularcompetitor – Facebook is a platform, an environment, where each person creates his or herown media world.In your opinion, what distinguishes Facebook from other social networks? It is very difficult to say whether Facebook has been successful or not. In the shortterm it has been extremely successful. However, since its history is exceptionally brief,nothing can be said about its long-term success. At one point, people just move from onesocial environment to another. Facebook has been witty, but more is needed for a long-termbusiness success.What could Facebook currently develop? 45
  46. 46. Facebook growth in the Estonian media market has been only negative as Facebookis not beneficial for the Estonian media and marketing market. The Estonian businesseshave made the wrong decisions as the apparent simplicity of Facebook has attached them toa phenomenon that is not entirely dependent on them. If Facebook changes something, youhave to choose whether to accept it or leave. In comparison, your own website offers manymore options. Corporate success on Facebook has varied a lot, although it is veryconvenient, it is still hype. But it is certainly not the first or the last hype. From the legalviewpoint, there are many activities on Facebook one should not do: the violation of termsappears to be a major problem. At the same time, nobody should be in charge of turning offyour webpage if there is something that Facebook does not like or if Facebook decides tochange.What could be the development of Facebook as an advertising channel? Where else should Facebook make money? Cherry, for example, is a marginalbusiness; Facebook would never deal with the micro-level domains. The model ofFacebook is based on pure advertising; either the content or advertising is paid for.Everything else belongs outside of the system and I do not think that these can be the mainprinciples. For example, Cherry might not exist after 12 months. Perhaps one moment it isunderstood that the business actually does not run smoothly. Companies return to thestarting point unwilling to give their margin away to another company.What is the future of social networks that creates the essential profit in 2015? Why are we talking about social network in the terms of future meaning that socialnetwork is the place where the primary use of the Internet is heading? It goes exactly to theplace where it needs to go. I ask about the mobile use: what exactly is the mobile use? IsiPad a mobile or a computer? I have to say there will be no revolution! All things arerelated to very specific reasons: if people in Estonia do not have a reason for a change, thenthe change does not take place. If there appear no prerequisites in Estonia, there will be nochanges. The world trend in Indonesia, New York, and Tallinn is exceptionally different,there are universal questions and topics that are not understood at all or different areas 46
  47. 47. understand these questions differently. One is the content and the other is the need. Afterall, the only thing that counts is how we use our 24 hours as they cannot be undone.What happens to Google who lost part of its market to Facebook? But what has Google lost anyway? Social networks have remained unsuccessfuldespite the investments, but it is perhaps better when the whole market is not in thepossession of one leader. We can trouble our minds with the future of Google andFacebook, but taking their increase streams into account, I do not believe that they have anyexistential problems. Google may keep on trying or they could unite or either one couldeventually buy another in the future, but I do not see a problem at all. Such co-operationsare likely to end in a way that something new emerges, something different; after all, lifedoes not stand still. There is market for everything. But as it is elementary from the nature,you cannot win in everything. It would be very surprising if anyone is the best in all things. This is not a revolution taking place, this is pure evolution. It is a certaintechnological development; it has taken place before, it will take place later and it does notchange people dramatically. Social media as a concept has existed in the past, but itsdevelopment has been slower. Those who speak about it and Facebook itself can make afortune with social media. Facebook has to be smart enough to take this value itself,because the value can also disappear if something else should emerge on the market. But Ido not know what it could be and I do not want to predict if it will happen or not. 47
  48. 48. Appendix 3. An interview with Marko Saue, GOAL creativedirectorWhy didn’t Google manage to create Facebook? That’s an interesting subject, but you are comparing two very different things.Google was created for a certain purpose, Facebook it just grew, as seen in the movie.Facebook is based on people’s curiosity and need to communicate. Google was startedelsewhere and the portfolio of Google is rather wide. Google has much more users with itspackage than Facebook. Perhaps a social network has not been a priority for Google andalso not a region that would sell. But can’t you see a problem in comparing such differentthings? You could compare Facebook to Orkut, like why is Facebook popular and Orkutisn’t. In that case we could give more relevant answers.The userbase and loyality of Google and Facebook is so different, therefore Google isstill probably trying to succed through social networks. Why should they create such a network?We think in our assignment that social networks are a subject which is developingstrongly since people have the ability to gain information about other people and alsouse these connections to spread information. This is what Google is missing. But what is the business purpose of Google? What and why does Google do?You’re saying that social networks are developing, but it seems to me that the gold ishidden where the main income of Google comes from. It is AdWords. Google’s mainincome is advertising. Google is producing a lot of free products for a wide range of use. Itis possible to sell adverts to these regions because people use free products. This is thebusiness purpose of Google in my opinion. They started with the search engine which isstill the central and most important part of their industry, but money comes fromadvertising. 48
