Jan 30, 2012
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With Facebook’s imminent (at the time of writing) IPO, I thought I would take a look back and analyse the reasons why Facebook has turned out to be the behemoth it is today. Facebook have made a lot of mistakes along the way, but they have now fully established themselves as the true social graph of the online world. With close to 1 billion members, Facebook is the largest network we’ve ever known and with a valuation of close to $100 billion and growing revenue, it is one of the most successful businesses ever! Here’s how Facebook achieved it.
I’m sure we are all familiar with the story behind how Facebook came about. For those of you that don’t know, Mark Zuckerberg set about making an online directory for his fellow students at Harvard. “The Facebook” quickly grew in popularity and soon Mark enlisted he friends, Dustin Moskovitz, Eduardo Saverin and Chris Hughes to help him open The Facebook up to other Colleges.
“The Facebook” quickly established itself in a number of colleges all around America and caught the attention of legendary Venture Capitalist Peter Thiel and the rest, as they say, is history.
The story that I’ve briefly outlined above is even more remarkable when you consider that Facebook was not the first “social network”. Myspace was already huge at the time, and there was already a number of other social networks, such as Friendster. In fact, many of the Colleges around America, already had a Facebook type online network for their students. Being the first in a new industry is often such a huge advantage that no other company or product ever catches up. Facebook has shown that, by building on what other people have created, you can often quickly eclipse the work of others and topple the current giant (in this case Myspace).
So how did Facebook manage to become the dominant social network? Here are the reasons I think they achieved it, and my analysis of why and how it worked.
Before I get into dissecting the precise reasons for Facebook success, let me just say this. I’m a big believer that Mark was in exactly the right place at the right time to create Facebook. Mark is obviously an incredibly talented and smart individual, but just like many successful Entrepreneurs before him, great success like his is often down to a huge number of factors. Malcolm Gladwell’s Outliers (Affiliate link) is a great book for really getting to grips with this concept.
One of the first steps in the right direction for Facebook was they established a very niche beachhead from the very beginning. At first Facebook was only open to students of Harvard who had a Harvard email address. In order to establish a product like Facebook, it is extremely important to pick a very precise group to target and establish yourself within that group. This is extremely important because this initial group of users will be imperative in order to grow and start targeting other groups and niches.
This was really a strategy that Mark stumbled upon due to his very modest launch. Interestingly, when companies who already have an audience launch a product, they often completely ignore this approach, even though it is likely that it was exactly this approach that lead to their growth. To read more about my thoughts on this strategy, take a look at The key to start up success is attacking the niche.
One of the first characteristics of Facebook was it’s incredible stickiness. Facebook appealed to the human characteristic of curiosity about the people we know and the people all around us. Facebook continues to have huge engagement levels with people viewing the site for hours on end and returning to it every single day. This is part of the reason for Facebook’s huge valuation. Again Mark really stumbled upon this aspect with Facebook. There isn’t really any technical feature or approach that really emphasisd stickiness and encouraged people to return. I believe Mark was lucky to find a basic human characteristic that his product could appeal to.
The cost of switching is another interesting aspect of the story of Facebook. As I mentioned before, when Facebook was first launched there was already a number of online social networks that had a similar set of features to Facebook. Users of these social networks had already established their friend connections, uploaded pictures, left thousands of comments and invested hundreds of hours of time into them. But when Facebook came along, they decided to abandon all of this and switch to a new empty profile. The cost of switching is a very important aspect of business. If your product has a high cost of switching, then your churn rate will likely be low. However if you are looking to disrupt an established incumbent where their users have a low cost of switching, your better product has a good chance of success.
I believe the reason for so many of Myspace’s users switching to Facebook can be attributed to Myspace’s failures as much as Facebook’s successes. I outlined this in a previous post The rise and fall of Internet super giants. This really goes to show that beating an already established industry leader is possible, so watch your back Facebook!
Facebook also seems to have stumbled upon one of the most important aspects of building an explosive social network, the elusive viral coefficient. This is where your current users are the reason for the next crop of users to start using your product. Facebook is only as valuable as long as the current users are investing time and content. In order to access that content you must join Facebook. And in order to get the most out of Facebook and go beyond your own profile, you must connect with other users and thus creating the viral coefficient. A positive viral coefficient is imperative for growth. To read a more depth explanation of the viral coefficient and other “engines of growth” you should read Eric Ries’ The Lean Startup.
