Facebook, The Perfect Startup

the Perfect Startup Five keys to their unprecedented success LOGO . …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 1

••• A quick word from Stéphane Distinguin ( CEO – faberNovel ) …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... It is not about the IPO the entire world is We all know Facebook. commenting on: an IPO is certainly not an We all know Mark Zuckerberg. end, but a point on a startup trajectory. These are the names. It’s all about perfection. Up to now, Facebook has been the perfect startup, not because it has We all know the figures, succeeded in everything, but because its has built they are mind-blowing: more than itself step by step, in a very pragmatic way. There is no miracle here: it is just a startup that has had an 900 million members for a current almost perfect stance towards every challenge it has valuation of over 100 billion dollars. faced to date, and has built the most fascinating innovation platform. At first sight, we all knew Facebook Perfection is rarely encountered and even harder to would be the biggest start up "after analyze… At faberNovel, as we do every year, and Google", Mark Zuckerberg, the Social after Google, Apple and Amazon, we wanted to Network hero, a juvenile CEO signing highlight what could be the formula behind Facebooks roaring success. Is there a formula for perfection? We autographs and striking the pose like would like to share our discoveries, our dissection of one of the biggest rock stars of his this marvel just to make it more useful for all of you. I generation. am not sure perfection will be achievable for all of us, but it certainly is our best source of inspiration.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 2

••• This work was made for you to share, reuse, remix, rework… …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... It is licensed under the Creative Commons BY-NC-SA license to allow for further contributions by experts and users in the coming months. You are free to share and remix/adapt the work. You must cite this document: faberNovel, Facebook: The Perfect Startup, May 2012. You may not use this work for commercial purposes. You may distribute a modified work under the same or similar license. Why do we release this kind of work for free? Our job is to help big organizations think and act like startups. And we believe that this cannot be achieved without causing people to want to innovate and explore new business models. Our ambition is to inspire you by giving you the keys to understand new markets like Russia or successful companies like Apple, Amazon… or Facebook.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 3

••• Facebook is quite a big 8 year old … …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... billion Likes & Comments per day million Photos uploaded per day million user accounts 12.8% global market share! Average Time spent by users in a month Source: Facebook S-1, May 2012…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 4

••• … with many characteristics of a giant . …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Instagram Snaptu Friendfeed $1 billion $65 million $47.5million (2012) (2011) (2009) The largest tech IPO in history $16 billion raised on the day of the IPO Which ranks its CEO among the TOP10 World’s Billionaires Source: Based on information disclosed by Facebook, May 2012; Facebook’s IPO commented by Bloomberg…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 5

••• Altough still a small company, relative to other tech giants …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook’s Page Views = 10x Youtube’s but… Facebook’s Revenues = 10% Google’s 1 trillion $37b 100 billion $3.7b 26 years ld average Facebook employee age Source: Facebook, Google, Adplanner June 2011…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 6

••• Its meteoric growth results in a remarkably high valuation per employee …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... 3500 employees $30 million valuation per employee Obviously, they must be doing something right Estimates: Fabernovel, based on a $100b valuation; Number of employees: Facebook, May 2012…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 7

We believe that Facebook’s amazing performance was driven by excellency in business management. Facebook is remarkable not so much in its product or usage, but in the way they built themselves as a company, from inception to maturity. What’s Facebook story?…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 8

••• Facebook isn’t the first social network in history …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... •  Created as an embryonic •  Probably the first genuine •  A reaction to Friendster social community. social network •  Chose an absolute freedom •  Bought by Yahoo in 1999 •  Faced technical difficulties policy for $3.57 billion. from 2004 to 2006 •  Huge success among artists •  Yahoo turned the service •  Lacked activity & content and celebrities into free web hosting in for the users •  Too much freedom attempts to monetize it. •  Chose a restrictive policy deteriorated the quality of •  Having lost the social (e.g. no pseudonym) the website element, the service •  Refused a $30 million •  Lacked activity for the users closed in 2009. buyout offer from Google •  Acquired by News Corp. for •  Acquired in 2009 for $26 $580 million in 2005 million after its reboot •  Sold for $35 million in 2011 to Specific Media These three social networks were short-lived leaders. Why would Facebook be different?…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 9

••• Facebook managed to survive 3 classical challenges …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Focus Technology Policy Facebook always kept the Facebook only experienced 3 Facebook has learned from the social feature at the center of severe outages: mistakes of its predecessors, the user-experience: •  The most severe outage keeping a balance between “Facebook’s mission is to Facebook faced was in 2010 freedom and control: make the world more open for 2.5 hours •  Allowing users to modify the and connected.” •  They experienced a few content difficulties later in 2010, •  Preventing users from Facebook stayed focused on unveiling new pages modifying the interface the “big idea”. •  In early 2012, some •  Allowing brands and artists Facebook’s European users to create special pages could not connect to the platform for a few hours…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 10

