Facebook Assignment

Individual Part 1403 words Question Number 6 -Analyse and critique Facebook business model in relation to its market capitalisation

Facebook is a Virtual Social Networks, which is part of group in specific areas on the Internet that allow you to share data and information, which are general or specific, in different forms, as text, files, images, photos, videos, etc. There is also the formation of affinity groups, forming virtual communities, with or without authorization, and open or not for discussion, debate and presentation of various topics. It is a generalist social media who is taking attention of the market not only because it has more than 800 million users (Facebook, 2011), but for the implementation of an innovative strategy, establishing a strong competitive advantage to the business. Ethiraj, Guler and Singh (2000) who pointed the business model as, "A unique configuration of elements that includes the goals, strategies, processes, technologies and organizational structure, designed to create value for customers, and thus compete successfully in a particular market." This definition takes all the processes involved in business, summing the resources used to add value to an organization. And it turns out to be a prerequisite, as it is unlikely that a brand can create of profit without first creating a competitive advantage. Facebook found this advantages on you that uses it, all the information that you offer and like, comment on a friend's wall, adding a photo, sending a message, so you are the goose that lays the golden eggs of Mark Zuckerberg, creating Facebook in 2004 at the university campus.

BlogStash (2011)

But how does Facebook make money?

Facebook browsing behaviour is to maximize the return of investment, but for its business model work, it will need a high number of users trafficking on their services. And the return will be correspondent of the traffic, the greater the time and activities performed during the navigation, the greater the profitability of Facebook, in proportion (Cobra, M., Brezzo, R., 2010). With this business model applies division into two major categories, profitability model and intangible value model, following is a propose of a structure that supports the business model developed by Facebook, structure created from the article of IBTimes, 2011, and from a report of Degen, Y., 2009:

In 2010 the company made US$ 2.13 billion in revenue and according to its reports they will make US$ 4.27 billion this year, double than the previous year, from full amount US$ 3.8 billion were generated from advertising, according to New York-based EMarketed. As Facebook does not charge membership for the service it becomes much easier to sell user information to advertisers (IBTimes, 2011). Whenever a user like and comment about a page of a business, this page will be shown up on his page and his friends pages, specially those who liked the page. As many likes and comments about pages, more advertising and more people getting to know the business, and there is where the company, that paid Facebook for the advertisement starts to get the recompense for the investment.

The introduction of games and entertainments as FarmVille and Mafia War helped Facebook to have a rapid growth, ones they charge a rental fee for the the company that create the game and wish to add it on Facebook page. On these games there is also a possibility to buy credits where it will improve the performance on the game, this year the company has made 3 times more than the previous year, US$ 470 million according to EMarketer (IBTimes, 2011). Another way that the company make money, and it has the smallest percentage of revenue, is selling virtual goods, where the average of a virtual gift is US$ 1, US dollar, and they keep a portion of the amount. Seems a really small amount but when it comes for 800 million users this amount becomes considerable.

Market capitalization It is the value of a company determined by the market price of its shares outstanding, it is calculated by multiplying the number of outstanding shares by a current market price. Institutional investors often use it as an investment criterion, requiring for example that a company has a market capitalization of a certain amount or more to qualify as an investment. Analysts examine the market capitalization in regards of the book value looking for an indication of how investors assess the prospects of a company (Bodie, Z., Kane, A., Marcus, A., 1998). Facebook is planning to open their market in 2012, just like LinkedIn did and had a really successful market opening, in 2011, negotiating their share price 84% above the initial price and closing the day with US$ 9 billion (Hum, R., Moreano, G., 2011). Facebook is trying to work out how would be the reaction of the market with an initial public offering (IPO). They could be successful just like LinkedIn, Zynga, Groupon or Twitter, but as everyone suffer, when it is open to the market, the information of the company will be exposed and stately all the competitors will be able to see their profits, risk factors, way of management and weakness (Taylor, L., 2011). When LinkedIn opened their shares to the market, Sheryl Sandberg, operator director officer of Facebook, said Facebook's IPO was "inevitable." "It is a process by which all companies must go through. This will be the company's next step. People were always asking us if Facebook would be sold. Now do not ask anymore [...] Nobody will buy us, we will go public." (Taylor, L., 2011) But at the situation that Facebook is at moment they do not have much choice, as the US department of Securities and Exchange Commission (SEC) obligate any company with more than US$10 million in assets whose securities are held by more than 500 owners

