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ISBN-10: 1308388098
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Contents
Facebook (in 2013): Will Wall Street Hit the Like Button? 1
iii
Credits
Facebook (in 2013): Will Wall Street Hit the Like Button?: Strategic Management, Second Edition 1
iv
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MHE-FTR-016
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Facebook (in 2013): Will Wall Street Hit the Like Button?
JANUARY 15, 2013, 10:03 A.M. Mark Zuckerberg, casually dressed in his hoodie, entered the media event
room at Facebook headquarters in Menlo Park, California. This was Facebooks first live introduction of a
new product. As he stepped in front of the audience, Zuckerberg noticed the numerous glowing white Apple
icons arrayed throughout the auditorium. These images very briefly reminded him of his mentor, the late Steve
Jobs, who played a significant role in his professional development and his companys success. Even some of
Facebooks current challenges were brought about by Jobs revolution of the mobile industry. Today, Zuckerberg
would attempt to engage an audience with a new product in a manner similar to Jobs flashy introductions of new
innovations.
Zuckerberg opened with a review of Facebooks mission and described the structure of the companys current
social ecosystem. Two current products, Timeline and News Feed, represented two of the three pillars supporting
the Facebook ecosystem. These two products allow users to view a portion of their social network by continuously
answering the questions, Whats going on? and Who is this? After reviewing the first two pillars, Zuckerberg
unveiled the third pillar: Graph Search, which allows users to query their social network directly. He intentionally
noted that Graph Search is very different from a normal web search because it filters results based on a users
connectivity to his or her social network.
After the presentation, Zuckerberg sat down with Sheryl Sandberg, Facebooks chief operating officer (COO)
and second in command, to discuss strategies for monetizing Facebooks data and users. Sandberg knew that she
and Zuckerberg had a strong professional relationship, but the topic of modifying Zuckerbergs creation for profit
was a subject of debate between them. Zuckerberg is all about building the best product and user experience,
while Sandberg, a Harvard MBA, is a driven businesswoman with a keen sense for shareholder value creation.
Sandberg eased into her chair saying, I think that went very well, referring to the Graph Search press event.
I believe you will change the way we look for answers from the Internet. It could also be a great tool for
advertisersand a way to deliver on the expectations of shareholders.
Zuckerberg answered immediately, I dont like seeing my vision for a connected world smothered with logos
and slogans! But that is why youre hereto try to convince me otherwise.
Sandberg responded, There are options for demonstrating the value of our data. Ways that can be a win for
everyoneyou, advertisers, shareholders, and users!
So, what are the latest ideas? countered Zuckerberg.
What are the latest ideas? The question stuck in Sandbergs mind. There were many ways to monetize
Facebooks user base of one billion people: ads on the mobile platform and the main site; charging users a usage
Frank T. Rothaermel and Seth Taylor (GT-MBA14) prepared this case from public sources. This case is developed for the purpose of class discussion. It is not
intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and
omissions, are entirely the authors. The authors thank Andrea Meyer for her editorial assistance and invaluable case writing guidance. by Rothaermel and
Taylor, 2015.
Facebook (in 2013): Will Wall Street Hit the Like Button?
fee; traditional banner and skyscraper advertisements. But the method could not be a drastic diversion to the user.
As Sandberg considered Zuckerbergs question, she knew that no matter what, it would always be a hard sell to
him. At the same time, Facebooks investors were growing more restless as they monitored the young companys
share price.
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Facebook (in 2013): Will Wall Street Hit the Like Button?
In 2012, Facebook brought in $5.09 billion in sales, a 37 percent increase over 2011 (Exhibit 3). The company
generated 84 percent of its revenue through advertising services and collected the rest through social gaming
fees charged to platform developers. Facebooks ad revenues are predicted to rise to $7.64 billion in 2014 (see
Exhibit 4), but there is still plenty of room for Facebook to grow.9 Google and Yahoo make nearly $88 per user
of their search engines, whereas Facebook makes only $15 per user account.10 However, Facebook chooses to
focus on average revenue per user (ARPU) as a tool for assessing its ability to monetize its users. Facebooks
ARPU (Exhibit 5) provides another metric for measuring how well Facebook is capturing value from its user
base. This measure has slowly risen over the years, with most of the growth being generated in North Americas
well-developed advertisement industry.
Facebook has ambitious plans for the future. The company has stated that it intends to connect the more than
two billion global Internet users.11 Its success in penetrating different countries, however, has varied. In most of
North America, South America, and Europe, Facebook reaches anywhere from 6080 percent of Internet users.
Exceptions are Brazil and Germany, where penetration rates are less than 30 percent. In Germany, users are quite
concerned about data privacy, while Googles Orkut social network competes with Facebook in Brazil (only
recently has Facebook surpassed Orkut in usage).12 In Russia, Facebook battles VKontakte for dominance, and in
China, Facebook is currently blocked by the government. This ban leaves a gap in the companys social network.
Facebooks equivalent in China is Renren, a network with roughly 200 million users.
Facebooks Leadership
MARK ZUCKERBERG
Founder Mark Zuckerberg (nicknamed Zuck) remains the CEO and chairman of Facebook, despite the fact
that many founders of successful technology startups are asked by venture capitalists to turn over the reins to more
experienced, professional managers. Compelled by the companys vision to connect the world by building a great
user experience, Zuckerberg wont see his ambitions sidelined by an outsider motivated primarily by increasing
shareholder value. Facebook is the obvious fusion of Zuckerbergs academic passions in psychology and computer science at Harvard. The website collects data to map out human relationships and social connectivity, which
Zuckerberg refers to as a social graph. Taken together, it is a social graph that has mapped one-tenth of the world
population in less than seven years.
In the early days, Facebook operated directly under Zuckerberg, who coded much of the original site and then
managed the engineering teams in the next phase. As Facebook grew out of its start-up phase, however, some
industry observers began to argue that the company was maturing faster than Zuckerberg was as its CEO. At times,
Zuckerbergs inexperience and casual appearance have received criticism. On several occasions, Zuckerberg has
worn flip-flops and hoodies to meetings with other executives. With his habit of arriving late to work and staying
into the middle of the night, even his work schedule hearkens back to college habits. He received more negative
press over comments he made in a speech in 2007, when he stated that young people are just smarter.13 In recent
years, it seems that Zuckerberg has actively sought to improve his public image and culled his brashness and
activities. He even hired a public speech coach, former president Bill Clintons speech adviser.