••• It has done so with a perfect scaling strategy …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Test Growth Consolidation College Networks Gradual opening to the world Self-sustaining community •  Low-scale •  Word-of-mouth extension (through •  Improvement of existing features •  High-density invitations) •  New features to maintain engagement •  High need to connect •  New features that drive engagement Build the platform Scale the platform Maintain the platform 2004-2006 2007-2010 Nowadays Source: Quora, “What are some decisions taken by the Growth team at Facebook […]?”, answered by Andy Johns…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 11

••• 2006 breakthrough: The News Feed – Your friends ticker tape …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... With the News Feed launched in 2006, Facebook managed to automate relevant content creation… from friends’ activity. The News Feed aggregates the user’s friends activity: status updates, photos uploads, comments… The more friends, the more content to explore. As every webmarketer knows: fresh content is key to generate stickiness. Facebook’s News Feed concept goes even further: providing user-centric content from his network, hence tastes and interests. News Feed gave a considerable competitive advantage to Facebook in its battle against MySpace, because it provides permanent user-centric content renewal.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 12

••• Facebook motto : “Product First”, but with business sense …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Mark Zuckerberg "Facebook was not originally created to be a company. It was built to accomplish a social mission - to make the world more open and connected" But Zuckerberg quickly understood that business perspective benefits the overall management: •  Straightforward and quantifiable objectives •  Money can assemble the best team of developers In order to enforce these objectives, he hired Sheryl Sandberg as COO in 2008. Zuckerberg met Sandberg in 2007, at a Christmas party, while she was still Vice President of Online Sales and Operations at Google.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 13

••• With 56.6% of voting rights, M. Zuckerberg can keep the shareholders at bay …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Here’s an enlightening extract from Facebook S-1: “Our CEO has control over key decision making as a result of his control of a majority of our voting stock. As a stockholder, even a controlling stockholder, Mr. Zuckerberg is entitled to vote his shares,[…], in his own interests, which may not always be in the interests of our stockholders generally. “ Source: Facebook S-1…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 14

••• Zuckerberg even refused several opportunities to sell out …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... “I admire Mark Zuckerberg for not selling out, for wanting to make a company. I admire that a lot.” Steve Jobs (1955-2011) Revenue $3.7 billion $300 million invested by DST Global $15 billion to postpone IPO acquisition offer $10 million by Microsoft acquisition offer by Friendster $1.6 billion acquisition offer by Yahoo Revenue Revenue $777 million $382,000 Source: Steve Jobs quoted in Walter Isaacson biography; acquisitions offers reported by TechCrunch…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 15

••• To sum up, Facebook managed to tackle one of the most common tensions in any startup: Product vs. Business …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Product Business vs. Many startups struggle or fail when they find themselves prioritizing one over the second. Facebook seems to have passed this test quite brilliantly. What is fascinating with Facebook ? The way it deals with most startup challenges.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 16

••• Facebook’s excellency lies in managing classical startup challenges …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Technology & User Experience Business model exploration Business & Ecosystem Disruption Long term vision…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 17

••• 1.  Technology & User Experience…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 18

••• Facebook’s platform is both a best practice in user-centric design… …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Customizable appearance thanks to new Cover Picture Timeline featuring the user’s story, with milestones and events. Engaging content thanks to smart display Facebook New Timeline, released in 2011, replaced “The Wall”…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 19

••• … and technical wizardry …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Visual aggregation of numerous sources of content Third-party apps integration Action links to out-of-platform apps and software…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 20

••• The result let people and brands tell their story in a way that is engaging and new …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 21

••• Facebook accomplishes all of this at a breakneck, startup pace …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... A new version of Facebook million is released every Tuesday to users! = 12,000 modifications per month More than 1,000 developers deliver code to be released each week, most of the time small iterations… sometimes completely new features. Facebook manages to do this with a few simple rules: #1 #2 #3 Developers are “Move Fast and individually responsible “Mark is always right” Break Things” for the code they write. Source: Arstechnica.com, A behind-the-scenes look at Facebook release engineering, April 2012; Facebook Developer Garage, Paris, April 2012…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 22

••• The key to Facebook’s agility: its testing process …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook teams’ tools prove there’s no need to be sophisticated to be efficient. They work with hacker tools, such as: IRC chat (a geek instant messaging system) and P2P file- sharing technology (basically content piracy tools) to release Facebook each week! Source: Arstechnica.com, A behind-the-scenes look at Facebook release engineering, April 2012; Facebook Developer Garage, Paris, April 2012…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 23

••• Acting like a startup is not just a question of process: it’s a question of culture …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Two atypical leaders…. Mark Zuckerberg, CEO Sheryl Sandberg, COO The Genius who hacked into Named in the top 100 most Harvard’s security network to influential people in the world, create the first version of and still leaving work at 5:30 Facebook at only 20. everyday to pick-up her children at school. … managing an army of highly-talented youngsters Avada Kedavra, Expecto Facebook average Patronum, Alohomora employee is 26 years-old Names of Facebook’ HQ meeting By comparison, IBM’s average rooms, inspired by Harry Potter magic employee is 44 year old… spells Source: Mashable…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 24

