1. Nicholas Young Case Study #1 MGS 4999-K5 2/11/2016
Put Your Money Where Your Mouth Is
Executive Summary
Facebook first started in 2004, only open to Harvard’s students, but was quickly released to
other campuses, and eventually, anybody. By 2012, Facebook had 1.06 billion Monthly Active
Users (MAUs) and 618 million Daily Active Users (DAUs). Sales for 2012 were 5.09 billion. With
an IPO of $38 per share, and a valuation of 104 billion, one of the largest in U.S. history,
Facebook is under pressure to increase net revenues in the coming years and justify its
historical valuation.
Introduction
Facebook is a social media website, started by Mark Zuckerberg, in 2004, that answers two
questions, “What’s going on?” and “Who’s this?” The website relies on three key products, the
news feed, timeline, and graph search. The news feed is a display of posts made by friends or
pages, and is displayed based on a complex algorithm. The timeline is a display of an individual
users activity on Facebook, and the graph search is a search bar, that allows users to expand
their network. With other products like messages, groups, pages, and notifications, along with
an aggressive acquisition of Instagram, Facebook fights to compete with its competitors.
Problem Definition
Facebook is under extreme pressure to produce for investors and shareholders when the price
of stock falls from $38 to as low as $18 in September. With average revenue per user of $15,
only 17% of Google’s, Facebook needs to monetize. Facebook can raise advertising rates if they
can convince advertisers of the values that Facebook provides, or they can risk losing users by
imposing a pay-to-use fee on its users. Foreign markets are an option, however, local

2. Nicholas Young Case Study #1 MGS 4999-K5 2/11/2016
competitors and lower revenues per user forms a risk. COO Sheryl Sandberg is concerned that
Facebook could end up like Myspace if they focus on monetization too much.
Background/History
2003, Harvard University student Mark Zuckerberg and friends build a rating website called
Facemash. After a large burst of popularity, Harvard administrators shut down the website and
punish Mark with 6 month probation. Next semester, Zuckerberg makes another, less
provocative website, The Facebook. At first, The Facebook was only available to Harvard
students, but when over half the campus signed up within the first month, Zuckerberg dropped
the “The” and opened Facebook to anyone with an email ending in “.edu.” By September 2005,
Facebook was open to anyone with an email. Revenues in 2005 were $9 million, and in 2006,
$48 million. By 2012, revenue soars to $5.09 billion, generated mostly by advertising services.
With average revenue per user of $15, much less than Google and Yahoo’s $88, Facebook plans
to connect “more than two billion global Internet users” moving forward.
Top Management Team
CEO Mark Zuckerberg, founder and chairman of Facebook, refuses to give up his seat regardless
of outside pressures. Mark Zuckerberg attended Harvard University from 2002 to 2004 and
studied in psychology and computer science. In an attempt to step away from early career
criticisms, Mark has hired a public speech coach, polished his image, and continues to grow into
what the world expects a CEO to look like. Mark’s two main concerns at the moment are
privacy and monetization of mobile users, his largest user base.
COO Sheryl Sandberg became a part of Facebook in 2008 after serving as Vice President of
Google’s global online sales and operations department. Sandberg also went to Harvard, and
graduated with an MBA in economics. According to Time and Fortune magazines, Sheryl is a
force to be reckoned with, considered one of the top 100 most influential people in the world,
and 50 most powerful women in business. Sheryl’s job at Facebook is to focus on international
expansion, revenue maximization, and business development. Because of Zuckerberg’s issues
with public relations, Sheryl Sandberg is the one who handles most of the public policies and
communications.
CFO David Ebersman was once CFO of Genentech Inc. before he joined Facebook after the CFO
before him, Gideon Yu, suddenly left. He was chosen for his experience in public companies and
was crucial to the successful IPO. From graduating from Brown University, to becoming CFO of
Facebook, David Ebersman is one of the main reasons people trade Facebook stock today.

3. Nicholas Young Case Study #1 MGS 4999-K5 2/11/2016
Competitors
Instagram is a photo sharing mobile app that arrived in October of 2010. No longer a
competitor because Facebook purchased it in 2012 for $1 billion, Instagram is kept as a
separate company.
Twitter, similar to Facebook in many respects, began in 2006. In 2012, Twitter reports over 500
million accounts, and ad revenues in 2011 of only $139.5 million compared to Facebook’s $3.15
billion. Twitter users post “tweets” for their followers to see. “Tweets” are text posts and are
limited to 140 characters. Many news broadcasters and celebrities are active on Twitter.
Twitter’s success is credited to its timeline and how it exposes users to the information they
want to see, based on who they follow. For now, Twitter is only a portion of the entity that
Facebook is, however, it remains a threat to Facebook’s users and profits.
Google began in 1998 as a search engine and has since grown to extravagant size. One of the
largest cloud computers and advertisers in the world, Google is a sizeable threat to Facebook,
especially with Google+. Google+ is similar to Facebook except for some key edges like Google+
circles, which allows users to sort and section off different groups of friends, and Google+
hangouts, which allows up to 10 people to simultaneously video chat. Google’s integration with
YouTube, Google.com, AdWords, Translate, Analytics, and more, makes Google a powerhouse,
yet Google still fails to compete with Facebook in terms of user base. Google does run close
with Facebook in regards to market share, holding about 16% each, and annihilates Facebook in
terms of average revenue per user, $88 as opposed to $15. Another edge that Google has over
Facebook is its developer’s platform. Facebook charges a 30% commission while Google
remains free. This could cost Facebook developers over time as they make the switch to
Google.
Microsoft, like Google, holds a large share of user interaction and offers hundreds of products
and services that distract from Facebook, Xbox, Bing, and MSN to name a few. Surprisingly,
Microsoft owns 10 percent equity in Facebook, a $240 million purchase in 2007, and has
partnered with Facebook to combat Google’s powerful reach. With Microsoft’s purchase of
Skype in 2011, both Facebook and Microsoft can compete against the video chatting
capabilities of Google, and the integration of Bing.com’s search engine into Facebook is another
partnership that confronts Google head to head. Mark Zuckerberg said, “We have a really good
relationship with Microsoft.”
LinkedIn is the world’s largest professional network. It began in 2002 and by 2012 has over 150
million members from over 200 countries. Almost one million job applications have been sent
through LinkedIn by 2012. As a “freemium” service (free for basic services, but charges for
premium services), and a shorter active user time, LinkedIn has a much larger per user-hour