must file annual and other periodic reports (SEC, 2010), so with IPO Facebook will be required to disclose the information about their financial activities or even without the IPO they will need to disclose the information anyway. But Facebook has applied for Spencer Ante reports and there was given a exemption which allows Facebook not to disclose their finances (Smith, J., 2008), basically Fenwick & Wests Thomas Kim argued that Facebooks restricted stock units should be treated differently, and the SEC agreed, see the document from FENWICK & WEST LLP in appendix 1. At the moment the company is evaluated in US$ 50 billion, big companies are investing heavily in the Facebook, as the Russian company Digital Sky Technologies invested US$ 500 million at the begin of 2011 (Craig, S. and Sorkin, A., 2011). As Facebook is getting ready for the initial public stock offering, 2012 or early 2013 as seen before, they are expecting and exploring to raise US$10 billion and accord with Wall Street Journal it will value the company at more than US$ 100 billion (Reuters, 2012). Even the company not charging for the services they became one of the biggest companies in the world and EMarketer estimate US$ 6 billion in revenue for 2012 (IBTimes, 2011). With the IPO and the valorisation of 100%, the company will be one of the biggest companies in the world and Facebook might be ready to pass to the next step, which I starting earlier than we thought, next year, early 2012, Facebook is opening an engineering office in New York City (Bloomberg Businessweek, 2011), and new investments in technology and communication will be created.

So with the IPO of the Facebook, will it be worth to invest? With 800 million users and migrating to mobile devices such as tablets and smartphones, social networking has the greatest potential to integrate the world's people and sell products and services. Traduzir do: portugus Digite um texto ou endereo de um site ou traduza um documento. Cancelar

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Assuming a market value of US$ 100 billion, this means that the actions of Facebook would be negotiated by a multiple of 23 times its revenue. This is not really common in the market, but has been used a lot for e-companies that have no profit, as Google, the major competitor, has been trading at 6.4 times its revenue, Apple and

Microsoft record, 2.5 and 2.8 times (Bloomberg Newa, 2011). Thought that Facebooks measures and stocks are much more expensive than its competitors, even as they are trying to diversify its revenue sources, charging, for example, tolls of developers using its platform to run games, it is still early to tell if it is a trustful investment. Traduzir do: portugus Digite um texto ou endereo de um site ou traduza um documento. Cancelar

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There are other risks to be observed, Facebook can be a new version of the previous fashionables Social Media Network, like MySpace and Second Life, after a great initial enthusiasm, the interest from the users waned. "Facebook is a good idea, but on the internet good ideas come and go as fast as they develop new technologies" said by Cludio Carvajal, professor of the University FIAP- Brazil.

Reference: Facebook (2011) Statistics. http://www.facebook.com/press/info.php?statistics [Accessed at 29/11/11] Ethiraj, Guler & Singh (2000) Modelos de negocios nas midias sociais: Danila Dourada https://docs.google.com/viewer? a=v&q=cache:oaMdCQw_8uQJ:daniladourado.files.wordpress.com/2 010/09/modelos-de-negocio-nas-midias-sociais.pdf+&hl=ptBR&pid=bl&srcid=ADGEESie8_6Ofy5YyUQpm0tnx2w3qUPa28krMfgspkLWv32ckukPLNPACplM10_A P7ReglIaUQ93o1MijbIATWq3DRapWfjntt8K1ZiiqwuuKci5wpXCnafVXT 5WXcil1kBaFnYMz9K&sig=AHIEtbRoSSgt3ESO2WV-8j8tWGGY63DAw [Accessed at 29/11/11]