••• When it comes to new features, Facebook takes a pragmatic approach …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Customer feedback Fail fast, fail often Constant improvement New News Feed Deals Groups In 2011, Facebook introduced a new With Facebook Deals, the engineering Through analytics, Facebook News Feed which presented “Top team faced a lack of traction: the discovered that Groups were Stories” first. Despite the business product wasn’t used enough to justify it cannibalizing a large portion of opportunity offered by this new to continue. They simply shut the their new Pages. feature, Zuckerberg decided to service down. They decided to improve their Groups remove it and set up the “latest to meet the genuine objective of the updates first” as demanded by the feature, differentiating it from User vast majority of users. Pages. At Facebook, modifications or removals are not seen as failures: everything is constantly tested and modified. It is a never ending beta, with high-quality user-experience. Source: Facebook Blog…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 25

••• Facebook’s main asset is the map generated by users data : the Social Graph …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Women Men The Social Graph is in fact the digital map of real-life connections and interactions between users. Facebook stores more than 100 Petabytes of user data. That’s 2x the size of the entire written works of mankind (from the beginning of recorded history, in all languages). In order to enrich this database, Facebook opened its Social Graph to third-party developers and app editors. Source: Facebook S-1…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 26

••• Facebook opened its data to third-party developers with an API: Open Graph …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Open Graph Open Graph is an API provided by Facebook. With users’ authorization, third-party developers can access users’ data or publish new data on user profiles. What’s an API? It is an Application Programming Interface, basically it is an interface through which software components communicate with each other. Access Publish & Access Access user’s data Publish rich actions and objects with Facebook Connect in users’ timelines with Open Graph 2.0 Now, users can like but also: listen, watch, read, cook… Publish Publish Include links into status updates Publish likes in users’ timelines with Open Graph 1.0 2008 2010 2012…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 27

••• Analyzing this graph with algorithms creates the Edge Rank …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... The Edge Rank is a score given to a piece of content for every user, depending on its interests. Whether a particular content will be displayed or not in the News Feed of a user will depend on its Edge Rank. Friend 1 The Edge It doesn’t doesn’t like Rank of the appear on post is low his News for Friend 1 Feed User A posts something about on his Timeline The Edge It appears Friend 2 likes Rank of the on his post is high News Feed for Friend 2 It is an major improvement of the News Feed, increasing content relevancy for each user.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 28

••• Before going further, let’s review some key Facebook concepts …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... News Feed Timeline Social Graph It’s the user’s Facebook It’s the profile page of every I t ’s t h e u s e r s ’ d a t a home page which user. It displays a timeline accumulated by displays the user ’s o n w h i c h a r e Facebook on its network activity: status chronologically placed the platform. It can be updates, photos main events of his social visualized as a social uploaded, links shared… life. map if each element is put into its context. Open Graph Edge Rank It’s Facebook’s API that It’s the relevancy coefficient enables any third-party calculated on content shared developer to connect to on Facebook’s platform. This Facebook’s database and relevancy is calculated for access the Social Graph each piece of content (with Authorization) to read relatively to every user. it and/or write new data.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 29

••• 2.  Business Model exploration…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 30

••• Facebook’s key figures …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... million users users connecting every day million million Pages apps in revenues in 2011 [Over $4 per user per year] In 2009, Facebook was profitable for the first time. In 2011 it generated $1b profit ! [$1 per user per year] Source: Facebook S-1, May 2012…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 31

••• Facebook’s actual business model is mainly advertising …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... In 2011 it generated billion in revenue, for $1b profit! billion Advertising +17% of average growth per quarter. million Sale of Facebook Credits +89% of average growth per quarter. Source: Facebook S-1, May 2012…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 32

••• An advertising-based business model inspired by Google’s …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Google implements CPC Google revenues increase x7 from 2002 to 2004 CPM advertising era Performance based advertising business Inherited from Print, TV & Radio advertising models are born 2008 2002 Performance based advertising market gets larger than CPM advertising CPM: Cost-per-Mille CPC: Cost-per-Click The Advertiser buys space to the Media Sales The Advertiser negotiates the price of one click- Agency for a thousand prints of the ad. through on its ad with the Media Sales service of the platform. This is usually display advertising. This is performance advertising. Source: Google…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 33

