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Facebook Case Study - How to Build Billion Dollar Company ?


Ashish Kumar
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We all know Facebook as the giant, powerful company that it is today but very few of us know that when Facebook actually came out in the market it was neither the first social media product in the market nor was it the best social media website in the market. In fact, when Facebook came out, there was already another social media website that had about 1 million users. And it was already one of the most visited websites on the Internet. But somehow, within the next four years Facebook made history by overtaking this huge company and went onto become one of the most powerful companies on the planet. And the reason why this happened has got some very very important business learnings for each one of us because more often than not, we all must have had a brilliant idea but then after doing a little bit of research, we tend to realize that there is already a giant company as our competitors doing the exact same thing as we planned to do. And that could be demotivating. But guys, what if I told you that instead, you should be super happy to build a business if there is already a giant competition in the market. And the fact that it will actually provide you a golden opportunity to build a business.

 

The question is- How is it even possible and how can you go on to build a business to compete with a billion dollar company.

 

The answer to this question lies in a story that dates back to 2004. This is when a social media website called Myspace had arrived on the Internet. It was just like the modern day Facebook which allowed people to form connections and helped them find new friends on the Internet. And within just one year Myspace became a sensation in the making with more than 1 million users signing up within the first month itself. And by the end of the year, Myspace had 5 million users. This is when in 2005, it got purchased by a gigantic media company called News Corp for $580 milllion. Because somehow, News Corp was one of those few organisations that actually realized the potential of social media ads, back in 2005. And the day this purchase happened it marked the beginning of the capitalistic Internet era.

 

During this time, Facebook was just a college student website which was open to only Ivy League students in the US. But on the other side, from 2005 to 2008 Myspace became the most visited social networking site in the world. And in 2006, it even surpassed Google to becoming the most visited website in the world. But something happened in the next 4 years because of which the same Myspace had 115 million users while on the other side Facebook, the college community website had more than 1 billion users.

 

The question is What exactly happened and how did two companies inspite of being in the exact same space, doing the exact same thing have such a vast difference in their success.

 

The first reason is based on the fundamental concept of social network and human psychology which is known as the Triadic closure property. And this is something that was suggested by a german sociologists named Georg Simmel in 1908. In simple words what it means is if there are three people: Shyam, Baburao and Raju, If Raju knows Babu and Babu knows Shyam then automatically, Raju will form a connection with Shyam and Raju will be more inclined to trust Shyam. So, basically, if A knows B, and B knows C then A is more inclined to form a connection with C eventually leading to speed of trust. And you must have observed this while you used Facebook or Instagram, that is when you get a request from a person who has 200 mutual friends you easily tend to accept their request. At the same time if you get a request from a person whom you possibly know but has got zero mutual friends there’s a little bit of skepticism that pops in. This is how the triadic closure property plays out.

 

In case of Myspace and Facebook, the major drawback with Myspace was that it did not allow users to use their real names as their usernames and because of this, although you could meet new people on the Internet through similar interests you couldn’t really tell who exactly are you chatting with. So, this kinda turned into a fine mix of privacy and creepiness. But on the other hand Facebook insisted on getting people to use their real names as their usernames. Why? Because as legend has it, Facebook was meant to stalk girls and if you didn’t know the names of those girls stalking wouldn’t be user-friendly right? Will do anything for girls Just kidding guys! It was meant to be that way because Mark Zuckerberg believed in helping people build authentic connections through digital technology. And regardless of the truth behind this statement the strategy of using real names turned out to be Facebook’s X factor because of which apart from connecting with people in their own respective social circle users actually started to expand their network to form second and third connections. And this is where the mutual friend feature came in handy and because of this, the networks on Facebook became far more deep rooted and helped people expand their connections beyond their social circle. And this is the reason why in 2006, when Facebook opened itself to the general public, people ran to create a Facebook account inspite of having a Myspace account already.