  49. 49. As for Facebook, they started with the network and now Facebook earns its money withadvertising. People want to advertise in that environment as well as they do in Google’senvironment.The search engine of Google is dominating at the moment, but it’s not perfect. There’sa lot of information, too much information pollution and if there is a better searchengine created, Google may loose an important part of their market. Google’scontacts are short-term, but the connections with Facebook are more long-term andmuch profound. Their clientbase is enormous. What is the clientbase for Google’ssearch engine, how many search feeds does Google have daily, what is the number? I’m not sure, but i think that there are more people using Google’s search enginethan Facebook in the world.Only because it’s the best search engine at the moment.But what can be better than the search engine of Google?Personal serviceWhat does that mean?There is too much information and nobody wishes to read 40 pages of links or advertsthat might not take you to the right place. Google has complex algorithms for this that order the information. There are manydifferent factors in search results which lead to the right result. Google also uses people’sfeedback to order the results. For example, if someone opens a page and closes it right afterthat, then that means the needed result wasn’t there and the page become less relevant forthe future. In that same way more popular pages that have a higher visitor count becomemore relevant. Google has done hard work making the first three pages for result the rightones for a person, it depens on how well people can ask. The most accurate and specificquestion gives the most specific answer. I wouldn’t say that the problem is getting 200pages for result, because usually the right result is in the first 3 or 5 links. 49
  50. 50. Since our assignment applies more for Facebook, who are the main competitors forFacebook? The main competitors for Facebook are QQ, for instance, the biggest social networkof China. Odnoklassinski and Vkontakte in Russia with over a hundred million users. Andthen there’s Orkut. That’s about it with bigger international competitors in my opinion. Onthe map of social networks (http://armenion.com/?p=1339) where the most used socialnetworks are segmented by countries, can be seen that Brasil, for example, is dominated byOrkut, then again QQ in China, Vkontakte in Russia. We can see the onward potential ofFacebook on the map and how far it can ever develope. Facebook is probably not evengoing to enter the China’s market since the restrictions are so high. Google also wanted toleave the China’s market because of the cencorship of results. Basicly, Google lost itspurpose in China due to the censoring giving unadequate results. Facebook and Youtubeare blocked or forbidden in certain countries. Basicly, Facebook is a medium whereeverybody are friends with eachother and share everything which makes the informationspread between people and that’s the reason why some countries with dictatorship don’twant to allow people to know how things really are. These countries have strong motors ofpropaganda and therefore it is impossible for Facebook to enter certain countries. But at themoment there isn’t a serious international rival for Facebook. We can’t say a product of adifferent region could be a competitor of Facebook. I don’t see that Google is a competitorof Facebook in the social network context. Since the numers of users for Orkut is sodifferent comparing to Facebook, even though Orkut is a part of Google and is practicallyin the same region, the question at the moment is more about how far Facebook is going todevelop and what happens to it after a few years. Is it a network connecting the wholeworld or not, but it is very difficult to overtake the market of Facebook, if not to sayimpossible. People don’t want to let go an environment which is so accustomed and towhich they have contributed so much: they have contacts, photos and other information inthere. Of course it is possible to develop a solution with a new network where you cansmootly transfer your stuff from Facebook. In the same way, as transferring your settingsfrom an old computer to a new one, which is really easy. There will be a lot of different 50
  51. 51. networks along with Facebook which are using Facebook’s base of contacts, but not theirincome.What is the difference between Facebook and other social networks? I’ve just recenlty signed to Facebook, in September 2009 I think. Previously I wasusing Orkut and I really liked it because it was really clear and simple. You had your owncontacts and pictures there and if you wanted to see someone else’s then you searched thatperson yourself. Facebook, on the other hand, came with the conception of a wall which isan information flow where different companies, games and people share information. Youdon’t have to read everything when browsing the flow, because the moment you arelooking you see the most important part of it: the stuff that is important to your friends,what do they most like and comment on, is at the beggining and you can also look at thelive feed which shows the latest posts. As an Orkut user, Facebook’s wall seemed reallyconfusing and I couldn’t understand where my pictures or pictures of my friends were andwhat was the wall supposed to be. At that time companies started to show interest toFacebook and because of my work I also signed up and started to examine, but I