4. Nicholas Young Case Study #1 MGS 4999-K5 2/11/2016
revenue than Facebook, but total revenues are much lower. LinkedIn is focused more on
professional development, and is used a lot less frequent than Facebook, but its value lies in its
premium services.
Foreign competition for Facebook includes other social networks like, Orkut, a primarily
Brazilian website, VKontakte, a Russian version, and in China, a current internet ban and
website Renren, Facebooks Chinese equal.
Internal/External Analysis
ROA-2012 = 0.44% 2015 = 8.31%
Monthly Average Users 2012 = 1.06B 2015 = 1.59B
Average Revenue per User 2012 = $8.02 2015 = $23.36
ROE 2012 = 0.54% 2015 = 9.28%
ROIC 2012 = -2.03% 2015 = 9.27%
*Google excluded due to skew. Google stock at 5/1/2012 was $603.79, at 12/1/2015,
$766.94
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50.00
100.00
150.00
200.00
250.00
300.00
5/1/2012 5/1/2013 5/1/2014 5/1/2015
StockPrice
Stock Value Comparison
Facebook
Twitter
LinkedIn
Microsoft

5. Nicholas Young Case Study #1 MGS 4999-K5 2/11/2016
Twitter, 1.85%
Facebook,
62.39%
Google+, 1.32%
Youtube,
20.00%
Others, 14.44%
% of All Social Media Site Visits in
2012
Twitter
Facebook
Google+
Youtube
Others
Twitter, 4.80%
Facebook,
45.40%
Google+, 0.90%
Youtube,
22.20%
Reddit, 4.43%
Other, 22.27%
% of All Social Media Site Visits in
2015
Twitter
Facebook
Google+
Youtube
Reddit
Other
0
10000
20000
30000
40000
50000
60000
70000
80000
2012 2013 2014 2015
Revenue In Millions
Twitter
LinkedIn
Facebook
Google

6. Nicholas Young Case Study #1 MGS 4999-K5 2/11/2016
Facebook’s Strengths
Market Dominance, over 62% of total Social media visits in 2012.
Steady Growth, nearly 150% revenue increase year to year.
High Revenues, second only to Google.
The original founder remains CEO.
The leadership includes a CFO and COO that are more than qualified, with years of
experience.
Acquired competitor, Instagram, in 2012 and has valuable partnership with Microsoft.
Revenues reach nearly $18 Billion in 2015.
Facebook’s Challenges
Monetization per user is low.
Security concerns are an ever pressing issue.
Competitors are gaining more market share.
Underperformance following IPO causes stress and puts Facebook under criticism
Opportunities for Facebook
Partnership with Microsoft gives Facebook an edge against Google.
Facebook has more active users than any of their competitors and continues to
introduce new products to stay competitive, like the integration of Skype, “Subscribe”,
and the acquisition of Instagram.
Mobile focus is growing in demand, and Facebook has prime position to seize the
growth.
Threats to Best Buy
Competitors continue to grow and consume some of Facebook’s market share. Google
continues to try and gain control over social media dominance.
Privacy concerns are at an all-time high and users are concerned about Facebook’s
cyber-security, and how protected users information is.

7. Nicholas Young Case Study #1 MGS 4999-K5 2/11/2016
Foreign markets prove hard to penetrate due to local competitors, and a ban in China.
Recommendation
I believe that Facebook should remain a free service, if you charge the users, many of
them will leave for a free service like Twitter. Barriers to foreign markets are too great
to rely on penetrating them to spur growth, so lower the priority of expansion.
However, Facebook offers one of the largest audiences to advertise to. I would suggest
raising the rates and showing advertisers the true value of advertising with Facebook to
grow revenue that way. I wouldn’t believe that advertisers would not be willing to pay
more now knowing the power of social media. Another idea would be to allow more
customization to a individuals page. Must it be blue and white? If you allowed a more
artistic expression on profile pages, I believe it would draw more active users and also
justify an increased advertising fee.
Conclusion
Facebook has been an overnight success and continues to take strides in front of its
competition. It may not be first, but Google is much more than a social media website.
As far as I’m concerned, Facebook remains the number one social media website, and I
don’t believe any change is necessary as far as product performance or features. I do
believe that if Facebook continues to manage its investments properly and leave room
for portfolio growth, then it will continue to provide returns to shareholders with ease.