The introduction of the iPhone truly revolutionalised the mobile phone industry. This wasn’t just good for the mobile phone industry industry, it also allowed companies like Twitter, Foursquare and Facebook to grow and realise their true potential.
Arguably, Facebook had already firmly established itself as a huge player on the Internet before the mobile phone revolution, but I believe this technology change was one of the key reasons for Facebook’s success today.
The iPhone, among others, allowed anyone to carry a powerful device with them in their pocket. The rising quality of mobile photography, geo-location and 3G Internet connections were really the driving forces behind much of Facebook’s growth. Mobile made Facebook even more sticky as you could check and update your Facebook wherever you were. Facebook was opened up to many new users who would not spend time in front of a computer, but would show active engagement through their mobile phone.
Facebook was incredibly lucky to be firmly established for when the smartphone industry finally took off. Mobile technology up until this point had never really realised it’s potential. This is another example of how Mark and Facebook were at the right place at the right time. If mobile had not finally taken off, it’s unlikely that Facebook would be the giant it is today.
Launched on May 24, 2007, the Facebook Platform has been another factor in Facebook’s huge growth. The Facebook Platform allows developers to create websites and applications either on Facebook.com or on the web that utilise Facebook’s social graph. This means that you can create a product that when a new user signs up, they already have all of their profile data and friend connections already in the app or website. This is desirable because it allows developers to piggy back on Facebook’s reach and growth in order to acquire new users. There is no better example of this than Zynga who built their very successful social games business and shot to fame by standing of Facebook’s shoulders.
The Facebook Platform and Facebook Connect have turned Facebook into a platform that can do a lot of good for the Internet. Facebook has become the de facto real life profile system that gives a person credibility and has become a huge communication tool. There are a growing number of companies that use Facebook’s platform to build targeted and personalised services and Facebook has transitioned from a social network to something far greater. Recognition must be given to the very talented people at Facebook, and in particular Dave Morin who helped create both the Facebook Platform and Facebook Connect. This strategy has created much of the tangible value of Facebook’s lofty market valuations and has given the company a strategy to pursue and a moat to defend itself from new products looking to disrupt the social network industry.
Facebook started off with a very talented founding team that was able to grow the product and the company in the early years. However, many of the early employees have now left Facebook to pursue their own Entrepreneurial visions. Facebook has continued to grow by investing heavily in new talent and acquiring smaller companies. This investment has become another key reasons why Facebook has reached the $100 billion valuation.
One of the interesting things about the Facebook story is the amount of mistakes the company has publicly made on the surface. Facebook has really pushed the boundaries of what we share on the Internet. Before Facebook, the majority of people would not share photos, personal information, or even their real name. Now we live in a society that is contributing many of the intimate details of our lives to the Internet.
Time after time Facebook has over-stepped the mark when launching new products that share more data about it’s users. Facebook product launches usually follow a repeating loop of, (1) Announce a new product or a change to an existing feature, (2) Try and calm down public and user backlash about privacy, (3) Apologise, but release the product or feature at a slightly slimmed down version, (4) Release the full product and have it fully adopted by the entire user base after they have slowly been opened up by the slimmed down version.
This product feature launch, whilst on the surface looks like Facebook have continually abused their position of power, is in fact a very clever way of introducing the features you want. Facebook have perfected the “launch, apologise, launch anyway” loop, and to their credit, the Internet is now a more open and better place for everyone.
To Mark’s credit, Facebook has really made very few mistakes thus far in it’s journey. Mark has grown the product from it’s early vision to something that is far greater and has built one of the finest companies ever. It will be interesting to see where Mark is looking to take Facebook after it’s IPO. Facebook advertising is a large growing part of Facebook’s revenue, and Facebook credits have opened up another interesting business model. However I believe it will be something far greater than adverts or game credits that really shows what a great company Facebook is.
Facebook must continue to innovate and push their product in order to stay on top. Every year there will be young pretenders trying to become “the next Facebook”. The social wave of technology might have reached it’s peak, and so Facebook must look to establish itself in the next great technology wave. It will be interesting to look back on the next 10 years and see where Mark takes his company, what areas they look to enter and what are the defining moments that propel the company to greater growth or lead it on a downward spiral.