Even as Zuckerberg has adapted to his role as a business leader, the way the company has tried to juggle user
privacy and the monetization during his tenure has opened him up to additional criticism. In December 2007,
Facebook launched a new advertising mechanism called Beacon. The feature was designed to track users activity
across all of the websites they visited and share their activity with friends via their Facebook account. Its release
prompted condemnation from users and privacy groups alike. A similar situation occurred in 2009, when the company released new privacy controls that, under the new settings, made public some messages originally thought
to be private. Addressing privacy concerns effectively remains in the front of Zuckerbergs mind as he considers
ways to monetize Facebooks prime audience, mobile users.14
Facebook (in 2013): Will Wall Street Hit the Like Button?
SHERYL SANDBERG
Sheryl Sandberg joined Facebook as chief operating officer (COO) in 2008, following a six-year stint as Googles
vice president of global online sales and operations. In that capacity, she worked with Googles AdSense and
AdWords programs; a unit that began with 300 staff but grew to 4,000, or about one-quarter of Googles work force,
under Sandbergs leadership.15 Eric Schmidt, Googles CEO at the time, considered her a superstar, but tension
grew between the companies after her departure, partly because Sandberg recruited Google executives and employees to work for Facebook.16 Sheryl Sandberg attended Harvard for both her undergraduate (economics) and graduate (MBA) degrees. She worked at McKinsey & Company and as chief of staff for Lawrence Summers at the U.S.
Department of Treasury prior to working at Google.17 Time magazine considers her one of the 100 Most Influential
People in the World, and Fortune places Sandberg as one of the 50 Most Powerful Women in Business.
Sheryl Sandberg is a vocal advocate for women in leadership. Her TED talk entitled Why We Have Too Few
Women Leaders has some three million views,18 and her book Lean In is a bestseller. In both, Sandberg speaks
about the low number of female leaders in todays society and how to overcome this situation.19
As COO and Zuckerbergs second in command at Facebook, Sandberg focuses on operations, revenue, and
international reach. She was also tapped for her sales, business development, public policy, and communications
prowess. Given Zuckerbergs public relations challenges, many consider Sandberg the professional face of
Facebook.20 Zuckerberg sought out Sandberg amid a shake-up of his executive team. He was looking for someone who would be comfortable serving as his No. 2 within the company, allowing him to maintain a tight rein on
Facebooks activities. To some extent, the leadership dynamic between the CEO and his COO can be explained in
simple terms: Zuckerberg brings in the users, while Sandberg brings in the money. The dynamic between the two
is respected within both Facebook and its board of directors.
Sandberg has been able to attract high-profile advertisers by showing them how targeted their ads can be when
theyre hooked into a network as intimately familiar with its users as Facebook is. She has also stepped up in unexpected areas when needed, such as when she completed a round of funding for Facebook when its chief financial
officer (CFO) left suddenly.21 Sandberg is known for her ability to form teams and break deadlocks, bringing an
analytics perspective and authentic communication to bear on the issues. In this way, Sandberg has been a key
figure in reshaping Facebooks business model. She is now working hard to help Zuckerberg find a viable business
model that will monetize the companys mobile users.22
DAVID EBERSMAN
After the departure of Facebooks chief financial officer Gideon Yu in 2009, the company sought a CFO with
public company experience that could help it prepare to go public in the next few years.23 The search turned up
David Ebersman, who was in his 15th year as CFO at the biotech company Genentech Inc. Prior to working at
Genentech, Ebersman, who received an undergraduate degree in economics from Brown University, held positions with Oppenheimer & Co. Inc. and the U.S. Department of Treasury.24
Ebersman was indispensable to the launch of Facebooks IPO on May 18, 2012, working closely with advisers from the institutions underwriting the offering, particularly those at J. P. Morgan. The SEC and the media
criticized Ebersman for his decision to raise the number of shares offered in Facebooks IPO three days before
Zuckerberg rang the NASDAQ bell, even going so far as to blame this decision for the stagnant stock price on the
day the IPO was issued.25
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Facebook (in 2013): Will Wall Street Hit the Like Button?
NEWS FEED
Released in September 2006, News Feed quickly became a core feature of Facebook. It is at the heart of a
users homepage and provides regular updates of friends posts, photos, events, group memberships, and so on.
The priority of items displayed in the News Feed is based on a complex algorithm. Several factors, such as the
number of friend comments on an item, who posted the original item, and the actual content, play a critical part
in the priority ranking.26 The success of the logic behind News Feed has kept users engaged and has contributed
to the immense popularity of the site. Zuckerberg claims that News Feed answers the question, Whats going on
in the world around you?27
TIMELINE
An updated version of the profile page, called Timeline, was launched in September 2011. It allows each user
to paint a complete life story on his or her profile. Users can select what information to share and with whom to
share it. Milestones older than 2004 (Facebooks launch year) are now easily represented on a graphical display.
Inspiration for this product came when its creator, Sam Lessin, viewed a hard copy of his profile stretched across
the office.28 According to Zuckerberg, Timeline answers the question, Who is this person?29
GRAPH SEARCH
Zuckerberg calls the network of connections between people the social graph. Facebook, as a product, is an
attempt to map the global social graph in the form of a massive database. Graph Search is a search bar that hovers
at the top of every Facebook page. In addition to acting as a title for the content of that page, Graph Search also
allows users to search for people, places, photos, and interests in their portion of the social graph. Zuckerberg
stated that Graph Search is meant to help people discover and make new connections,30 whereas the previous
two pillars helped people maintain their connections. Later releases of the tool will include information from
Open Graph (described in the following Creating Value for Developers section) and allow users to search
Facebook posts. It is also expected to migrate to Facebook mobile.
Facebook has taken a giant step into Googles territory with the release of Graph Search. The years that
Facebook spent attracting users and their personal information have come together to give Facebook an edge
over Googles user database. In fact, in anticipation of such a move by Facebook, Google launched its own social
networking tool, Google1 in 2011. So far, Google1 has made little headway against Facebooks massive head
start in the social network space.31 Facebook search capabilities will also directly compete with other social-based
information services like Yelp, LinkedIn, and Amazon.com in the areas of finding restaurants and shops, making
business connections, and buying goods.32
MESSAGES
Included with the initial launch of Facebook, messaging has remained a core feature of the social networking
site. Today, Facebooks messaging products include e-mail (i.e., users can opt to utilize a free@facebook.com e-mail
address), chat, and text messaging. Since November 2010, users have seamlessly accessed all three products in one
integrated location. A separate mobile application (app) called Messenger was launched in November 2012. This app
allows users to quickly message with their Facebook friends and supports image attachment and audio messages.