 

Now, this begs the question If this was just this simple feature of using real usernames that distinguished Facebook from Myspace then why didn’t Myspace incorporate that feature and kill Facebook altogether? In fact, this is what Facebook did with Snapchat right? By introducing Instagram stories. In fact, the Myspace team even had the backing of a large corporation like News Corp, right? Then why couldn’t they incorporate this feature? Well, as it turns out, this is exactly why they couldn’t incorporate the feature in their website. Because News corp turned Myspace into a proper corporate organisation which had to follow protocols and procedures and more than the ideas and the execution, the focus went to register quarterly profits, yearly profits and all the other corporate procedures. In fact, even if the Myspace team came out with a brilliant idea. It first used to get scrutinized by the lawyers, then by so-called experts and then a series of meetings used to be held and then a series of emails to be sent and it just kept going back and forth, And in the process, things got so slow that the ideas just got lost into bureaucracy and even something as simple as adding a feature also took forever to be executed. While on the other side, Facebook was being run by a bunch of college students who could add, change, modify and delete features overnight and make major modifications to the website without any formalities.

 

Unfortunately finally when Myspace incorporated the option of real usernames it was already 2008 and Facebook had already surged way ahead. So, to put that straight, while Myspace became a rigid organisation that was focused on procedures and protocols and was constantly debating about who is right and who is not. Facebook was obsessively focused on what is right and executed ideas with agility. And this became the second reason for the fall of Myspace and the rise of Facebook.

 

And the story didn’t end here, the rigid corporate structure of Myspace also lead to another huge setback that literally became the golden recipe for Facebook to surge way ahead of Myspace. And this recipe also became a game changer for Amazon, Google and Apple. And this was the idea of third party integration wherein Facebook practically tranformed from a product to becoming a platform. On 24th of May 2007, Facebook launched the Facebook platform to provide a framework for software developers to create applications that could interact with core features of Facebook. For example, Spotify could use Facebook API to allow users to share music directly within the Spotify application itself. Candy Crush used Facebook for instant login and I’m sure most of you must have used it. And thirdly, Nike run club used Facebook API to enable its users to share their achievements of their run with their friends by posting directly to the Facebook’s news feed. So, this way Facebook allowed developers and gave them the freedom to use their technology and build products and services of their own. Whereas on the other hand, Myspace was set to be a notoriously closed system and Myspace even used to block contents from potential competitors. And for some reason it also ended up blocking Photobucket which was at that time the most popular photo sharing website. And this is the third reason why Facebook became an incredible platform not just for consumers and advertisers but also for developers. And by the way, this concept of going from a product to a platform is also the reason for the unprecedented success of Apple because back then even Steve Jobs was skeptical about allowing third party developers. But when Apple started providing its platform to developers the iconic App Store was born and that changed Apple forever. Even Android did the same with Play Store. BUT, BUT, BUT. If you look at Nokia, Nokia acted like Myspace and made it very difficult for developers to operate because the symbianOS was too rigid for third party apps to be built upon. And fast forward to 2006, Amazon launched its own version of third party integration by allowing third party sellers to use this technology to sell their products. And guess what? In 2020 alone, Amazon generated $80.46 billion dollars in third-party seller services revenue which is more than the revenue generated by its own sellers. This was the insane revenue stream that Myspace passed on and turned Facebook into the billion dollar company that it is today.

 

Now, let’s talk about the 3 important lessons from this case study :-

 

Lesson 1, Every entrepreneur and a leader needs to realize that the fundamental purpose of an organisational structure is not just to help you make strategic decisions but to enable you to make those strategic decisions before its too late. And the day you realize that these protocols are making the execution of ideas tedious you need to kill those protocols straightaway or else those very same protocols will end up killing your organisation.

 

Lesson 2, regardless of how marvelous your technology is, if you’re building a business to consumer product, Human centred design must always be taken into consideration because if you see, in this case, it was the simple feature of mutual friends that actually got Facebook the same amount of popularity as Myspace. Because knowingly or unknowingly it abided by the triadic closure property.

 

Last and most importantly, even if you’re not the first mover in the industry it’s completely fine guys. In fact, it is great because regardless of how big a company is if they are venturing into a new space, they will make mistakes. And if you carefully learn from those mistakes you can save yourself a lot of time, a lot of money and a lot of efforts. And more importantly, merely by learning from those mistakes you will have the opportunity to race ahead of the game, Because afterall, wisdom is that attribute that often separates a few legendary entrepreneurs from the many good ones.

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