••• How Facebook tried to replicate Google’s formula… to find out it wasn’t working for them …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook tried to replicate Google’s high-value proposition: large traffic, targeting and performance driven by search context, and tools for advertisers. Facebook offered two types of advertising: CPM and CPC. Both were placed on the same spot on the right bank of the page. Traffic: Performance: Targeting: Tools: Facebook is the most Facebook enhances Facebook uses the Facebook sets up its time-consuming action by introducing data provided by own advertising website with 8h18 rich ads, with a Title, users. It supposedly platform with all the per user per month, Picture, and Text. provides a 90% targeting options. and 1 trillion PV. accuracy. The average click-through rate in 2010 proved Facebook’s advertising weakness : Google Traditional banner advertising Facebook Source: WordStream, 2010…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 34

••• And yet, Facebook has generated a lot of money out of its advertising …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Revenue from advertising: Q4 2011 With the average user spending 8 hours and 18 minutes a month on Facebook, there is potential for much, million $ increase YoY much more. Revenue per minute of user activity (Q4 2011) Source: Facebook S-1, May 2012; Estimates Fabernovel…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 35

••• So Facebook decided to do what it is best at …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook invents SOCIAL advertising And extends its platform philosophy to its monetization strategy. It is neither an epiphany nor a direct strategy: it has been implemented Facebook-style, through small iterations. Let’s see how.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 36

••• A critical notion to understand: Facebook is not a social network… …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... The network is how each person is related to another.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 37

••• … it is a social media …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook is also a digital content exchange platform of our social network.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 38

••• A simple feature led to a whole new social thinking strategy …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... In 2009, Facebook introduced the “Like” action The “Like” feature generated so much traction that Facebook was eager to implement it everywhere.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 39

••• Applied to brands, the like button developed the social graph even further …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 40

••• Applied to third-party content, it improved social discovery …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... In one-click on any type of content, users could recommend the content they stumbled upon to their friends. With this feature, Facebook deeply evolved: News about user’s Content sharing social network (articles, videos,…)…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 41

••• Facebook’s Like had become a real economy …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... In 2011… More than There were Average Like User years old million websites million average amount of friends had integrated the “likes” a day Like button more clicks on external links A few examples: On Gawker.com On NHL.com On NBA.com Facebook integration Facebook visitors are Facebook was #2 increased traffic by 200% reading 92% more articles referral source. Source: Facebook, 2011…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 42

••• Focus on: the Viral Loop …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... *139 is the average size of Facebook users’ networks, Source: Facebook S-1…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 43

••• Facebook decided to look for new interactions that could strengthen and qualify this relationship with brands …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 44

••• With its new version of Open Graph, Facebook is able to qualify the actions of its users more precisely …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... 2012 Facebook now has a granular view of how its users are related to brands, products, services… Case Study: Spotify Spotify was one of the first to set the example, at f8 Example: conference* in 2011. How did it use the new Open Graph features? User’s activity on Spotify is recorded and published on Facebook. The action is defined as “listening” and both the song and the artist are identified. * The f8 conference is the annual meeting of Facebook developers, similar to Apple’s WWDC…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 45

••• How powerful is this relationship exactly? We asked Dailymotion …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Dailymotion is YouTube’s main competitor. They saw the potential of Open Graph at the f8 Conference in September 2011. After f8, technical teams at Dailymotion were granted a direct access to Facebook Tech Support in order to integrate Open Graph publications on their service. +10% in 4 months with Open Graph million million video views per day video views per day Though beneficial for Dailymotion, they didn’t Dailymotion worked with Facebook to improve really enjoy it at first: many users complained the user experience: implementing Privacy that it was too invasive and spammed their buttons (turn off Open Graph publications) on News Feed. their video, and aggregating the publications on Facebook’s walls to avoid spam. Source: Dailymotion…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 46

••• Facebook now monetizes this Viral Loop effect with Sponsored Stories …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Sponsored stories – January 2012 With Sponsored Stories, Facebook introduces digital word of mouth marketing. Brands can now amplify the Viral Loop effect by purchasing impressions of Branded Activities on targeted users. Different types of branded activities: Likes OpenGraph publications Check-ins (Mark likes Starbucks) (Mark drank a Cappuccino at Starbucks) (Mark is at Starbucks)…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 47

••• Sponsored Stories: how does it work exactly? Case study, Starbucks …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Reach among Starbucks fans with Everyday, Starbucks gets tagged in Sponsored Stories: Branded Activities 75% (without having to pay for it) Here, Sheryl just checked-in with one of her friends. Depending on on this Depending this update’s Edge Rank, update’s Edge Rank, Sponsored thethe publication will publication will appear in in friends’ appear friends’ News Feeds. News Feeds. Reach among Starbucks fans without Sponsored Stories: 16% The story appears on Sheryl friends’ News feed whose profiles match Starbucks’s targeting. Around $0.36 CPM in the US (source SocialBakers.com) With Sponsored Stories, Starbucks can make sure the story will appear on Sheryl friends’ News feed. Starbucks pays to boost its Edge Rank towards targeted profiles. Source: Facebook…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 48