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Facebook (in 2013): Will Wall Street Hit the Like Button?
GROUPS
Facebook Groups provide users with an online space to discuss common interests. Examples of Groups
include family, sports teams, and church groups. Launched in September 2004, the feature allows users to
control the content they sharefor example, pictures, calendars, and commentsvia customizable privacy
settings.
EVENTS
The Event feature lets users create an event, invite other Facebook users to the event, and track RSVPs for the
event. An event can include a map location for the address and a host for the event who is also a Facebook user.
In addition, guests can communicate with each other on the event page. A new version of Facebook Events was
launched in May 2010. This upgrade made it easier for users to create events from their homepage while adding
more details about an event.
PLACES
Launched in August 2010, Places is a Facebook mobile feature that lets users share their physical location
with other users by checking in. Users can tag other Facebook users who are with them as well and, if their
Facebook friends have visited the same location and left comments about their experience, users can see that
information.
NOTIFICATIONS
Introduced in May 2009, Facebook Notifications are visual alerts that signal users to activity on their page
or within their social graph. Separate notifications appear for friend requests, messages, and general activity. Notifications accumulate and are displayed as numbers within red notification bubbles located on the
Facebook page.
FRIENDS LISTS
Launched in December 2007, Friends Lists added another layer to the News Feed algorithm. Users can use
Friends Lists to create Smart lists or Friends and Acquaintances lists to ensure that content from specific friends
is given the highest priority on their homepage. Friends Lists was updated in September 2011 to compete with
circles on Google1, which some considered superior to Facebooks solution.34 Lists, like Googles circles, help
users focus on content that they are immediately interested in reviewing, eliminating the need to wade through
mundane updates from those to whom they arent as closely connected. This feature also provides users with a
way to share information privately.35
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Facebook (in 2013): Will Wall Street Hit the Like Button?
PAGES
Also launched in late 2007, Facebook Pages allow any individual or group (e.g., celebrities, public figures,
businesses, colleges, or organizations) to create a public profile page in order to interact with the Facebook community. When users like a page, they automatically sign up for any and all content published through that page;
this content is then posted to the users News Feeds. Pages operate similarly to the model of Facebook competitor
Twitter in that the owner of a Facebook Page need not approve likes from users (unlike a friendship between individual Facebook users, which requires dual acceptance). Through effective use of pages, an owner can increase
his or her exposure by taking advantage of the algorithms associated with the News Feed. By the end of 2011,
there were more than 37 million Facebook Pages, including ones for most Fortune 500 companies, a large number
of public and private universities, and many national and local celebrities.36
VIDEO CALLING
In the summer of 2011, Facebook partnered with Skype (which had been purchased by Microsoft in May
2011) to form Video Calling, a feature intended to compete directly with the Hangouts feature on Google1. Video
Calling enabled users to call friends for free directly from Facebook after installing the Skype plug-in.
SUBSCRIBE
September 2011 brought another new feature to Facebook: Subscribe, which promotes the further customization of the Facebook experience. The Subscribe feature gives users the option to tailor what they pull into their
News Feed, allowing them to turn on or off comments, photos, life events, or games from individual Facebook
friends. In addition, a user can subscribe to articles authored by his or her favorite journalists from sites such as
CNN, USA Today, The Wall Street Journal, and Forbes. From then on, any time a favorite journalist authors an
article, it is posted to the Facebook users News Feed.
GIFTS
The Facebook Gifts feature was rolled out in December 2012 as a way to capitalize on e-commerce beyond
the cut that Facebook takes from game developers on the Facebook platform. Users can visit a friends Timeline,
click Give Gift, select a gift, insert a message, and send a physical gift to that friend. Currently, this feature is
only available in the United States, but Facebook plans to expand it to other countries.
Facebook (in 2013): Will Wall Street Hit the Like Button?
Reach. With more than one billion MAUs, if Facebook were a country, it would be the third largest in the world
by populationthat amounts to quite a reach. Companies have the ability to purchase lists of the users who subscribe to the pages of other companies, which can be used to target a specific audience. As an example, in 2010
IronPlanet Motors (a competitor to eBay Motors) purchased the BMW and Mercedes-Benz Fan Page subscriber
lists in order to advertise the launch of its new car auction website to those users. Similarly, movie studios can
notify fans on their page of an upcoming movie release. Paramount Studios, for example, reached 65 million fans
in one day when it advertised the release of Transformers: Dark of the Moon on Facebook.39 Facebook also offers
free tools for tracking the performance of ads called the Ads Manager. With the release of Graph Search, Facebook
intends to open up a new opportunity for advertisers and marketers: Companies that have a page can be discovered
by users as a result of their Graph Search queries based on the information the organization posts on its page.40
Relevance. Relevance is important to advertisers because, in todays economy, marketers are being asked to do
more with less. This is where Facebook can play a vital role. Users identify themselves based on many demographic factorsfor example, age, gender, race, location, education level, and special interestswhich allows
Facebook to deliver targeted ads with a higher success rate than industry averages (90 percent versus 35 percent,
according to a recent study).41 A good example of a targeted advertising campaign is that of CM Photographics, a
wedding photography company based in Minneapolis, Minnesota. With Facebooks help, CMPhotographics, on
a limited budget of $1,544, targeted recently engaged women aged 24 to 30 who lived in close proximity to CMs
location.42 The targeted campaign led to a substantial increase in revenue during the ensuing 12 months.