BlogStash (2011) How Does Facebook Make Money? http://www.blogstash.com/how-does-facebook-make-money/ [Accessed at 29/11/11] Cobra, M., Brezzo, R.(2010) O Novo Marketing. Campus. Elsevier Ltd. Brazil LJ Rich (2011) How can social networks make money? BBC Click. http://news.bbc.co.uk/1/hi/programmes/click_online/9457946.stm [Accessed at 30/11/11] IBTimes Staff Reporter (2011) How Does Facebook Make Money? International Business Times. IBT http://www.ibtimes.com/articles/234132/20111019/how-doesfacebook-make-money.htm [Accessed at 30/11/11] Degen, Y. (2009) ONTOLOGIA PARA MODELOS DE NEGCIOS DE REDE SOCIAIS NA INTERNET: UM ENSAIO TERICO-EXPLORATRIO. University FGV. EBAPE. Rio de Janeiro - Brazil https://docs.google.com/viewer? a=v&q=cache:s8ELuunG4RwJ:bibliotecadigital.fgv.br/dspace/bitstre am/handle/10438/6674/YVES%2520DEGEN.pdf%3Fsequence %3D1+&hl=ptBR&pid=bl&srcid=ADGEESi0Uu19jid4dxCY47T6FpapMIzWc9Zk8O92 qorq3_O5mtfbcug69e6VA_BKaScPEzvN8CFOEd1IL4VPokafI8F2T4zupzK9AeEH80By4qbF7kkmdOnUG601JgvhHqEmlK_5mD&sig=AHIEtbQduCrz1wzIi F2CpDUg1GJKaO4_MQ [Accessed at 30/11/11] Bodie, Z., Kane, A., Marcus, A. (1998) Fundamentos de Investimentos 3rd Edition. Bookman Hum, R., Moreano, G. (2011) LinkedIn Market Cap Now Bigger Than NYSE Euronext, Many Others. CNBC. http://www.cnbc.com/id/43095800/LinkedIn_Market_Cap_Now_Bigge r_Than_NYSE_Euronext_Many_Others [Accessed at 30/11/11] Taylor, L. (2011) O futuro do Facebook no mercado aberto. Universia Wharton http://www.wharton.universia.net/index.cfm? fa=viewArticle&id=2078&language=portuguese [Accessed at 30/11/11] SEC (2010) The Laws That Govern the Securities Industry. U.S. Securities and Exchange Commission. http://www.sec.gov/about/laws.shtml [Accessed at 01/12/11] Smith, J. (2008) Facebook Gets SEC Disclosure Exemption as Number of Stockholders Grows. Inside Facebook. LifeStreet media http://www.insidefacebook.com/2008/11/23/facebook-gets-secdisclosure-exemption-as-number-of-stockholders-grows/ [Accessed at 01/12/11]

Craig, S. and Sorkin, A. (2011) Goldman Offering Clients a Chance to Invest in Facebook. DealBook. NY Times. http://dealbook.nytimes.com/2011/01/02/goldman-invests-infacebook-at-50-billion-valuation/ [Accessed at 05/12/11] Reuters (2012) Facebook gearing up for 2012 IPO: source. Yahoo Finance. http://finance.yahoo.com/news/facebook-gearing-2012-iposource-024533552.html [Accessed at 05/12/11] Bloomberg Businessweek (2011) Facebook, Inc. http://investing.businessweek.com/research/stocks/private/snapshot .asp?privcapId=20765463 [Accessed at 06/12/11] Bloomberg Newa (2011) Business news: $100B Facebook IPO, trouble at Cargill http://www.nj.com/business/index.ssf/2011/11/business_news_100b_ facebook_ip.html [Accessed at 06/12/11] Carvajal, C. (2011) Era Facebook. FIAP- Brazil http://www.incorporativa.com.br/mostranews.php?id=182 [Accessed at 06/12/11]