••• It all sums up to two well-known webmarketing concepts …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Being visible Paying to increase your visibility Integrating with Facebook platform will Buying Sponsored Stories will guarantee make your content visible by Facebook your content to reach a maximum number of users. users. e.g. through Like, Facebook Connect, or Open Graph. Equivalent in search marketing: Search Engine Marketing (SEM). Providing engaging content will help you gain visibility. Equivalent in search marketing: Search Engine Optimization (SEO).…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 49

••• But with word of mouth marketing, the whole concept of targeting changes dramatically …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... New target: engagement Ambassadors Brands now have to seek their fans’ engagement to turn them into brand ambassadors. They then can target fans’ friends while sparking off your fans’ engagement. It’s a win-win situation for Facebook: it delegates a part of the targeting to its users, while improving the overall quality and relevancy of content shared by brands.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 50

••• In order to enable its social adv. strategy, Facebook created two special forces …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Technology Marketing Facebook Partner Developers Facebook Studios They work with high-potential partners to They promote how-tos and best-practices in help them integrate new social features. this new field of “social marketing”. Even though it is a high-value service, it is They will also deliver “facebook studio free! Awards” to the best players in the field. Their job can be compared to Evangelist, Business Developer, Developer, Engineer.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 51

••• 3.  Business & Ecosystem…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 52

••• The Facebook ecosystem: an incredible source of economic value …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook is at the core of a large, new economic ecosystem: apps and websites built on or integrated with Facebook, media consulting and advertising agencies, community managers… According to Deloitte, According to University of Maryland Facebook’s positive impact researchers Facebook’s impact on the on European economy is American economy is…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 53

••• Two levels of dependence exist in Facebook’s ecosystem …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Both are considered by Facebook as content providers.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 54

••• At the heart of the Facebook Ecosystem: Facebook Platform …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook was created as a platform from the beginning… The story goes that Zuckerberg, having envisioned a platform model for Facebook, met Bill Gates through Harvard’s network. Gates shared with Zuckerberg his vision of the best platform... which he followed. In 8 years, Facebook has built one of the biggest platforms in the world: The largest gaming platform in the world: million apps More daily players than XBOX+PlayStation +Wii+Gameboy altogether Source: David Kirkpatrick, The Facebook Effect; Facebook…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 55

••• Facebook’s platform is built on three main tools …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook Platform: a set of tools to enable developers to leverage the power of social. Open Graph Apps Canvas Apps Social Plug-ins Timeline apps let users Canvas Apps are the “traditional” Social plug-ins are code enhance their timeline with Facebook Apps that run inside elements that developers can content coming from third-party Facebook. embed in their websites or apps. Ex: Zynga (Farmville) and many mobile applications to implement Ex: The Spotify Timeline App other gaming apps. some of Facebook’s most will automatically post wrap-ups important functionalities: the Like of what you’ve been listening button, the Facebook Connect recently. button, the Facebook comment module, etc.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 56

••• Facebook’s stance towards its ecosystem is dual …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Openness Control Facebook Plaform is genuinely open Facebook keeps control on its platform without the need to ask for Facebook’s and its product. validation or permission of use. Facebook has never hesitated to roll out Facebook is dependent on the success big changes in its functionalities even of its partners : the more users interact though it harmed a certain number of with apps or social plug-ins, the higher its partners. Facebook’s activity. Facebook Credits is a good example: it has been developed as a tool for developers to simplify their payment process, but Facebook takes a 30% cut and has forced them to use this payment system on their platform since 2010. To keep users from being constantly spammed with Zynga games stories in their newsfeed, Facebook decided to display these stories only to users who actually play Zynga games.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 57

••• Case Study: Zynga, a company born of Facebook’s ecosystem …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Zynga is the main social-games producer on 12% Facebook. They created hit-games such as: FarmVille, Zynga accounts for 12% Café World, FishVille, Texas Hold’em Poker, Mafia of Facebook’s revenue Wars… they recently bought OMGPOP, Draw Something’s creators. Facebook accounts for 95% 95% of Zynga’s revenue ($600M) Zynga launched its own web platform using Facebook Credits Launch of the Facebook Zynga agreed to sign Platform and birth of Zynga, a 5-year partnership End of 2011 : a company dedicated to contract benefiting Zynga launched developing gaming Facebook mostly Facebook CityVille on apps Google+: Zynga hopes it is the first Zynga raised $1B in its IPO (biggest tech IPO step towards less since Google’s) dependency on at a $7B valuation Facebook 21,7M players 34,8M players 3,5M players Dec 2009 : 60M Monthly Active Users Feb 2012 : 240M Monthly Active Users Source: Zynga; Appdata…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 58

••• Facebook’s ecosystem is outsourced growth …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... For Facebook, growth is not about money, growth is calculated by the amount of content available on their platform. Organic growth External growth Facebook benefits from the Facebook always keeps an eye on addition of content coming from high-potential teams building state-of- third-party apps integrating into the-art social applications that could Facebook. improve the product. API Business Acqui-hires By opening its platform to third-party Facebook already made 24 developers Facebook virtually acquisitions within its ecosystem. increases its content production without bearing the costs. Examples: Gowalla Examples: They joined the Facebook Places team Legal issues and technical costs for streaming music or video. Friendfeed Its team improved the News Feed…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 59