Social Context. With sponsored stories and social ads, Facebook provides a rich social context for advertisers. As of January 2012, sponsored stories (e.g., a friend checking in to a Starbucks) are prominently displayed
directly in a users News Feed. The friend has now automatically become an advocate for the company across
his or her social graph, driving company awareness. Social ads allow marketers to add context to their ads. This
enables product differentiation and, according to a recent Nielsen study, increases ad recall by more than 50
percent.43
Engagement. The social web is an evolving species, and Facebook has been a leader in identifying new advertising tactics that improve user engagement. For instance, dynamic ads that include a poll, hit upon a users special
interest, or encourage feedback all improve awareness. For example, through its Facebook page, the Chinese restaurant P.F. Changs offered a free lettuce wrap to all customers during a three-week period.44 All of P.F. Changs
fans and friends of those fans saw the ad. Over 50,000 customers took advantage of the offer; 40 percent of them
were first-time customers.45
Market Opportunities. Facebook ads can display in multiple locations on the screen, and Facebooks ad system
guarantees a fixed number of ad impressions for a fixed price. Most important, Facebook invests in technology
that dynamically decides the best available ad to display to a user depending on that users unique attributes. The
system does a real-time comparison of the bids that different advertisers have offered to pay to advertise to that
type of user. This type of technology helps Facebook maximize ad revenue.
As Facebook continues to expand its advertising offering, it expects its ad revenue to follow suit. Additional
advertising opportunities for Facebook could arise from three main areas: traditional offline branded advertising,
online advertising, and mobile advertising. In 2010, traditional offline advertisingtelevision, print, and radio
was a $363 billion industry, representing 62 percent of the total worldwide advertising spent.46 As marketers
continue to gravitate toward online advertising, a large percentage of this offline budget will be allocated to advertisers such as Google and Facebook. Similarly, the global mobile advertising market is expected to grow from
$1.5 billion to $17.6 billion by 2015.47 Currently, Facebooks mobile app is one of the most popular downloads;
Facebook boasts 680 million mobile MAUs. However, the mobile path has an added challenge in that greater
mobile use generally reduces ads per user, given the smaller screen size of mobile devices.48
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Facebook (in 2013): Will Wall Street Hit the Like Button?
Current Competitors
INSTAGRAM
Instagram, a photo-sharing service for iPhones and Android phones, was founded in October 2010 and quickly
became a leader in online photo sharing. In March, CEO Kevin Systrom announced that registered Instagram
users had nearly doubled from 15 million to 27 million in the previous three months.56 On April 9, 2012, Facebook
acquired Instagram for $1 billion, the largest deal ever for Facebook.
Zuckerberg saw the acquisition as a milestone for the company and said, We dont plan on doing many
more of these, if any at all.57 Photo sharing, which is one of Facebooks core features, has been a vital element in
the companys success and efforts to drive user engagement. By acquiring Instagram, Facebook has eliminated a
potential competitor and gained access to the talent that created the robust Instagram app for iPhone and Android.
For now, Facebook plans to retain Instagram as a separate business unit, but it will be expected to share some of
its talent and innovation with the parent company.
TWITTER
Launched in July 2006, Twitter has become an extremely popular free micro-blogging and social networking
service. As of July 30, 2012, Twitter had over 500 million accounts with 27 percent designated as active users,
according to the French analytics firm, Semiocast. The most popular method of using Twitters service has been
through the companys main website, which is accessed through desktop computers rather than through mobile
devices. This accounts for 27.6 percent of worldwide activity.58
Twitter gives users the ability to communicate with friends and family via text-based posts in real time. Users
submit a tweet, which is limited to 140 characters in length, to their profile page. A subscriber to the users page
(known as a follower) then receives the tweet automatically. Unlike Facebook, which requires the dual acceptance
of friend requests, Twitter stimulates interaction between complete strangers because users dont need to approve
who follows them.
Individuals, organizations, and companies have quickly realized the benefit of this type of interaction: the
ability to reach an unlimited, yet targeted, audience. TV channels such as CNN, MSNBC, and ESPN now use
Twitter as part of their broadcasts. And celebrities, athletes, and politicians have accepted the technology as well;
75 percent of NBA players, 82 percent of U.S. Congress members, and 85 percent of U.S. Senators are active
Twitter users.59 Former vice president of product, Jason Goldman, attributes Twitters appeal to the fact that it
delivers interesting, relevant timelines ... about the people and places that matter to you. Giving people better information about the world around them and the things they care about has become the cornerstone of the
product offering. 60
Even though mainstream adoption has quickly become a reality, Twitter is still growing its business model.
Twitters 2011 ad revenue was $139.5 million. While analysts estimate that it will grow to $540 million by 2014,
the percent change in revenue is expected to decline year over year during that time (see Exhibit 6).61 Meanwhile,
Facebooks ad revenue was $3.15 billion in 2011 alone.62 In addition, users of Facebook spend significantly more
time on the website each month than users of Twitter. Of all social media site visits in October 2012, Facebook
captured 62.39 percent, while Twitter captured only 1.85 percent (see Exhibit 7).63
For the time being, Twitter generates only a fraction of the ad revenue and user interest of Facebook; however,
as Twitter continues to grow, the chance of users spending more time with it communicating with friends and
family will grow as well. Professor Tim Loughran of Notre Dame summed it up as follows: Facebook is in the
business of communication. Anybody who can facilitate a more precise or quicker communication should be
perceived as a threat to Facebook.64
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GOOGLE
Founded in 1998 as a provider of Internet search results, Google has become a leader in cloud computing and
advertising, particularly since its highly successful IPO in 2004, which raised $1.9 billion on a valuation of $23
billion (see Exhibit 8). The companys strategic growth, both organically and through acquisitions, beyond its
initial core competency of Internet search is evident in its stock performance (see Exhibit 9).
A major driver of revenue for Google, just as with Facebook, is online advertising. In the large $40 billion U.S.
online advertising market, Google holds a commanding lead over its competitors. It currently has a 44.9 percent
share of the market, while Yahoo and Facebook hold 7.4 percent and 6.5 percent, respectively (see Exhibit 10).65
In 2014, Google is projected to have a 47.4 percent share of the industry, which will then have grown to $53 billion. While Facebook is expected to oust Yahoo from its second-place position during that same time, it is still
projected to claim only a 7.1 percent share of the market.66
In the online display advertising market, a subset of the overall online advertising market, Google and Facebook
are more evenly matched. In this $15 billion industry, the two companies each hold about 16 percent of the market. However, Google is projected to supplant Facebook as the leader in online display ad revenue by 2013 and
grow its market share further in 2014, by which time it is expected to account for 21.7 percent of the market,
while Facebook slips to 17.1 percent (see Exhibit 11).67 Google also added to its revenue by acquiring Motorolas
mobile divisionin 2012, 8 percent of Googles revenues came from the hardware and services of Motorola
Mobile.68
For Facebook, another area of concern is Google1. Google1 has several improved and additional features
over Facebook. Google1 circles allow users to organize the people they are connected to and give them better
control over their privacy settings. Hangouts is a video chat feature that allows up to 10 friends to communicate through videoconferencing. The integration of Google1 with YouTube and the image organizer and viewer,
Picasa, allows for improved video and photo sharing. Whats more, the third-party developer platform associated
with Google1 (which is similar to Facebooks developer platform) is completely free, while Facebook charges a
30 percent commission. This incentive could drive developers away from Facebook and to the Google1 platform,
which would parallel Googles initiative of driving iPhone developers to the Android operating system through
more attractive developer commissions.