wasn’t anactive user. There’s a big difference whether you have 400 friends in Orkut or 50 friends inFacebook. The rooted value of Orkut seemed really important to me since I had posted a lotof pictures and had a lot of comments by friends over the years. I didn’t want to let that go.Now I haven’t used Orkut at all for year. I still have my account, but a lot of friends havedeleted their’s. As Orkut was trying to copy Facebook using the same wall and functions itseemed more as a failure and the new layout of Orkut was really silly in my opinion. In acertain point I switched Orkut back to the older version because I was used to it and I knewexactly what was what. The new version seemed strange. Facebook was more alive andinteresting and it offered more opportunities, because you could see what was happening allthe time, not just the pictures people have uploaded. Orkut showed only the uploadedpictures. Compared to Orkut, Facebook has enliven the communication between people forsure. The base of contacts is growing really fast, I have about 800 friends right now who Iknow all and have met with, I don’t accept strangers. Often you discover similar intrestswith old acquaitances. You discover that your high school classmate also rides a motorbike 51
  52. 52. or that they live right next to you. Without Facebook you wouldn’t know that. This bringspeople closer to eachother. If a person says Facebook is diminishing social activities thenthat person is silly, because Facebook is only increasing the social activities in my opinion.Actually, we are communicating with a lot more people in Facebook then we really do. Theusual day consists of going to work, speaking with your workmates and clients, goinghome, speaking with the people you live and some of your friends, at weekend going outand that’s about it. In real life the older people get the narrower their circle of friendsbecome. But through Facebook it rather expands which is great.What could Facebook be developing at the moment? Facebook Places recently made its way to Estonia which is a supercool solution andmakes FourSquare, which is actually really popular among young people, loose its purpose.Firslty, FourSquare don’t have that many users, because all the users of Facebook candefine their location and therefore get location-based offers from companies. ActuallyFacebook takes a part of the location-based Cherry to itself. That’s one of the most coolestand revolutionary things. But what else is Facebook doing that they already haven’tdeclared is unknown, because the development of Facebook is always new for regularusers. Developers and marketers go through a lot of trouble, because there are certain ruleswhich may be seen differently. The platform of Facebook is rapidly growing, but there arealways errors with developing and that is why there are always some kind of problems withapplications. Sometimes it seems that Facebook is managed by a bunch of geeks who do asthey please and take off applications and add new ones. When a new thing is added toFacebook then the old ones don’t work which is why the development seems a bit hectic orrandom. The development is fast indeed, but for those who want to use this platform todevelop their applications, this makes one hell of a headache.Will Facebook remain free for a company, what do you think? Free Facebook is a strange term, because adding a page to Facebook is free ofcourse, but marketing there is not. Companies are paying huge amounts for advert banners.I think I have paid Facebook through myself about half millions kroons for advertising 52
  53. 53. different campaigns of different companies. But the saying that every fan is going to haveto pay is a rumors to scare people.In what direction could Facebook develop as a channel for advertising? Right now Facebook is rather a new, modern and an alternative way to market, butin the future I think it will become a usual everyday part of campaigns. Complete integratedmarketing campaigns are going to contain television, outdoor, Facebook and so on. Sincethe number of users is alreay that big, it is possible making the right activities in Facebookto communicate instantly and daily with a certain group of people. Making a base is thefirst and most important part and also the most expensive. In order to get 10, 20 or 30thousand fans you have to do a lot of work puting out prizes and buying banners, butonwards it is a free channel for a long period of time. You can spread information with justtyping messages and adding pictures of your company. It has already become a massivelyused advertising channel. Through time the use of Facebook is probably becoming moresystematic and natural, but it will certainly have a big potential. As my enterprise is mainlyon social media marketing I could even say that 80 to 90 % is just marketing in Facebookand all the companies I am working with are showing a lot of interest in it.Could the large amount of companies and information pollution become a breakingpoint for Facebook as an information channel? Actually the question is how well can a person use Facebook. One saying there istoo much information and pollution and too much nonsense means one just doesn’t knowthe kind of main functions of Facebook which can be used to hide games, the informationyou don’t care about etc. Basicly, you don’t have to throw a friend out of the friendlist notto see them sharing games on your wall. If you want to you can go to their pages and stillbe friends. Also, Facebook groups is a very good thing. I have a 25 member group of closerfriends where someone posts „What are you doing on Friday?“ and others reply andcommunicate in private without all of it being seen by other people. You can make differentgroups and not look at the wall at all, just go and have a look at what’s going on in thegroup and it becomes really private and personal without all the games, adverts and stuff. I 53