••• 4.  Disruption…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 60

••• With mobile, the game’s rules are changing …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Smartphone penetration Tablet penetration (US - March 2012) (US – April 2012) With a growing penetration of mobile devices around the world, web-based companies such as Facebook are facing a critical challenge. Mobile will be the next interface for businesses to reach their audience. Facebook is a web-based company, that now has to be a new entrant into mobile. As with every new entrant, it had to pick a strategy: Build or Partner or Buy Source: comScore, IPSOS…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 61

••• With all its features, Facebook could have been an excellent mobile OS* …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Everything in Facebook could be translated to a mobile app. *Operating System…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 62

••• But it’s a bit too late for Facebook to conquer the mobile market from the top… …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... OS shares (US) March 2012 For Facebook, building a proprietary mobile OS would mean: Spending too much time… You don’t build a mobile OS as quickly as you update your platform. … on a sector they don’t know… Mobile sector means dealing with phone builders and carriers. Smartphones sold (world) Q1 2012 … with no chance of large success. The market is now well established and blocked by the major phone builders and OS. Facebook can’t replicate its web success on mobile. Source: comScore, IDC…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 63

••• … and Facebook failed to build strong partnerships with existing players …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... iOS and Android represent 80% of the market, and they are almost closed to Facebook. HTC Salsa HTC Chacha Apple chose Twitter for Photo Sharing On Android, Facebook integration is on iOS limited to HTC’s Facebook button Apple decided to integrate Twitter instead of On Android, Facebook faces another problem: Facebook in iOS, following heated negotiations atomization. It would have to partner with every regarding the integration of Facebook Credits single Android constructor, and implement inside Facebook’s App. (this eventually didn’t Facebook on every single mobile, for each version happen, and Facebook had to go with Apple of Android. In-App purchases)…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 64

••• So Facebook is just an app on mobile… …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 65

••• … and it is a completely different perspective …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Web Mobile vs. Facebook’s mobile app cannot provide the same level of functionalities integration as the web version.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 66

••• On mobile, alternatives have diluted Facebook’s user engagement …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook decided to focus on the expansion of the platform to all the mobile devices, rather than trying to improve the quality of its apps on main devices. So, in its effort to reach every single user, Facebook lost the hype. Facebook emblematic features are challenged by “cooler” or more convenient apps. In-App Purchase News Feed Credits New York Times Check-ins Foursquare Instagram Photos…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 67

••• Facebook bought Instagram to get back some of its lost hype …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Three reasons why Facebook had to buy Instagram, even for $1 billion: Buy an attractive Integrate the Instagram Call dibs on Instagram point of entry experience further into Twitter was also interested in Photo-sharing is an Facebook Instagram and had already placed essential element on an offer for its buyout. Facebook mobile, and Instagram Even when shared on Facebook, had to act fast. managed to create a the level of integration wasn’t Facebook-like level of beneficial enough for Facebook. engagement. A quite simple product: take photo, apply funny filter, share.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 68

••• But buying apps doesn’t solve Facebook’s problem on mobile: it could be squeezed out in the next 10 years by new competing apps …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Web Mobile Facebook Facebook Messenger Instagram Spotify FarmVille Eventbrite … Social Live chat Photo Sharing Music Game Ticketing On mobile, Facebook lost the central position in the ecosystem which made its success on the web. This position is dangerous for Facebook, so they had to devise a way out.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 69

••• In fact, Facebook has no choice but to change the game’s rules …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook is extending its Social Graph to the mobile market. The phone being social, who, better than Facebook, can understand its dynamics? Facebook chose a 4th option to impact the market: Build Partner Buy Innovate…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 70

••• Facebook will use the ubiquity of social relationships to build a cross-device back- end for developers …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook will gather data on every device and redistribute it seamlessly.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 71

••• Facebook circumvents the traditional mobile OS barrier-to-entry …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 72

••• In May 2012 Facebook launched its mobile weapon: the Facebook App Center …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook App Center is a cross-device web and mobile App Store: On the mobile App Center, users can browse apps, and if a mobile app requires installation, they will be sent to download the app from the App Store or Google Play. In November 2011, Facebook enabled a new feature for mobile app developers: they could set up their mobile apps IDs on the platform so that mobile users, when clicking on a link mentioning the app, could directly be redirected to the app, or the store. For the single month of April 2012, Facebook had already sent 160M users to third-party mobile apps. In May 2012, 90M users were sent directly to Apple’s App Store! Facebook’s goal with the App Center is to take advantage of this phenomenon. Source: Facebook…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 73

••• Facebook’s App Center positions itself prior to the classic distribution platforms …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 74