Yet, Google1 lacks Facebooks installed base of users as of late 2012. Google1 had 235 million active users
at the end of December 2012, up from 150 million in June of that same year. However, even with this increase,
Google1 claimed only 1.32 percent of social media site visits (Exhibit 7).69 Meanwhile, Facebooks one billion
active users comprise 62.39 percent of social media site visits.70 Still, Google has seen a boost in click-through
rates on some display ads of anywhere from 2 percent to 15 percent due to the additional user information provided by its social media product.71
Googles drive for Internet dominance and social strategy includes a suite of products and services (e.g.,
Chrome, Google.com, Picasa photo software, YouTube, Translate, Analytics, AdWords, and others). Rather than
focusing on any single product, what matters most to Google is how much time users spend within the Google
ecosystem once logged in to their account.72 Now that all of these products and services are linked to Google1,
Google will be able to paint a more complete picture of each of its users. Such fine-grained data will be vital in
Googles push to become the dominant online presence delivering customized advertising.
MICROSOFT
Even though it owns a 10 percent equity stake in Facebook (which it bought in 2007 for $240 million), Microsoft
remains a Facebook competitor across several market segments. Similar to Google, Microsoft commands a large
percentage of advertising revenue and both online and offline user interaction. Microsoft offers a fleet of products
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and services that competes directly with Facebook. Windows Mobile, the Xbox 360, the Bing search engine, and
MSN (a portal to news, sports, games, shopping, and videos) all drive traffic away from Facebook and Google. In
2012 alone, Microsoft accounted for 5.7 percent of U.S. online advertising revenue and was projected to remain
third behind Google and Facebook over the next several years (see Exhibit 10).
On the other hand, Facebook and Microsoft have formed a strategic partnership that enables the two companies to compete directly with Google on several fronts. In May 2011, Microsoft purchased Skype for $8.5 billion
and soon after partnered with Facebook to challenge Google1s videoconferencing capabilities.73 At the time
of the deal, Zuckerberg said, We have a really good relationship with Microsoft. Now that Skype is owned by
Microsoft, that gives us the sense of stability that its going to be with a company we can trustthat we know we
have a longstanding relationship with.74 The truth of this statement seemed evident in May 2012, when Microsoft
sold $550 million worth of patents and licenses to Facebook.75
Previously mentioned as a competitor in the area of user interaction, Microsofts Bing search engine has also
formed an alliance with Facebook in an effort to improve the breadth and depth of its social search data. Bing
is now the default search engine within Facebook. This partnership will compete directly with Google1 and
Google.com search results. Moreover, Bing search queries conducted within Facebook are not directly accessible
to Google for further data analysis.
LINKEDIN
Started in 2002 in co-founder Reid Hoffmans living room, LinkedIn has grown into the worlds largest professional network.76 In February 2012, the company had more than 150 million members accessing the site from
more than 200 countries in 17 languages; 60 percent of LinkedIn members live outside the U.S.77 All Fortune 500
companies have at least one executive with a LinkedIn profile, and 82 Fortune 100 companies use the recruiting
tools provided by LinkedIn. At the beginning of 2012, there were more than two million LinkedIn Company Pages
(which are similar to Facebook Pages) and almost one million online job applications originating from within
LinkedIn.78
LinkedIn held its IPO on May 19, 2011, at a price of $45 per share. The stock quickly jumped to over $90
per share, making the company worth around $9 billion (see Exhibit 9).79 In 2011, the company recorded
$522 million in revenue with earnings of $11.91 million, which equates to a very healthy price-to-earnings
ratio (P/E) of approximately 850.80 However, LinkedIns ad revenue drags behind Facebooks. It was $154.6
million in 2011, and is projected to increase to $405.6 million by 2014 (see Exhibit 12).81 Meanwhile,
Facebooks ad revenue was $3.15 billion in 2011.82 In addition, LinkedIn site visits accounted for only 0.83
percent of all social media site visits in October 2012 (see Exhibit 7).83 Still, although LinkedIn users spend
much less time on the site than Facebook users do on Facebook, LinkedIn brings in $1.30 per user-hour
spent on its site, while Facebook brings in only $0.06.84 In addition, LinkedIn has added more user-friendly
features, making it more akin to a network that allows for professional connections embedded within social
interactions.
LinkedIn operates on a business model called freemium, in which it offers its core product for free but then
charges for premium services. LinkedIn offers premium products to individuals as well as to companies. For
example, users have a choice of three subscription levels, getting access to a larger number of services at each
level. Premium services enable users to see who has viewed their profile, do premium searches that let them build
job leads, see full profiles beyond second-degree connections, and send messages to people with whom users are
not connected. For their part, companies can purchase LinkedIn products, such as LinkedIn Recruiter Corporate,
that help them find qualified employees and contact those individuals directly. Another product, LinkedIn Sales
Navigator, helps salespeople build better prospect lists.
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Facebook (in 2013): Will Wall Street Hit the Like Button?
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Facebook (in 2013): Will Wall Street Hit the Like Button?
Only one analyst, Daniel Salmon at BMO Capital Markets, called for an underperform rating and gave a price
target of $25, citing his concern about Facebooks advertising revenue.91
Facebook stock continued its downward trend in July and August of 2012 (Exhibit 9). The market cap as of August
16 was $48 billion, 54.2 percent ($56.8 billion) less than the IPO market cap.92 In the months following the IPO,
Facebook far underperformed its closest comparable IPOs: Google and LinkedIn. Google grew much faster than the
NASDAQ 100 in its first six months, while LinkedIn grew at roughly the same rate as the NASDAQ 100 over the same
period. Even investors who anticipated that Facebook would perform no worse than LinkedIn were disappointed.
UNDER SCRUTINY
Discussions over the declining stock prices put Morgan Stanley, the NASDAQ exchange, and Facebook executives under great public scrutiny. Morgan Stanley and Facebooks CFO have been criticized for making changes
to the price and number of shares just before the offering. These shares and prices were set at the far upper end of
13
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Facebook (in 2013): Will Wall Street Hit the Like Button?
the limit for the company.93 As a result, the NASDAQ faces a review of its systems and procedures by the SEC.94
Perhaps the sharpest criticism may have been offered against Mark Zuckerberg, whom many have perceived as
an untested CEO.95
For her part, chief operating officer, Sheryl Sandberg, has been fielding questions about Facebooks advertising strategies and pointing to positive signals and moves. At Facebooks first earnings call after its IPO,
Sandberg called Facebook a platform company, saying, We want to take social companies and make them
big, and take big companies and make them social. Her approach highlighted the growth that Facebook was
seeing in its social ads, which are sponsored stories that show up in a users News Feed. Sandberg has noted
Facebooks commitment to scrutinizing sponsored stories, saying, Were looking at the social context to make
sure its really relevant.96 Facebook also monitors user reactions to make sure the ads are adding value and not
alienating users, because News Feed is so core to the user experience. Sandberg added that sponsored stories
perform multiple times better than ads in Facebooks sidebar, because they are more like a recommendation
from a friend.
Another advantage that Sandberg sees for Facebook is in the area of local business advertising. Local businesses represent a huge opportunity for Facebook, Sandberg said, adding that local is the Holy Grail of
Internet.97 Local businesses are typically not very tech-savvy, and more than 40 percent of them have no
web presence at all, Sandberg said. This gives Facebook an advantage because many business owners are
Facebook users in their private lives. If they see messages from other businesses, they can imagine ads working
for their businesses as well, and they know how to set up their profiles and timelines, which are very similar
to business pages.
DEFENSIVE MEASURES
After a disappointing start, concerns about Facebooks stock price deepened in the fall of 2012, as investors
prepared for the release of a large portion of public shares scheduled to hit the market in late November (see
Exhibit 15). Zuckerberg and other company executives had indicated on September 5, 2012, that they would not
sell more shares than were necessary to cover their tax liabilities. This measure was taken as a statement of faith
in the companys future. Facebook also sought to protect its stock prices by buying back 101 million shares before
the lockup periods expired and more shares become available for sale.98
In an interview with Michael Arrington at TechCrunchs Disrupt conference on September 11, 2012, Zuckerberg
publicly confessed to feeling disappointed in Facebooks stock performance and conceded that it wasnt good for
company morale. Even so, Zuckerberg reassured shareholders, employees remained motivated by their desire to
[build] stuff they are proud of.99 In addition, he issued formal responses to rumors, denying development of a
Facebook phone and hinting at future work with search engines. More important, he revealed the strategic focus
for Facebooks future: mobile devices. After admitting that Facebook had made a mistake in its early mobile strategy by focusing development on HTML5, Zuckerberg said the company would concentrate on native applications
for mobile devices going forward. While there was no mention of immediate opportunities in the mobile market,
Zuckerberg did explain how the task of monetizing Facebook mobile products was up to the product development
teams.
Since Facebooks services have already captured 600 million of 5 billion mobile Internet users, Facebooks
mobile days may be its brightest if it can replicate Twitters recent success.100 Digital marketing research company eMarketer cites a marketing campaign launched by P.F. Changs as the reason Twitters ad revenue jumped
from $139.5 million to $259.9 million in 2012. P.F. Changs Lunar New Year advertisement generated one million
clicks70 percent of which were from mobile devicesin just four days.101
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Facebook (in 2013): Will Wall Street Hit the Like Button?
EXHIBIT 1
1,100%
1,000%
900%
800%
700%
600%
500%
400%
300%
200%
100%
Ju
nSe 09
pDe 09
cM 09
ar
Ju 10
nSe 10
pDe 10
cM 10
ar
Ju 11
nSe 11
pDe 11
cM 11
ar
Ju 12
nSe 12
pDe 12
c12
0%
700%
600%
500%
400%
300%
200%
100%
0%
Ju
nSe 09
pDe 09
cM 09
ar
Ju 10
nSe 10
pDe 10
cM 10
ar
Ju 11
nSe 11
pDe 11
cM 11
ar
Ju 12
nSe 12
pDe 12
c12
16
(continued)
16
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Facebook (in 2013): Will Wall Street Hit the Like Button?
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Facebook (in 2013): Will Wall Street Hit the Like Button?
EXHIBIT 1
(Continued)
700%
600%
500%
400%
300%
200%
100%
Se
p10
De
c1
M 0
ar
-1
1
Ju
n11
Se
p11
De
c1
M 1
ar
-1
2
Ju
n12
Se
p12
De
c12
10
Ju
n-
09
-1
ar
09
cDe
09
n-
pSe
Ju
0%
EXHIBIT 2
$1,400
Advertising
Rest of the World
$1,200
Asia
$1,000
Europe
$800
$600
$400
Asia
$200
Europe
U.S. & Canada
cDe
pSe
12
12
12
nJu
ar
-1
11
cDe
Se
p-
11
11
Ju
n-
1
-1
ar
M
De
c-
10
$0
17
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Facebook (in 2013): Will Wall Street Hit the Like Button?
EXHIBIT 3
Fiscal Year
2010
2011
2012
1,785
3,908
9,626
373
547
1,170
574
1,475
2,391
246
450
882
2,990
6,331
15,103
29
63
65
367
398
1,991
Receivables total
Inventories total
Assets total
Accounts payable trade
Long-term debt
Liabilities total
828
1,432
3,348
2,162
4,899
11,755
Sales (net)
1,974
3,711
5,089
354
537
720
449
1,095
3,187
Income taxes
402
695
441
606
1,000
53
606
1,000
53
0.28
0.47
0.02
0.28
0.47
0.02
Source: Compustat.
EXHIBIT 4
100%
$10
$8
$7.64
68.2%
60.6%
$6
$4
$6.72
60%
$5.06
32.8%
$3.15
2011
2012
2013
Facebook ad revenues
% change
40%
13.7%
$2
$0
80%
2014
20%
0%
Source: Authors depiction of data from Google edges closer to Facebook as US display advertising becomes two-horse race, eMarketer,
February 22, 2012, http://bit.ly/WnbzfA.
18
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Facebook (in 2013): Will Wall Street Hit the Like Button?