••• Facebook App Center offers value to both users and app developers …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Users App Developers Discovery Marketing Discovery of new apps is a critical App developers have very issue for mobile users nowadays, restricted options if they want to with an ever-increasing number of promote their app. apps. Facebook offers its social Facebook offers its marketing power to enable recommendation and peer- virality on app promotion. selection power to solve this problem.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 75

••• And with Mobile Sponsored Stories, Facebook monetizes apps promotion …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... In April 2012, Facebook launched its Sponsored Stories on Mobile. From now on, some sponsored stories will appear in mobile users’ newsfeeds. These Sponsored stories can link directly to the App Store or App Center… From now on, app developers can integrate a viral, word-of-mouth, marketing campaign on mobile, using Facebook’s advertising. This is no coincidence if 7 of iOS Top 10 apps and 8 of Android Top 10 apps are integrated with Facebook. Source: Facebook…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 76

••• If successful, Facebook can become the apps merchandising expert …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Apps marketing is a very lucrative business. According to our partners at Applidium*, the sector offers to Facebook an ideal mix for their strategy: High-costs Limited cross-device actions A marketing campaign to get an app in the TOP5 Compared to iOS, it is hard to promote of iOS’s App Store in France costs between successfully an app on Android. The main $10,000 and $30,000. For the US, this price reason for that is the fragmentation of the would go over $50,000. Android market in terms of devices. Facebook’s App Center will help editors market Facebook’s power resides in the fact that they their apps. It will be easy for Facebook to can redirect their users directly to the app on any monetize this help if it proves efficient. device. With more than 500,000 apps on iOS App Store only, Facebook is entering a huge market. * Applidium is faberNovels subsidary specialized in Apps Design & Development.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 77

••• The App Center is beneficial to Facebook in many ways …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Improve the average quality of Facebook Apps Facebook has set guidelines of quality for the apps aspiring to be displayed in the App Center. Foster Facebook integration in third-party apps To fully benefit from Facebook’s viral promotion, app developers will have to implement the latest social features offered by Facebook. Generate revenue Facebook also introduced the first guidelines to offer Paid Apps inside the App Center. Apps could also integrate Facebook Payments. Increase the amount of Facebook Apps The opportunity to offer Paid Apps will create a new economic opportunity for developers.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 78

••• Facebook, a 21st century telco…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 79

••• Facebook is a new breed of telco …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Basically, Facebook does the same job as a telco: Maintain a network, give people an identity and provide communication tools But its telecommunication offer is much broader than that of today’s telcos: Devices Reach Interactions Live profiling Facebook is king of Facebook has 901 In Facebook, people Facebook manages the web and has million users across share a lot more and stores the data already more than the world and it will diverse type of that make the 50% of its users on probably reach the 1 content: message, conversation. It is able mobile devices. billion users milestone photos, comments, to understand what its in 2012, that’s a 14% like, videos, articles, network is doing, in global market share! music,… real-time.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 80

••• Quite an irony: Facebook is still dependent on brick-and-mortar telcos …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Facebook’s network is built upon telcos’ networks It will be interesting to watch in the coming years how this relationship will evolve. Will there be a clash? Will they partner? Merge? Will Facebook offer solutions to create a Mesh Network?…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 81

••• Both business models are built upon the monetization of a strong technological asset… …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Wires and pipes network Social Graph Classic telcos have no idea of what their Facebook sees and stores the data network is carrying. flowing in its network. Hence the value of the network is limited Hence the value of the network to the value of the infrastructure. depends on the utility potential of this data.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 82

••• … but they monetize it differently …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Free 30% cut $ per user (ARPU business) CPC/CPM Tomorrow? $ / data Facebook’s monetization Telcos’ monetization is flat is selective and variable The high competition has forced them to Facebook’s relationship with its users is package their offer, triggering a different from the one it has with its convergence between business and home partners, or with its advertisers… solutions, and decreasing prices. The result is a strong leverage that It is a simple linear revenue model Facebook can pull to earn money from dependent on the number of users. highly-profitable partners.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 83

••• Our take: Five challenges awaiting Facebook…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 84

••• # 1: Facebook will have to protect its users …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Challenge With nearly 1 billion users, Facebook now reaches a little less than 50% of the Internet world population. Its challenge will soon be securing its user base over acquiring new users. Facebook’s answer Privacy guidelines for developers Legal protection After a huge amount of complaints from users, There has been a lot of noise around a story Facebook introduced new privacy guidelines: involving a recruiter who asked a candidate for developers are encouraged to implement Privacy access to his Facebook account. Facebook Switch buttons. declared that, in such case, it would use its legal team to sue employers. Stealth mode ••• Our take When evolving from a startup to a big company, priorities evolve. Having grown its user base to this extent, Facebook now has a lot more responsibilities than before. Part of this responsibility is to curb third-party developers’ enthusiasm in exploiting the data of its users. Facebook has to switch from an open position, with guidelines, to a firm position: with rules.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 85

••• # 2: Facebook will have to be included in every part of the social conversation …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Challenge In a nutshell, the quantity of the content on the platform drives traffic and drives Facebook’s business model. If a large part of the social conversation was to be happening outside Facebook, it could have dramatic consequences for the company. Facebook’s answer Existing solutions… … and Innovation Facebook has already opened a lot of solutions Facebook believes in its technical team’s capacity to integrate out-of-platform conversations inside of innovation. They will devise new way of Facebook: comments plugins, live chat for live connecting third-party content to its platform. events,… ••• Our take Facebook has to be the tool on which the social conversation happens. It means that they have to cover anything that is a hot topic, anywhere the conversation happens. So Facebook not only needs to offer a connection to its platform, but have a strong value proposition to persuade content providers into integrating with Facebook.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 86

••• # 3: Facebook will have to sell its new social advertising …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Challenge Being a pioneer means that even if they face no challenger on this specific market in the near future it will have to persuade marketers that their product is a good buy and, to a certain extent, a better buy than other online advertising resellers. Facebook’s answer Evangelization With the Marketing Teams and the new Facebook Studio both working at identifying best-practices, Facebook wants to persuade advertisers of the efficiency of social advertising. ••• Our take Evangelization is not enough to convince advertisers. Facebook actually adopts a developer point of view on this challenge: providing a technical solution, trying to spark off excitement, and providing best- practices as a documentation. In fact, Facebook has to develop its own social metrics in order to prove the efficiency of both its products and advertising. In the past, every media had to create its own metrics: print, press, radio, TV, web… and now social media has to follow the rule.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 87

••• # 4: Facebook will have to distribute its data …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... Challenge The constant excitement surrounding Facebook comes from the gigantic quantity of data they possess. Facebook has to transform this potential into real money, without scaring away its users - as discussed in #1. Facebook’s answer Facebook Connect & Open Graph 2.0 Facebook has broadly opened its data to third-party developers with Facebook Connect. They can now quickly build customized user experiences with the use of this data. ••• Our take Even though Facebook is helping other apps to generate value by lowering the barrier-to-entry to social traction, this doesn’t generate revenues directly. But Facebook is not exploiting its main potential: laser- sharp, real-time targeting for advertising. It doesn’t need to be the advertising reseller, Facebook could simply open a “Targeting API” to which any advertiser could connect, paying for the service: a price for a thousand requests for example.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 88

••• # 5: Mastering these 4 challenges, Facebook will rise as the perfect social data startup …………………………………………………………….…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 89

••• We are faberNovel We help large organizations think and act like startups! We help our clients make the most of digital opportunities and emerging practices. We build on tomorrow’s challenges to deliver significant impact. We are designers, business analysts, and engineers. ••• We work ideas into successful projects. We make innovation happen. facebook.com/faberNovel @faberNovel www.fabernovel.com…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 90

••• Contact us • We welcome your questions & comments on our work. Please let us know what you think! • We also like to present our work in person. Ask us for a live presentation of this study! • And we’d love to tell you more about faberNovel. We’re just a click away.…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 91

Stéphane Distinguin Cyril Vart Founder & CEO Partner & VP Strategy @fano @cyrilvart Marie-Caroline Lanfranchi John Geraci Partner & Project Director General Manager, faberNovel NYC @mariecaroline @johngeraci Maxime Coupez Kévin Smouts Senior Project Manager Junior Project Analyst @mc0up3z @kevinsmouts …………………………………………………………….………………………………………………… Design Team …………………………………………………………….………………………………………………… Benoit Talabot Jules Mahé Partner & Art Director Graphic Designer @bybent @julesmahe …………………………………………………………….………………………………………………… Acknowledgements …………………………………………………………….………………………………………………… Dailymotion, Applidium, Inside Facebook, Mashable, TechCrunch, ReadWriteWeb, Business Insider, Fast Company, Arstechnica, Quora, Wordstream, Business Insider, Comscore, IDC, IPSOS…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 92

San Francisco Paris 169 11th street, 17 rue du Faubourg du Temple San Francisco CA 91 103, USA 75010 Paris +1415 626 6406 +33 1 42 72 20 04 meet_sf@fabernovel.com meet_paris@fabernovel.com Ho Chi Minh City New York Moscow H17 K300 Cong Hoa St, Ward 412 Broadway, Floor 2, 3-iy Monetchikovskiy Peureulok 12, Tan Binh Dist, Ho Chi Minh City Ny NY 10013 17, Stroenie 2 Moscow 11054 +84 8 3811 7771 +1415 298 0209 +7 (999) 639 80 82 meet_hcmc@fabernovel.com meet_nyc@fabernovel.com meet_moscow@fabernovel.com…………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. …………………………………………………………….………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. faberNovel 2012 ••• 93

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