EXHIBIT 5
$5
$4
$4.08
$3.40
$3
$3.20
$2.84
$2.77
Europe
$3.20
$2.90
$2.80
Worldwide
$2.49
Rest of the
World
$0.44
$0.47
$0.56
c-
p-
De
Ju
n-
12
$0.37
12
$0.41
12
$0.69
c-
pSe
n-
1
-1
M
ar
cDe
$1.29
$0.58
-1
$0.40
$1.28
$0.55
ar
$0.38
$1.21
$0.53
$0.31
$0.56
11
$0.33
$1.37
$1.54
$1.38
11
$1.24
$0.54
11
$0.44
$1.26
$0.50
$1.43
$1.40
$1.34
$1.14
$0.43
10
$0
$1.25
$1.33
Ju
$1
$1.19
De
$1.26
Asia
$1.71
$1.60
Se
$2
EXHIBIT 6
$600
$540.0
210%
$500
$399.5
$400
$300
$0
% change
$259.9
86%
$200
$100
Twitter ad revenues
54%
$139.5
35%
$45.0
2010
2011
2012
2013
2014
Source: Authors depiction of data from Twitter, LinkedIn to see solid ad revenue growth, eMarketer, January 31, 2012.
19
Facebook (in 2013): Will Wall Street Hit the Like Button?
EXHIBIT 7
70
Percent Share of Visits
60
50
40
30
20
10
es
m
Cl
In
as
st
sm
at
ra
ed
ag
gg
Ta
Li
Ya
ho
o!
Pi
An
nk
sw
ed
er
In
t
er
nt
og
le
es
er
itt
ub
uT
Tw
Go
Fa
Yo
ce
bo
ok
Source: Authors depiction of data from Most popular social media websites in the United States in October 2012, Statista Industry
Statistics, November 25, 2012.
EXHIBIT 8
$300
Market Cap, in billions
Google (GOOG)
$250
Facebook (FB)
Amazon (AMZN)
$200
LinkedIn (LNKD)
$150
Groupon (GRPN)
Yahoo (YHOO)
$100
eBay (EBAY)
$50
Netix (NFLX)
20
12
20
11
20
10
20
09
20
08
07
20
20
06
20
05
04
20
20
03
20
02
01
20
20
00
99
20
19
98
97
19
96
19
95
19
19
94
$0
19
20
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Facebook (in 2013): Will Wall Street Hit the Like Button?
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Facebook (in 2013): Will Wall Street Hit the Like Button?
EXHIBIT 9
Panel 1: Google
NASDAQ: 100
NYSE: GOOGLE
1-
05
rAp
1-
ar
-0
05
1-
1N
Fe
11Oc
t-1
1
Ja
b-
05
n-
c1-
1-
De
No
v-
04
04
4
t-0
1-
1-
1-
Oc
pSe
Au
g-
04
04
140%
120%
100%
80%
60%
40%
20%
0%
220%
Panel 2: LinkedIn
NYSE: LINKEDIN
NASDAQ: 100
12
Ja
n1-
1D
ec
-1
1
ov
-1
1
Se
p1
1-
1
g1
1Au
1
l-1
Ju
1-
1
n1
Ju
1-
1Ma
y-
11
40%
30%
20%
10%
0%
210%
220%
230%
240%
(continued)
21
Facebook (in 2013): Will Wall Street Hit the Like Button?
EXHIBIT 9
(Continued)
Panel 3: Facebook
NYSE: FACEBOOK
NASDAQ: 100
13
1-
Ja
n-
12
De
1-
1-
No
v-
c-
12
2
t-1
Oc
1-
Se
1-
Au
1-
p-
g-
12
12
2
l-1
Ju
1-
nJu
1-
ay
-1
12
20%
10%
0%
210%
220%
230%
240%
250%
260%
270%
1-
22
EXHIBIT 10
2012
2013*
2014*
41.0%
44.9%
46.6%
47.4%
Yahoo!
9.5%
7.4%
6.2%
5.6%
5.4%
6.5%
7.1%
7.1%
Microsoft
5.7%
5.7%
6.0%
6.5%
AOL
2.8%
2.4%
2.2%
2.1%
Total Top 5
64.4%
66.9%
68.1%
68.7%
$32.0
$39.5
$46.5
$52.8
*Projected.
Source: Authors depiction of data from Google edges closer to Facebook as US display advertising becomes two-horse race, eMarketer,
February 22, 2012, http://bit.ly/y2FYgi.
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Facebook (in 2013): Will Wall Street Hit the Like Button?
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Facebook (in 2013): Will Wall Street Hit the Like Button?
EXHIBIT 11
2012
2013*
2014*
$1.73
14.0%
$2.58
16.8%
$3.29
17.7%
$3.75
17.1%
$1.71
13.8%
$2.54
16.5%
$3.68
19.8%
$4.76
21.7%
Yahoo!
$1.35
10.8%
$1.40
9.1%
$1.50
8.1%
$1.64
7.5%
Microsoft
$0.56
4.5%
$0.67
4.4%
$0.80
4.3%
$0.96
4.4%
AOL
$0.53
4.3%
$0.62
4.0%
$0.71
3.8%
$0.81
3.7%
Total Top 5
$5.88
47.4%
$7.81
50.8%
$9.98
53.7%
$11.92
$12.40
$15.39
$18.57
54.4%
$21.91
*Projected.
Source: Authors depiction of data from Google edges closer to Facebook as US display advertising becomes two-horse race, eMarketer,
February 22, 2012, http://bit.ly/y2FYgi.
EXHIBIT 12
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
$405.6
95%
$310.7
$226.0
$154.6
46%
37%
2011
2012
2013
31%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
LinkedIn ad revenues
% change
2014
Source: Authors depiction of data from Twitter, LinkedIn to see solid ad revenue growth, eMarketer, January 31, 2012, http://bit.ly/
A3mdNS.
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Facebook (in 2013): Will Wall Street Hit the Like Button?
EXHIBIT 13
$104.8
$80.0
before IPO
$15.0
$50.0
$35.0
after IPO
$10.0
18-Dec-2012
18-Nov-2012
18-Oct-2012
18-Sep-2012
18-Aug-2012
18-Jul-2012
18-Jun-2012
2012
18-May-2012
2011
2010
2009
2008
2007
2006
$1.0
2005
24
Source: Authors depiction of data from Facebook investors cash out, The Wall Street Journal, August 17, 2012, http://on.wsj.com/
ZX1r4W.
EXHIBIT 14
Bank
Analyst
Rating
Price Target
Morgan Stanley
Scott Devitt
Overweight
$38.00
J. P. Morgan
Doug Anmuth
Overweight
$45.00
Goldman Sachs
Heather Bellini
Buy
$42.00
BofA-Merrill
Justin Post
Neutral
$38.00
Barclays
Anthony DiClemente
Equal-weight
$35.00
Citigroup
Mark Mahaney
Neutral
$35.00
Credit Suisse
Spencer Wang
Neutral
$34.00
Andre Sequin
Outperform
$40.00
Wells Fargo
Jason Maynard*
Outperform
$37.00
Daniel Salmon
Underperform
$25.00
William Bird
Neutral
Piper Jaffray
Gene Munster
Overweight
Raymond James
Aaron Kessler
Market Perform
N/A
Stifel Nicolaus
Jordan Rohan
Hold
N/A
William Blair
Ralph Schackart
Outperform
N/A
Kevin Kopelman
Neutral
N/A
Pacific Crest
Evan Wilson
Sector Perform
Jason Helfstein
Ouperform
N/A
$41.00
N/A
$41.00
Source: Authors depiction of data from Analysts hit the tepid button on Facebook, The Wall Street Journal, June 27, 2012, http://on.wsj.
com/VE9P23.
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Facebook (in 2013): Will Wall Street Hit the Like Button?
EXHIBIT 15
Shares
2,500
2,000
149
47
1,197
1,500
1,000
55
271
500
421
421
692
747
1,944
2,093
May 2012
Aug 2012
OctNov 2012
Nov 2012
Dec 2012
May 2013
Source: Authors depiction of data from Facebook investors cash out, The Wall Street Journal, August 17, 2012, http://on.wsj.com/
ZX1r4W.
25
26
Facebook (in 2013): Will Wall Street Hit the Like Button?
Endnotes
1. The Social Network [Film], 2010.
2. Facebook IPO filing puts high value on social network, USA Today, February 2, 2012, http://usat.ly/y5z8UK.
3. A brief history of Facebook, The Guardian, July 24, 2007, http://bit.ly/AHNfU.
4. Facebook IPO filing puts high value on social network.
5. Facebook Form S-1 registration statement, SEC, May 16, 2012, http://1.usa.gov/LJb1NN.
6. Ibid.
7. Ibid.
8. Ibid.
9. Google edges closer to Facebook as US display advertising becomes two-horse race, eMarketer, February 22, 2012,
http://bit.ly/y2FYgi.
10. Facebook: One billion and counting, The Wall Street Journal, October 5, 2012, http://on.wsj.com/134nYvE.
11. Facebook Form S-1 registration statement.
12. Floating Facebook: The value of friendship, The Economist, February 4, 2012, http://econ.st/yq7kQa.
13. Facebook CEO seeks help as site grows upGoogle veteran to be Zuckerbergs no. 2, The Wall Street Journal,
March5, 2008, http://on.wsj.com/TBMcIs.
14. Ibid.
15. Helft, M. (2010), Mark Zuckerbergs most valuable friend, The New York Times, October 2, http://nyti.ms/1aiOvsN.
16. Ibid.
17. Person of the Year: Mark Zuckerberg, Time magazine, December 15, 2010.
18. http://www.ted.com/talks/sheryl_sandberg_why_we_have_too_few_women_leaders.html.
19. Sandberg, S. (2010), Why we have too few women leaders, TEDWomen, December.
20. The acceptable face of Facebook, The Economist, July 21, 2011, http://econ.st/VDqBi8.
21. Sandberg, S. (2013), Lean In (New York: Knopf).
22. Facebook CEO seeks help as site grows up.
23. Facebook seeks a new finance chief as Yu leaves, The Wall Street Journal, April 1, 2009, http://on.wsj.com/1jska.
24. Facebook hires finance chief, The Wall Street Journal, June 30, 2009, http://on.wsj.com/4vQ9Fa.
25. Inside fumbled Facebook offering, The Wall Street Journal, May 23, 2012, http://on.wsj.com/JEVdyb.
26. Facebook overview, Facebook, http://bit.ly/GMr0Lq.
27. Graph search event video, Facebook Newsroom, January 15, 2013, http://bit.ly/14mMqrL.
28. Facebook overview.
29. Graph search event video.
30. Ibid.
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Facebook (in 2013): Will Wall Street Hit the Like Button?
31. Facebook on collision course with Google on web searches, The Wall Street Journal, January 16, 2013, http://on.wsj
.com/14mMZBT.
32. Ibid.
33. Facebook overview.
34. Ibid.
35. Facebook to organize friends into lists, The Wall Street Journal, September 13, 2011, http://bit.ly/Vltapl.
36. Facebook overview.
37. Facebook Form S-1 registration statement.
38. Ibid.
39. Ibid.
40. Introducing Graph Search: Help people discover your business, Facebook-Studio, January 15, 2013, http://bit.ly/
WcKyPl.
41. Facebook Form S-1 registration statement.
42. Ibid.
43. Ibid.
44. Ibid.
45. Ibid.
46. Ibid.
47. Ibid.
48. Facebook annual report, Facebook, 2012.
49. Ibid.; Facebook IPO filing.
50. f8 conference, Facebook, September 11, 2012, https://www.facebook.com/f8.
51. Facebook annual report, Facebook, 2012
52. Facebook Form S-1 registration statement.
53. Ibid.
54. Ibid.
55. Ibid.
56. Insta-Rich: $1 billion for Instagram, The Wall Street Journal, April 10, 2012, http://on.wsj.com/IfvnR7.
57. Ibid.
58. Twitter may have 500M1 users but only 170M are active, TechCrunch, July 31, 2012, http://tcrn.ch/Xst7NM.
59. Twitter shares active user numbers, The Wall Street Journal, September 8, 2011, http://on.wsj.com/q27dF1.
60. Twitter VP Jason Goldman steps down, The Los Angeles Times, December 8, 2010, http://lat.ms/fSWZnI.
61. Twitter, LinkedIn to see solid ad revenue growth, eMarketer, January 31, 2012, http://bit.ly/A3mdNS.
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Facebook (in 2013): Will Wall Street Hit the Like Button?
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29